UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





Form
10-Q











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





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








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








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








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





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





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





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





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





PPL
      Corporation
            Common
      stock, $.01 par value, 374,576,538
      shares outstanding at October 31, 2008.PPL
      Energy Supply, LLC
            PPL
      Corporation indirectly holds all of the membership interests in PPL Energy
      Supply, LLC.PPL
      Electric Utilities Corporation
            Common
      stock, no par value, 66,368,056 shares outstanding and all held by PPL
      Corporation at October 31, 2008.





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





PPL
CORPORATION


PPL
ENERGY SUPPLY, LLC


PPL
ELECTRIC UTILITIES CORPORATION





FORM
10-Q


FOR THE
QUARTER ENDED SEPTEMBER 30, 2008





Table of
Contents


PageGLOSSARY OF TERMS AND ABBREVIATIONS
            iFORWARD-LOOKING INFORMATION
            1PART
      I.  FINANCIAL INFORMATIONItem
      1.  Financial StatementsPPL
      Corporation and SubsidiariesCondensed Consolidated Statements of
      Income
            2Condensed Consolidated Statements of Cash
      Flows
            3Condensed Consolidated Balance
      Sheets
            4PPL
      Energy Supply, LLC and SubsidiariesCondensed Consolidated Statements of
      Income
            6Condensed Consolidated Statements of Cash
      Flows
            7Condensed Consolidated Balance
      Sheets
            8PPL
      Electric Utilities Corporation and SubsidiariesCondensed Consolidated Statements of
      Income
            10Condensed Consolidated Statements of Cash
      Flows
            11Condensed Consolidated Balance
      Sheets
            12Combined Notes to Condensed Consolidated Financial
      Statements
            14Item
      2.  Management's Discussion and Analysis of Financial Condition
      and Results of OperationsPPL Corporation and Subsidiaries
            53PPL Energy Supply, LLC and
Subsidiaries
            72PPL Electric Utilities Corporation and
      Subsidiaries
            87Item 3.  Quantitative and Qualitative
      Disclosures About Market Risk
            95Item 4.  Controls and
      Procedures
            95Item 4T.  Controls and
      Procedures
            95PART
      II.  OTHER INFORMATIONItem 1.  Legal Proceedings
            96Item 1A.  Risk Factors
            96Item 6.  Exhibits
            96SIGNATURES
            97COMPUTATION
      OF RATIO OF EARNINGS TO FIXED CHARGESPPL Corporation and Subsidiaries
            98PPL Energy Supply, LLC and
      Subsidiaries
            99PPL Electric Utilities Corporation and
      Subsidiaries
            100CERTIFICATES
      OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER
              PURSUANT
      TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002PPL Corporation
            101PPL Energy Supply, LLC
            103PPL Electric Utilities Corporation
            105CERTIFICATES
      OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER
              PURSUANT
      TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002PPL Corporation
            107PPL Energy Supply, LLC
            109PPL Electric Utilities Corporation
            111







GLOSSARY OF TERMS AND ABBREVIATIONS





PPL Corporation and its
current and former subsidiaries





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





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





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





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





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





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





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





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





PPL
Gas Utilities - PPL Gas Utilities Corporation, a regulated utility
subsidiary of PPL that provided natural gas distribution, transmission and
storage services, and the competitive sale of propane until its sale in October
2008.





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





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





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





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





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





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





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





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





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





WPD
- refers collectively to WPDH Limited and WPDL.





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





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





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





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





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





Other terms and
abbreviations





£ - British
pounds sterling.





1945
First Mortgage Bond Indenture - PPL Electric's Mortgage and Deed of
Trust, dated as of October 1, 1945, to Deutsche Bank Trust Company Americas, as
trustee, as supplemented.





2001
Senior Secured Bond Indenture - PPL Electric's Indenture, dated as of
August 1, 2001, to The Bank of New York Mellon (as successor to JPMorgan Chase
Bank), as trustee, as supplemented.





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


A.M.
Best - A.M. Best Company, a company that reports on the condition of
insurance companies.


APB- Accounting Principles Board.





ARB- Accounting Research Bulletin.





ARO
- asset retirement obligation.





Bcf
- billion cubic feet.





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





COLA
- license application for a combined construction permit and operating license
from the NRC.





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





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





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





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





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





EMF
- electric and magnetic fields.





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





EPS
- earnings per share.





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





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





FIN- FASB Interpretation.





Fitch- Fitch, Inc.





FSP-FASB Staff
Position.





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





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





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





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





ISO
- Independent System Operator.





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





LIBOR-London Interbank Offered
Rate.





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





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





MTM
- mark-to-market.





MW
- megawatt, one thousand kilowatts.





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





NERC
- North American Electric Reliability Corporation.





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





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





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





NYMEX- New York
Mercantile Exchange.





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





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





PP&E-
property, plant and equipment.





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





PUC
Final Order - final order issued by the PUC on August 27, 1998,
approving the settlement of PPL Electric's restructuring
proceeding.





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





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





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





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





RMR
- reliability must run.





SCR
- selective catalytic reduction, a pollution control process.





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





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





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





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





Smart
meter-an electric meter that utilizes smart metering
technology.





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





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





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





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





VaR
- value-at-risk.





Accounting
Pronouncements





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





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





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





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





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





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





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





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





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





FSP
FAS 157-3 - Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active.





SFAS
128- Earnings per Share.





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





SFAS
141 - Business Combinations.





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





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





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





SFAS
157 - Fair Value Measurements.





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





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





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





FORWARD-LOOKING INFORMATION





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





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


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





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





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





PartI.FINANCIAL
      INFORMATIONItem 1. Financial
      StatementsCONDENSED
      CONSOLIDATED STATEMENTS OF INCOMEPPL
      Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars, except per share data)Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,2008
            
            2007
            
            2008
            
            2007Operating
      RevenuesUtility
            
            $
            1,007
            
            
            $
            1,016
            
            
            $
            3,108
            
            
            $
            3,074Unregulated
      retail electric and gas
            
            
            43
            
            
            
            28
            
            
            
            110
            
            
            
            73Wholesale
      energy marketingRealized
            
            
            758
            
            
            
            517
            
            
            
            1,639
            
            
            
            1,244Unrealized
      economic activity (Note 14)
            
            
            1,157
            
            
            
            
            
            
            
            361
            
            
            
            (99
            )Net
      energy trading margins
            
            
            (132
            )
            
            
            20
            
            
            
            (82
            )
            
            
            38Energy-related
      businesses
            
            
            148
            
            
            
            193
            
            
            
            395
            
            
            
            563Total
            
            
            2,981
            
            
            
            1,774
            
            
            
            5,531
            
            
            
            4,893Operating
      ExpensesOperationFuel
            
            
            267
            
            
            
            257
            
            
            
            718
            
            
            
            692Energy
      purchasesRealized
            
            
            500
            
            
            
            228
            
            
            
            1,126
            
            
            
            677Unrealized
      economic activity (Note 14)
            
            
            1,058
            
            
            
            7
            
            
            
            173
            
            
            
            (127
            )Other
      operation and maintenance
            
            
            364
            
            
            
            324
            
            
            
            1,101
            
            
            
            996Amortization
      of recoverable transition costs
            
            
            73
            
            
            
            78
            
            
            
            217
            
            
            
            229Depreciation
            
            
            117
            
            
            
            108
            
            
            
            347
            
            
            
            334Taxes,
      other than income
            
            
            77
            
            
            
            73
            
            
            
            224
            
            
            
            223Energy-related
      businesses (Note 8)
            
            
            134
            
            
            
            178
            
            
            
            361
            
            
            
            581Total
            
            
            2,590
            
            
            
            1,253
            
            
            
            4,267
            
            
            
            3,605Operating
      Income
            
            
            391
            
            
            
            521
            
            
            
            1,264
            
            
            
            1,288Other
      Income - net
            
            
            1
            
            
            
            23
            
            
            
            17
            
            
            
            71Interest
      Expense
            
            
            120
            
            
            
            117
            
            
            
            338
            
            
            
            357Income
      from Continuing Operations Before Income Taxes, Minority Interest and
      Dividends on Preferred Securities of a Subsidiary
            
            
            272
            
            
            
            427
            
            
            
            943
            
            
            
            1,002Income
      Taxes
            
            
            59
            
            
            
            88
            
            
            
            285
            
            
            
            188Minority
      Interest
            
            
            
            
            
            
            1
            
            
            
            1
            
            
            
            2Dividends
      on Preferred Securities of a Subsidiary
            
            
            5
            
            
            
            5
            
            
            
            14
            
            
            
            14Income
      from Continuing Operations
            
            
            208
            
            
            
            333
            
            
            
            643
            
            
            
            798(Loss)
      Income from Discontinued Operations (net of income taxes) (Note
      8)
            
            
            (5
            )
            
            
            (11
            )
            
            
            10
            
            
            
            72Net
      Income
            
            $
            203
            
            
            $
            322
            
            
            $
            653
            
            
            $
            870Earnings
      Per Share of Common Stock:Income
      from Continuing Operations:Basic
            
            $
            0.55
            
            
            $
            0.88
            
            
            $
            1.72
            
            
            $
            2.08Diluted
            
            
            0.55
            
            
            
            0.87
            
            
            
            1.70
            
            
            
            2.06Net
      income:Basic
            
            $
            0.54
            
            
            $
            0.85
            
            
            $
            1.75
            
            
            $
            2.27Diluted
            
            
            0.54
            
            
            
            0.84
            
            
            
            1.73
            
            
            
            2.25Dividends
      Declared Per Share of Common Stock
            
            $
            0.335
            
            
            $
            0.305
            
            
            $
            1.01
            
            
            $
            0.915The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED CONSOLIDATED STATEMENTS OF CASH
      FLOWSPPL
      Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)Nine
      Months Ended
              September
      30,2008
            
            2007Cash
      Flows from Operating ActivitiesNet
      income
            
            $
            653
            
            
            $
            870Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
            
            
            347
            
            
            
            345Amortization
      - recoverable transition costs and other
            
            
            286
            
            
            
            327Pre-tax
      gain from the sale of a Latin American business
            
            
            
            
            
            
            (94
            )Defined
      benefits
            
            
            (55
            )
            
            
            31Deferred
      income taxes and investment tax credits
            
            
            (56
            )
            
            
            (95
            )Impairment
      of assets
            
            
            65
            
            
            
            98Gain
      on the sale of emission allowances
            
            
            (1
            )
            
            
            (85
            )Unrealized
      gain on derivatives and other hedging activities
            
            
            (83
            )
            
            
            (68
            )Other
            
            
            56
            
            
            
            42Change
      in current assets and current liabilitiesAccounts
      receivable
            
            
            127
            
            
            
            (65
            )Accounts
      payable
            
            
            (31
            )
            
            
            (50
            )Fuel,
      materials and supplies
            
            
            (15
            )
            
            
            23Other
            
            
            (150
            )
            
            
            61Other
      operating activitiesOther
      assets
            
            
            28
            
            
            
            (33
            )Other
      liabilities
            
            
            (10
            )
            
            
            (55
            )Net
      cash provided by operating activities
            
            
            1,161
            
            
            
            1,252Cash
      Flows from Investing ActivitiesExpenditures
      for property, plant and equipment
            
            
            (979
            )
            
            
            (1,119
            )Proceeds
      from the sale of Latin American businesses
            
            
            
            
            
            
            191Proceeds
      from the sale of telecommunication operations
            
            
            
            
            
            
            47Expenditures
      for intangible assets
            
            
            (283
            )
            
            
            (24
            )Proceeds
      from the sale of intangible assets
            
            
            11
            
            
            
            86Purchases
      of nuclear plant decommissioning trust investments
            
            
            (169
            )
            
            
            (176
            )Proceeds
      from the sale of nuclear decommissioning trust investments
            
            
            149
            
            
            
            165Purchases
      of other investments
            
            
            (50
            )
            
            
            (516
            )Proceeds
      from the sale of other investments
            
            
            36
            
            
            
            574Net
      increase in restricted cash and cash equivalents
            
            
            (70
            )
            
            
            (35
            )Other
      investing activities
            
            
            5
            
            
            
            10Net
      cash used in investing activities
            
            
            (1,350
            )
            
            
            (797
            )Cash
      Flows from Financing ActivitiesIssuance
      of long-term debt
            
            
            699
            
            
            
            855Retirement
      of long-term debt
            
            
            (299
            )
            
            
            (904
            )Issuance
      of common stock
            
            
            19
            
            
            
            25Repurchase
      of common stock
            
            
            (38
            )
            
            
            (565
            )Payment
      of common stock dividends
            
            
            (365
            )
            
            
            (343
            )Net
      increase in short-term debt
            
            
            109
            
            
            
            150Other
      financing activities
            
            
            (9
            )
            
            
            (17
            )Net
      cash provided by (used in) financing activities
            
            
            116
            
            
            
            (799
            )Effect
      of Exchange Rates on Cash and Cash Equivalents
            
            
            (5
            )
            
            
            2Net
      Decrease in Cash and Cash Equivalents
            
            
            (78
            )
            
            
            (342
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            430
            
            
            
            794Cash
      and Cash Equivalents included in Assets Held for Sale
            
            
            (3
            )
            
            
            (13
            )Cash
      and Cash Equivalents at End of Period
            
            $
            349
            
            
            $
            439The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED CONSOLIDATED BALANCE
      SHEETSPPL
      Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)September
      30,
              2008
            
            December
      31,
              2007AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            349
            
            
            $
            430Short-term
      investments
            
            
            82
            
            
            
            108Restricted
      cash and cash equivalents
            
            
            326
            
            
            
            203Accounts
      receivable (less reserve:  2008, $36; 2007, $39)Customer
            
            
            460
            
            
            
            574Other
            
            
            75
            
            
            
            87Unbilled
      revenues
            
            
            553
            
            
            
            531Fuel,
      materials and supplies
            
            
            321
            
            
            
            316Prepayments
            
            
            112
            
            
            
            160Deferred
      income taxes
            
            
            35
            
            
            
            25Price
      risk management assets
            
            
            630
            
            
            
            319Other
      intangibles
            
            
            60
            
            
            
            76Assets
      held for sale (Note 8)
            
            
            328
            
            
            
            318Other
            
            
            19
            
            
            
            21Total
      Current Assets
            
            
            3,350
            
            
            
            3,168InvestmentsInvestment
      in unconsolidated affiliates - at equity
            
            
            44
            
            
            
            44Nuclear
      plant decommissioning trust funds
            
            
            498
            
            
            
            555Other
            
            
            30
            
            
            
            9Total
      Investments
            
            
            572
            
            
            
            608Property,
      Plant and EquipmentElectric
      plant in serviceTransmission
      and distribution
            
            
            8,595
            
            
            
            8,787Generation
            
            
            9,560
            
            
            
            8,812General
            
            
            802
            
            
            
            83618,957
            
            
            
            18,435Construction
      work in progress
            
            
            999
            
            
            
            1,287Nuclear
      fuel
            
            
            365
            
            
            
            387Electric
      plant
            
            
            20,321
            
            
            
            20,109Gas
      and oil plant
            
            
            68
            
            
            
            66Other
      property
            
            
            184
            
            
            
            20220,573
            
            
            
            20,377Less:  accumulated
      depreciation
            
            
            7,871
            
            
            
            7,772Total
      Property, Plant and Equipment
            
            
            12,702
            
            
            
            12,605Regulatory
      and Other Noncurrent AssetsRecoverable
      transition costs
            
            
            357
            
            
            
            574Goodwill
            
            
            889
            
            
            
            991Other
      intangibles
            
            
            550
            
            
            
            335Price
      risk management assets
            
            
            970
            
            
            
            587Other
            
            
            1,116
            
            
            
            1,104Total
      Regulatory and Other Noncurrent Assets
            
            
            3,882
            
            
            
            3,591Total
      Assets
            
            $
            20,506
            
            
            $
            19,972The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED
      CONSOLIDATED BALANCE SHEETSPPL
      Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)September
      30,
              2008
            
            December
      31,
              2007Liabilities
      and EquityCurrent
      LiabilitiesShort-term
      debt
            
            $
            200
            
            
            $
            92Long-term
      debt
            
            
            1,075
            
            
            
            678Accounts
      payable
            
            
            656
            
            
            
            689Above
      market NUG contracts
            
            
            29
            
            
            
            42Taxes
            
            
            67
            
            
            
            127Interest
            
            
            146
            
            
            
            131Dividends
            
            
            130
            
            
            
            118Price
      risk management liabilities
            
            
            722
            
            
            
            423Liabilities
      held for sale (Note 8)
            
            
            40
            
            
            
            68Other
            
            
            440
            
            
            
            514Total
      Current Liabilities
            
            
            3,505
            
            
            
            2,882Long-term
      Debt
            
            
            6,714
            
            
            
            6,890Deferred
      Credits and Other Noncurrent LiabilitiesDeferred
      income taxes and investment tax credits
            
            
            2,006
            
            
            
            2,192Price
      risk management liabilities
            
            
            1,144
            
            
            
            916Accrued
      pension obligations
            
            
            58
            
            
            
            59Asset
      retirement obligations
            
            
            384
            
            
            
            376Above
      market NUG contracts
            
            
            10
            
            
            
            29Other
            
            
            781
            
            
            
            752Total
      Deferred Credits and Other Noncurrent Liabilities
            
            
            4,383
            
            
            
            4,324Commitments
      and Contingent Liabilities (Note 10)Minority
      Interest
            
            
            19
            
            
            
            19Preferred
      Securities of a Subsidiary
            
            
            301
            
            
            
            301Shareowners'
      Common EquityCommon
      stock - $0.01 par value (a)
            
            
            4
            
            
            
            4Capital
      in excess of par value
            
            
            2,185
            
            
            
            2,172Earnings
      reinvested
            
            
            3,725
            
            
            
            3,448Accumulated
      other comprehensive loss
            
            
            (330
            )
            
            
            (68
            )Total
      Shareowners' Common Equity
            
            
            5,584
            
            
            
            5,556Total
      Liabilities and Equity
            
            $
            20,506
            
            
            $
            19,972(a)
            
            780
      million shares authorized; 375 million shares issued and
      outstanding at September 30, 2008, and 373 million shares issued
      and outstanding at December 31, 2007.The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED CONSOLIDATED STATEMENTS OF
      INCOMEPPL
      Energy Supply, LLC and Subsidiaries(Unaudited)(Millions
      of Dollars)Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,2008
            
            2007
            
            2008
            
            2007Operating
      RevenuesWholesale
      energy marketingRealized
            
            $
            758
            
            
            $
            517
            
            
            $
            1,639
            
            
            $
            1,244Unrealized
      economic activity (Note 14)
            
            
            1,157
            
            
            
            
            
            
            
            361
            
            
            
            (99
            )Wholesale
      energy marketing to affiliate
            
            
            453
            
            
            
            453
            
            
            
            1,370
            
            
            
            1,356Utility
            
            
            195
            
            
            
            204
            
            
            
            647
            
            
            
            638Unregulated
      retail electric and gas
            
            
            43
            
            
            
            28
            
            
            
            110
            
            
            
            73Net
      energy trading margins
            
            
            (132
            )
            
            
            20
            
            
            
            (82
            )
            
            
            38Energy-related
      businesses
            
            
            146
            
            
            
            191
            
            
            
            389
            
            
            
            557Total
            
            
            2,620
            
            
            
            1,413
            
            
            
            4,434
            
            
            
            3,807Operating
      ExpensesOperationFuel
            
            
            267
            
            
            
            257
            
            
            
            718
            
            
            
            692Energy
      purchasesRealized
            
            
            456
            
            
            
            171
            
            
            
            996
            
            
            
            520Unrealized
      economic activity (Note 14)
            
            
            1,058
            
            
            
            7
            
            
            
            173
            
            
            
            (127
            )Energy
      purchases from affiliate
            
            
            29
            
            
            
            43
            
            
            
            87
            
            
            
            117Other
      operation and maintenance
            
            
            287
            
            
            
            238
            
            
            
            837
            
            
            
            743Depreciation
            
            
            81
            
            
            
            72
            
            
            
            240
            
            
            
            227Taxes,
      other than income
            
            
            25
            
            
            
            24
            
            
            
            70
            
            
            
            74Energy-related
      businesses (Note 8)
            
            
            136
            
            
            
            177
            
            
            
            360
            
            
            
            578Total
            
            
            2,339
            
            
            
            989
            
            
            
            3,481
            
            
            
            2,824Operating
      Income
            
            
            281
            
            
            
            424
            
            
            
            953
            
            
            
            983Other
      Income - net
            
            
            1
            
            
            
            21
            
            
            
            12
            
            
            
            57Interest
      Income from Affiliates
            
            
            4
            
            
            
            11
            
            
            
            11
            
            
            
            23Interest
      Expense
            
            
            89
            
            
            
            73
            
            
            
            236
            
            
            
            217Interest
      Expense with Affiliate
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4Income
      from Continuing Operations Before Income Taxes and Minority
      Interest
            
            
            197
            
            
            
            383
            
            
            
            740
            
            
            
            842Income
      Taxes
            
            
            36
            
            
            
            72
            
            
            
            222
            
            
            
            139Minority
      Interest
            
            
            
            
            
            
            1
            
            
            
            1
            
            
            
            2Income
      from Continuing Operations
            
            
            161
            
            
            
            310
            
            
            
            517
            
            
            
            701Income
      from Discontinued Operations (net of income taxes)
      (Note 8)
            
            
            
            
            
            
            13
            
            
            
            5
            
            
            
            89Net
      Income
            
            $
            161
            
            
            $
            323
            
            
            $
            522
            
            
            $
            790The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED CONSOLIDATED STATEMENTS OF CASH
      FLOWSPPL
      Energy Supply, LLC and Subsidiaries(Unaudited)(Millions
      of Dollars)Nine
      Months Ended
              September
      30,2008
            
            2007Cash
      Flows from Operating ActivitiesNet
      income
            
            $
            522
            
            
            $
            790Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
            
            
            240
            
            
            
            234Amortization
            
            
            51
            
            
            
            83Pre-tax
      gain from the sale of a Latin American business
            
            
            
            
            
            
            (94
            )Defined
      benefits
            
            
            (61
            )
            
            
            26Deferred
      income taxes and investment tax credits
            
            
            31
            
            
            
            (25
            )Impairment
      of assets
            
            
            61
            
            
            
            98Gain
      on the sale of emission allowances
            
            
            (1
            )
            
            
            (85
            )Unrealized
      gains on derivatives and other hedging activities
            
            
            (86
            )
            
            
            (70
            )Other
            
            
            40
            
            
            
            28Change
      in current assets and current liabilitiesAccounts
      receivable
            
            
            164
            
            
            
            (61
            )Accounts
      payable
            
            
            (27
            )
            
            
            (90
            )Fuel,
      materials and supplies
            
            
            (9
            )
            
            
            32Other
            
            
            (101
            )
            
            
            125Other
      operating activitiesOther
      assets
            
            
            14
            
            
            
            (26
            )Other
      liabilities
            
            
            (4
            )
            
            
            (71
            )Net
      cash provided by operating activities
            
            
            834
            
            
            
            894Cash
      Flows from Investing ActivitiesExpenditures
      for property, plant and equipment
            
            
            (761
            )
            
            
            (884
            )Proceeds
      from the sale of Latin American businesses
            
            
            
            
            
            
            191Proceeds
      from the sale of telecommunication operations
            
            
            
            
            
            
            47Expenditures
      for intangible assets
            
            
            (276
            )
            
            
            (22
            )Proceeds
      from the sale of intangible assets
            
            
            11
            
            
            
            86Purchases
      of nuclear plant decommissioning trust investments
            
            
            (169
            )
            
            
            (176
            )Proceeds
      from the sale of nuclear decommissioning trust investments
            
            
            149
            
            
            
            165Purchases
      of other investments
            
            
            (47
            )
            
            
            (477
            )Proceeds
      from the sale of other investments
            
            
            33
            
            
            
            509Net
      increase in restricted cash and cash equivalents
            
            
            (120
            )
            
            
            (27
            )Net
      increase in note receivable with affiliate
            
            
            (10
            )Other
      investing activities
            
            
            2
            
            
            
            5Net
      cash used in investing activities
            
            
            (1,188
            )
            
            
            (583
            )Cash
      Flows from Financing ActivitiesIssuance
      of long-term debt
            
            
            699
            
            
            
            6Retirement
      of long-term debt
            
            
            (57
            )
            
            
            (141
            )Distributions
      to Member
            
            
            (666
            )
            
            
            (1,272
            )Contributions
      from Member
            
            
            125
            
            
            
            700Net
      increase in short-term debt
            
            
            150
            
            
            
            111Other
      financing activities
            
            
            (8
            )
            
            
            (7
            )Net
      cash provided by (used in) financing activities
            
            
            243
            
            
            
            (603
            )Effect
      of Exchange Rates on Cash and Cash Equivalents
            
            
            (5
            )
            
            
            2Net
      Decrease in Cash and Cash Equivalents
            
            
            (116
            )
            
            
            (290
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            355
            
            
            
            524Cash
      and Cash Equivalents included in Assets Held for Sale
            
            
            
            
            
            
            (13
            )Cash
      and Cash Equivalents at End of Period
            
            $
            239
            
            
            $
            221The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED CONSOLIDATED BALANCE
    SHEETSPPL
      Energy Supply, LLC and Subsidiaries(Unaudited)(Millions
      of Dollars)September
      30,
              2008
            
            December
      31,
              2007AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            239
            
            
            $
            355Short-term
      investments
            
            
            82
            
            
            
            102Restricted
      cash and cash equivalents
            
            
            277
            
            
            
            146Accounts
      receivable (less reserve:  2008, $21; 2007, $20)Customer
            
            
            246
            
            
            
            376Other
            
            
            49
            
            
            
            61Unbilled
      revenues
            
            
            403
            
            
            
            339Accounts
      receivable from affiliates
            
            
            138
            
            
            
            169Note
      receivable from affiliate
            
            
            10Collateral
      on PLR energy supply to affiliate
            
            
            300
            
            
            
            300Fuel,
      materials and supplies
            
            
            287
            
            
            
            282Prepayments
            
            
            63
            
            
            
            120Deferred
      income taxes
            
            
            66
            
            
            
            49Price
      risk management assets
            
            
            628
            
            
            
            318Other
      intangibles
            
            
            60
            
            
            
            76Other
            
            
            5
            
            
            
            7Total
      Current Assets
            
            
            2,853
            
            
            
            2,700InvestmentsInvestment
      in unconsolidated affiliates - at equity
            
            
            44
            
            
            
            44Nuclear
      plant decommissioning trust funds
            
            
            498
            
            
            
            555Other
            
            
            24
            
            
            
            5Total
      Investments
            
            
            566
            
            
            
            604Property,
      Plant and EquipmentElectric
      plant in serviceTransmission
      and distribution
            
            
            4,141
            
            
            
            4,470Generation
            
            
            9,560
            
            
            
            8,812General
            
            
            255
            
            
            
            33413,956
            
            
            
            13,616Construction
      work in progress
            
            
            894
            
            
            
            1,165Nuclear
      fuel
            
            
            365
            
            
            
            387Electric
      plant
            
            
            15,215
            
            
            
            15,168Gas
      and oil plant
            
            
            68
            
            
            
            66Other
      property
            
            
            182
            
            
            
            20015,465
            
            
            
            15,434Less:  accumulated
      depreciation
            
            
            5,935
            
            
            
            5,904Total
      Property, Plant and Equipment
            
            
            9,530
            
            
            
            9,530Other
      Noncurrent AssetsGoodwill
            
            
            889
            
            
            
            991Other
      intangibles
            
            
            422
            
            
            
            214Price
      risk management assets
            
            
            950
            
            
            
            568Other
            
            
            715
            
            
            
            660Total
      Other Noncurrent Assets
            
            
            2,976
            
            
            
            2,433Total
      Assets
            
            $
            15,925
            
            
            $
            15,267The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED
      CONSOLIDATED BALANCE SHEETSPPL
      Energy Supply, LLC and Subsidiaries(Unaudited)(Millions
      of Dollars)September
      30,
              2008
            
            December
      31,
              2007Liabilities
      and EquityCurrent
      LiabilitiesShort-term
      debt
            
            $
            200
            
            
            $
            51Long-term
      debt
            
            
            225
            
            
            
            283Accounts
      payable
            
            
            590
            
            
            
            611Accounts
      payable to affiliates
            
            
            63
            
            
            
            61Above
      market NUG contracts
            
            
            29
            
            
            
            42Taxes
            
            
            70
            
            
            
            102Interest
            
            
            130
            
            
            
            94Deferred
      revenue on PLR energy supply to affiliate
            
            
            12
            
            
            
            12Price
      risk management liabilities
            
            
            722
            
            
            
            421Other
            
            
            305
            
            
            
            357Total
      Current Liabilities
            
            
            2,346
            
            
            
            2,034Long-term
      Debt
            
            
            5,297
            
            
            
            4,787Deferred
      Credits and Other Noncurrent LiabilitiesDeferred
      income taxes and investment tax credits
            
            
            1,321
            
            
            
            1,413Price
      risk management liabilities
            
            
            1,143
            
            
            
            904Accrued
      pension obligations
            
            
            19
            
            
            
            23Asset
      retirement obligations
            
            
            384
            
            
            
            376Above
      market NUG contracts
            
            
            10
            
            
            
            29Deferred
      revenue on PLR energy supply to affiliate
            
            
            3
            
            
            
            12Other
            
            
            461
            
            
            
            465Total
      Deferred Credits and Other Noncurrent Liabilities
            
            
            3,341
            
            
            
            3,222Commitments
      and Contingent Liabilities (Note 10)Minority
      Interest
            
            
            19
            
            
            
            19Member's
      Equity
            
            
            4,922
            
            
            
            5,205Total
      Liabilities and Equity
            
            $
            15,925
            
            
            $
            15,267The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED CONSOLIDATED STATEMENTS OF
      INCOMEPPL
      Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,2008
            
            2007
            
            2008
            
            2007Operating
      RevenuesRetail
      electric
            
            $
            813
            
            
            $
            812
            
            
            $
            2,463
            
            
            $
            2,438Wholesale
      electric to affiliate
            
            
            29
            
            
            
            43
            
            
            
            87
            
            
            
            117Total
            
            
            842
            
            
            
            855
            
            
            
            2,550
            
            
            
            2,555Operating
      ExpensesOperationEnergy
      purchases
            
            
            44
            
            
            
            55
            
            
            
            129
            
            
            
            156Energy
      purchases from affiliate
            
            
            453
            
            
            
            453
            
            
            
            1,370
            
            
            
            1,356Other
      operation and maintenance
            
            
            102
            
            
            
            104
            
            
            
            306
            
            
            
            295Amortization
      of recoverable transition costs
            
            
            73
            
            
            
            78
            
            
            
            217
            
            
            
            229Depreciation
            
            
            32
            
            
            
            34
            
            
            
            97
            
            
            
            99Taxes,
      other than income
            
            
            51
            
            
            
            49
            
            
            
            155
            
            
            
            149Total
            
            
            755
            
            
            
            773
            
            
            
            2,274
            
            
            
            2,284Operating
      Income
            
            
            87
            
            
            
            82
            
            
            
            276
            
            
            
            271Other
      Income - net
            
            
            
            
            
            
            2
            
            
            
            4
            
            
            
            12Interest
      Income from Affiliate
            
            
            1
            
            
            
            5
            
            
            
            5
            
            
            
            14Interest
      Expense
            
            
            22
            
            
            
            29
            
            
            
            72
            
            
            
            91Interest
      Expense with Affiliate
            
            
            3
            
            
            
            4
            
            
            
            8
            
            
            
            13Income
      Before Income Taxes
            
            
            63
            
            
            
            56
            
            
            
            205
            
            
            
            193Income
      Taxes
            
            
            22
            
            
            
            16
            
            
            
            72
            
            
            
            62Net
      Income
            
            
            41
            
            
            
            40
            
            
            
            133
            
            
            
            131Dividends
      on Preferred Securities
            
            
            5
            
            
            
            5
            
            
            
            14
            
            
            
            14Income
      Available to PPL
            
            $
            36
            
            
            $
            35
            
            
            $
            119
            
            
            $
            117The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED CONSOLIDATED STATEMENTS OF CASH
      FLOWSPPL
      Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)Nine
      Months Ended
              September
      30,2008
            
            2007Cash
      Flows from Operating ActivitiesNet
      income
            
            $
            133
            
            
            $
            131Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
            
            
            97
            
            
            
            99Amortization
      - recoverable transition costs and other
            
            
            232
            
            
            
            242Other
            
            
            1
            
            
            
            7Change
      in current assets and current liabilitiesAccounts
      receivable
            
            
            (14
            )
            
            
            (14
            )Accounts
      payable
            
            
            (53
            )
            
            
            (26
            )Prepayments
            
            
            (34
            )
            
            
            (52
            )Other
            
            
            23
            
            
            
            (34
            )Other
      operating activitiesOther
      assets
            
            
            
            
            
            
            13Other
      liabilities
            
            
            18
            
            
            
            (7
            )Net
      cash provided by operating activities
            
            
            403
            
            
            
            359Cash
      Flows from Investing ActivitiesExpenditures
      for property, plant and equipment
            
            
            (193
            )
            
            
            (208
            )Expenditures
      for intangible assets
            
            
            (7
            )
            
            
            (2
            )Purchases
      of investments
            
            
            
            
            
            
            (32
            )Proceeds
      from the sale of investments
            
            
            
            
            
            
            57Net
      decrease (increase) in restricted cash and cash
equivalents
            
            
            41
            
            
            
            (10
            )Net
      decrease in note receivable from affiliate
            
            
            147Other
      investing activities
            
            
            3
            
            
            
            7Net
      cash used in investing activities
            
            
            (9
            )
            
            
            (188
            )Cash
      Flows from Financing ActivitiesIssuance
      of long-term debt
            
            
            
            
            
            
            250Retirement
      of long-term debt
            
            
            (232
            )
            
            
            (483
            )Payment
      of common stock dividends to PPL
            
            
            (73
            )
            
            
            (95
            )Payment
      of dividends on preferred securities
            
            
            (14
            )
            
            
            (14
            )Net
      (decrease) increase in short-term debt
            
            
            (41
            )
            
            
            39Other
      financing activities
            
            
            
            
            
            
            (3
            )Net
      cash used in financing activities
            
            
            (360
            )
            
            
            (306
            )Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            
            34
            
            
            
            (135
            )Cash
      and Cash Equivalents at Beginning of Period
            
            
            33
            
            
            
            150Cash
      and Cash Equivalents at End of Period
            
            $
            67
            
            
            $
            15The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED CONSOLIDATED BALANCE
    SHEETSPPL
      Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)September
      30,
              2008
            
            December
      31,
              2007AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            67
            
            
            $
            33Restricted
      cash and cash equivalents
            
            
            43
            
            
            
            42Accounts
      receivable (less reserve:  2008, $15; 2007, $18)Customer
            
            
            214
            
            
            
            197Other
            
            
            17
            
            
            
            17Unbilled
      revenues
            
            
            149
            
            
            
            192Accounts
      receivable from affiliates
            
            
            13
            
            
            
            16Note
      receivable from affiliate
            
            
            130
            
            
            
            277Prepayments
            
            
            50
            
            
            
            16Prepayment
      on PLR energy supply from affiliate
            
            
            12
            
            
            
            12Other
            
            
            48
            
            
            
            53Total
      Current Assets
            
            
            743
            
            
            
            855Property,
      Plant and EquipmentElectric
      plant in serviceTransmission
      and distribution
            
            
            4,453
            
            
            
            4,316General
            
            
            479
            
            
            
            4434,932
            
            
            
            4,759Construction
      work in progress
            
            
            92
            
            
            
            114Electric
      plant
            
            
            5,024
            
            
            
            4,873Other
      property
            
            
            2
            
            
            
            25,026
            
            
            
            4,875Less:  accumulated
      depreciation
            
            
            1,913
            
            
            
            1,854Total
      Property, Plant and Equipment
            
            
            3,113
            
            
            
            3,021Regulatory
      and Other Noncurrent AssetsRecoverable
      transition costs
            
            
            357
            
            
            
            574Intangibles
            
            
            128
            
            
            
            121Prepayment
      on PLR energy supply from affiliate
            
            
            3
            
            
            
            12Taxes
      recoverable through future rates
            
            
            243
            
            
            
            245Other
            
            
            115
            
            
            
            158Total
      Regulatory and Other Noncurrent Assets
            
            
            846
            
            
            
            1,110Total
      Assets
            
            $
            4,702
            
            
            $
            4,986The
      accompanying Notes to Condensed Consolidated Financial Statements are an
      integral part of the financial
statements.


CONDENSED
      CONSOLIDATED BALANCE SHEETSPPL
      Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions
      of Dollars)September
      30,
              2008
            
            December
      31,
              2007Liabilities
      and EquityCurrent
      LiabilitiesShort-term
      debt
            
            
            
            
            
            $
            41Long-term
      debt
            
            $
            649
            
            
            
            395Accounts
      payable
            
            
            45
            
            
            
            46Accounts
      payable to affiliates
            
            
            145
            
            
            
            192Taxes
            
            
            30
            
            
            
            44Collateral
      on PLR energy supply from affiliate
            
            
            300
            
            
            
            300Other
            
            
            111
            
            
            
            120Total
      Current Liabilities
            
            
            1,280
            
            
            
            1,138Long-term
      Debt
            
            
            793
            
            
            
            1,279Deferred
      Credits and Other Noncurrent LiabilitiesDeferred
      income taxes and investment tax credits
            
            
            752
            
            
            
            763Other
            
            
            245
            
            
            
            220Total
      Deferred Credits and Other Noncurrent Liabilities
            
            
            997
            
            
            
            983Commitments
      and Contingent Liabilities (Note 10)Shareowners'
      EquityPreferred
      securities
            
            
            301
            
            
            
            301Common
      stock - no par value (a)
            
            
            364
            
            
            
            364Additional
      paid-in capital
            
            
            424
            
            
            
            424Earnings
      reinvested
            
            
            543
            
            
            
            497Total
      Shareowners' Equity
            
            
            1,632
            
            
            
            1,586Total
      Liabilities and Equity
            
            $
            4,702
            
            
            $
            4,986





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


Combined
Notes to Condensed Consolidated Financial Statements
(Unaudited)





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





1.
            Interim
      Financial Statements





(PPL,
PPL Energy Supply and PPL Electric)





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





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





(PPL)





In
October 2008, PPL completed the sale of its natural gas distribution and propane
businesses.  On the Statements of Income, the operating results of the
natural gas distribution and propane businesses for the three and nine months
ended September 30, 2008 and 2007, are classified as Discontinued
Operations.  At September 30, 2008 and December 31, 2007, the
assets and liabilities related to the natural gas distribution and propane
businesses are reflected in the Balance Sheets as held for sale.  See
Note 8 for additional information.  The Statements of Cash Flows do
not separately report the cash flows of the Discontinued
Operations.





(PPL
and PPL Energy Supply)





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





2.
            Summary of Significant Accounting
  Policies





(PPL,
PPL Energy Supply and PPL Electric)





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





Price
Risk Management





Master Netting
Arrangements





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





PPL's and
PPL Energy Supply's obligation to return counterparty cash collateral under
master netting arrangements was $3 million at September 30, 2008 and $21
million at December 31, 2007.





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





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





New
Accounting Standards Adopted





SFAS 157, as
amended





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





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





PPL and
its subsidiaries adopted SFAS 157, as amended by FSP FAS 157-1 and FSP FAS
157-2, prospectively, effective January 1, 2008.  Limited
retrospective application for financial instruments that were previously
measured at fair value in accordance with footnote 3 of EITF Issue No. 02-3 was
not required.  The January 1, 2008 adoption did not have a significant
impact on PPL and its subsidiaries.  As permitted by this guidance,
PPL and its subsidiaries will apply SFAS 157, as amended, prospectively,
effective January 1, 2009, to nonfinancial assets and nonfinancial liabilities
that are not recognized or disclosed at fair value in the financial statements
on a recurring basis.  PPL and its subsidiaries are in the process of
evaluating the impact of applying SFAS 157, as amended, to these
items.  The potential impact of this application is not yet
determinable, but could be material.





In
October 2008, the FASB amended SFAS 157 through the issuance of FSP FAS 157-3,
which was effective upon issuance, including prior periods for which financial
statements have not been issued.  FSP FAS 157-3 amends SFAS 157 to
clarify its application in a market that is not active.  PPL and
its subsidiaries adopted FSP FAS 157-3, prospectively, effective July 1,
2008.  The adoption of FSP FAS 157-3 did not have a material effect on
PPL and its subsidiaries.





Since PPL
and PPL Energy Supply elected to defer the effective date of SFAS 157, as
amended, for eligible assets and liabilities, the provisions of this standard
were not applied to intangible assets acquired, charges related to certain
emission allowances and AROs recognized in 2008.  PPL also did not
apply this standard to determine the impairments recognized during 2008 related
to its natural gas distribution and propane businesses.


SFAS 159





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





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





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





New
Accounting Standards Pending Adoption





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





3.
            Segment and Related
Information





(PPL
and PPL Energy Supply)





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





Financial
data for the segments are:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,PPL
            
            2008
            
            2007
            
            2008
            
            2007Income
      Statement DataRevenues
      from external customersSupply
      (a)
            
            $
            1,965
            
            
            $
            751
            
            
            $
            2,396
            
            
            $
            1,792International
      Delivery
            
            
            203
            
            
            
            212
            
            
            
            673
            
            
            
            665Pennsylvania
      Delivery
            
            
            813
            
            
            
            811
            
            
            
            2,462
            
            
            
            2,4362,981
            
            
            
            1,774
            
            
            
            5,531
            
            
            
            4,893Intersegment
      revenuesSupply
            
            
            453
            
            
            
            453
            
            
            
            1,370
            
            
            
            1,356Pennsylvania
      Delivery
            
            
            30
            
            
            
            44
            
            
            
            89
            
            
            
            119Net
      IncomeSupply
      (a)
            
            
            98
            
            
            
            205
            
            
            
            297
            
            
            
            454International
      Delivery (b)
            
            
            73
            
            
            
            108
            
            
            
            233
            
            
            
            319Pennsylvania
      Delivery (c)
            
            
            32
            
            
            
            9
            
            
            
            123
            
            
            
            97$
            203
            
            
            $
            322
            
            
            $
            653
            
            
            $
            870





September 30,
      2008
            
            December 31,
      2007Balance
      Sheet DataTotal
      assetsSupply
            
            $
            10,506
            
            
            $
            9,231International
      Delivery
            
            
            5,142
            
            
            
            5,639Pennsylvania
      Delivery
            
            
            4,858
            
            
            
            5,102$
            20,506
            
            
            $
            19,972





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,PPL Energy
      Supply
            
            2008
            
            2007
            
            2008
            
            2007Income
      Statement DataRevenues
      from external customersSupply
      (a)
            
            $
            2,417
            
            
            $
            1,201
            
            
            $
            3,761
            
            
            $
            3,142International
      Delivery
            
            
            203
            
            
            
            212
            
            
            
            673
            
            
            
            6652,620
            
            
            
            1,413
            
            
            
            4,434
            
            
            
            3,807Net
      IncomeSupply
      (a)
            
            
            88
            
            
            
            215
            
            
            
            289
            
            
            
            471International
      Delivery (b)
            
            
            73
            
            
            
            108
            
            
            
            233
            
            
            
            319$
            161
            
            
            $
            323
            
            
            $
            522
            
            
            $
            790





September 30,
      2008
            
            December 31,
      2007Balance
      Sheet DataTotal
      assetsSupply
            
            $
            10,783
            
            
            $
            9,628International
      Delivery
            
            
            5,142
            
            
            
            5,639$
            15,925
            
            
            $
            15,267





(a)
            
            Includes
      unrealized gains and losses from economic activity.  See Note 14
      for additional information.(b)
            
            The
      nine-month period in 2008 and both periods in 2007 include the results of
      Discontinued Operations of the Latin American businesses.  See
      Note 8 for additional information.(c)
            
            2008
      and 2007 include the results of Discontinued Operations of PPL's natural
      gas distribution and propane businesses.  See Note 8 for
      additional information.





4.
            Earnings Per Share





(PPL)





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





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





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








Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Income
      (Numerator)Income
      from continuing operations
            
            $
            208
            
            
            $
            333
            
            
            $
            643
            
            
            $
            798(Loss)
      income from discontinued operations (net of income taxes)
            
            
            (5
            )
            
            
            (11
            )
            
            
            10
            
            
            
            72Net
      Income
            
            $
            203
            
            
            $
            322
            
            
            $
            653
            
            
            $
            870Shares
      (Denominator)Shares
      for Basic EPS
            
            
            374,291
            
            
            
            379,896
            
            
            
            373,394
            
            
            
            383,036Add
      incremental shares:Convertible
      Senior Notes
            
            
            
            
            
            
            1,710
            
            
            
            585
            
            
            
            1,620Restricted
      stock, stock options and other share-based awards
            
            
            2,394
            
            
            
            2,969
            
            
            
            2,603
            
            
            
            3,002Shares
      for Diluted EPS
            
            
            376,685
            
            
            
            384,575
            
            
            
            376,582
            
            
            
            387,658Basic
      EPSIncome
      from continuing operations
            
            $
            0.55
            
            
            $
            0.88
            
            
            $
            1.72
            
            
            $
            2.08(Loss)
      income from discontinued operations (net of income taxes)
            
            
            (0.01
            )
            
            
            (0.03
            )
            
            
            0.03
            
            
            
            0.19Net
      Income
            
            $
            0.54
            
            
            $
            0.85
            
            
            $
            1.75
            
            
            $
            2.27Diluted
      EPSIncome
      from continuing operations
            
            $
            0.55
            
            
            $
            0.87
            
            
            $
            1.70
            
            
            $
            2.06(Loss)
      income from discontinued operations (net of income taxes)
            
            
            (0.01
            )
            
            
            (0.03
            )
            
            
            0.03
            
            
            
            0.19Net
      Income
            
            $
            0.54
            
            
            $
            0.84
            
            
            $
            1.73
            
            
            $
            2.25





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





During
the nine months ended September 30, 2008, all Convertible Senior Notes were
either converted at the election of the holders or redeemed at par by PPL
Energy Supply.  No Convertible Senior Notes were outstanding at
September 30, 2008.  See Note 7 for additional
information.





During
the nine months ended September 30, 2008, PPL issued 1,053,422 shares of
common stock related to the exercise of stock options, vesting of restricted
stock and restricted stock units and conversion of stock units granted to
directors under its stock-based compensation plans.





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





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Stock
      options
            
            
            662
            
            
            
            
            
            
            
            221Restricted
      stock units
            
            
            12
            
            
            
            
            
            
            
            4





5.
            Income Taxes





(PPL,
PPL Energy Supply and PPL Electric)





Reconciliations
of effective income tax rates are:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,PPL
            
            2008
            
            2007
            
            2008
            
            2007Reconciliation
      of Income Tax ExpenseFederal
      income tax on Income from Continuing Operations Before Income Taxes,
      Minority Interest and Dividends on Preferred Securities of a
      Subsidiary at statutory tax rate - 35%
            
            $
            95
            
            
            $
            150
            
            
            $
            330
            
            
            $
            351Increase
      (decrease) due to:State
      income taxes (a)
            
            
            7
            
            
            
            11
            
            
            
            24
            
            
            
            22Amortization
      of investment tax credit
            
            
            (2
            )
            
            
            (3
            )
            
            
            (7
            )
            
            
            (8
            )Domestic
      manufacturing deduction
            
            
            (6
            )
            
            
            (4
            )
            
            
            (13
            )
            
            
            (6
            )Difference
      related to income recognition of foreign affiliates (net of foreign income
      taxes)
            
            
            (20
            )
            
            
            (4
            )
            
            
            (37
            )
            
            
            (21
            )Enactment
      of the U.K.'s Finance Act 2008 and 2007 (b)
            
            
            (8
            )
            
            
            (54
            )
            
            
            (8
            )
            
            
            (54
            )Stranded
      cost securitization (a)
            
            
            (2
            )
            
            
            (2
            )
            
            
            (5
            )
            
            
            (5
            )Federal
      income tax credits (c)
            
            
            3
            
            
            
            (3
            )
            
            
            16
            
            
            
            (55
            )Change
      in foreign tax reserves (a)
            
            
            
            
            
            
            
            
            
            
            5Foreign
      income tax return adjustments
            
            
            
            
            
            
            
            
            
            
            (17
            )Change
      in federal tax reserves (a)
            
            
            
            
            
            
            (3
            )
            
            
            6
            
            
            
            (33
            )Other
            
            
            (8
            )
            
            
            
            
            
            
            (9
            )
            
            
            (3
            )(36
            )
            
            
            (62
            )
            
            
            (45
            )
            
            
            (163
            )Total
      income tax expense
            
            $
            59
            
            
            $
            88
            
            
            $
            285
            
            
            $
            188Effective
      income tax rate
            
            
            21.7%
            
            
            
            20.6%
            
            
            
            30.2%
            
            
            
            18.8%





(a)
            
            For
      the three months ended September 30, 2008, PPL recorded
      an insignificant tax benefit related to income tax reserve changes,
      which consisted of a $2 million benefit reflected in "Stranded cost
      securitization," offset by a $2 million expense reflected in "State income
      taxes."
              
              For
      the three months ended September 30, 2007, PPL recorded a $4 million
      benefit related to income tax reserve changes, which consisted of a $3
      million benefit reflected in "Change in federal tax reserves" and a $2
      million benefit reflected in "Stranded cost securitization," offset by a
      $1 million expense reflected in "State income taxes."
              
              For
      the nine months ended September 30, 2008, PPL recorded an $8 million
      expense related to income tax reserve changes, which consisted of a $5
      million expense reflected in "Change in foreign tax reserves" and a $6
      million expense reflected in "Change in federal tax reserves" and a
      $2 million expense reflected in "State income taxes," offset by a $5
      million benefit reflected in "Stranded cost securitization."
              
              For
      the nine months ended September 30, 2007, PPL recorded a $37 million
      benefit related to income tax reserve changes, which consisted of a $33
      million benefit reflected in "Change in federal tax reserves" and a $5
      million benefit reflected in "Stranded cost securitization," offset by a
      $1 million expense reflected in "State income taxes."(b)
            
            The
      U.K.'s Finance Act 2008, enacted in July 2008, included a phase-out of tax
      depreciation on certain buildings.  As a result, PPL recorded an
      $8 million deferred tax benefit during the third quarter of 2008 related
      to the reduction in its deferred tax liabilities.
              
              The
      U.K.'s Finance Act 2007, enacted in July 2007, included a reduction
      in the U.K.'s statutory income tax rate.  Effective April 1,
      2008, the statutory income tax rate was reduced from 30% to
      28%.  As a result, PPL recorded a $54 million deferred tax
      benefit during the third quarter of 2007 related to the reduction in its
      deferred tax liabilities.(c)
            
            In
      March 2008, PPL recorded a $13 million expense to adjust the amount of
      synthetic fuel tax credits recorded during 2007.  See Note 10
      for additional information.







Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,PPL Energy
      Supply
            
            2008
            
            2007
            
            2008
            
            2007Reconciliation
      of Income Tax ExpenseFederal
      income tax on Income from Continuing Operations Before Income Taxes and
      Minority Interest at statutory tax rate - 35%
            
            $
            69
            
            
            $
            134
            
            
            $
            259
            
            
            $
            295Increase
      (decrease) due to:State
      income taxes (a)
            
            
            5
            
            
            
            13
            
            
            
            20
            
            
            
            24Amortization
      of investment tax credit
            
            
            (2
            )
            
            
            (2
            )
            
            
            (6
            )
            
            
            (6
            )Domestic
      manufacturing deduction
            
            
            (6
            )
            
            
            (4
            )
            
            
            (13
            )
            
            
            (6
            )Difference
      related to income recognition of foreign affiliates (net of foreign income
      taxes)
            
            
            (20
            )
            
            
            (4
            )
            
            
            (37
            )
            
            
            (21
            )Enactment
      of the U.K.'s Finance Act 2008 and 2007 (b)
            
            
            (8
            )
            
            
            (54
            )
            
            
            (8
            )
            
            
            (54
            )Federal
      income tax credits (c)
            
            
            3
            
            
            
            (7
            )
            
            
            16
            
            
            
            (58
            )Change
      in foreign tax reserves (a)
            
            
            
            
            
            
            
            
            
            
            5Foreign
      income tax return adjustments
            
            
            
            
            
            
            
            
            
            
            (17
            )Change
      in federal tax reserves (a)
            
            
            1
            
            
            
            (2
            )
            
            
            7
            
            
            
            (31
            )Other
            
            
            (6
            )
            
            
            (2
            )
            
            
            (4
            )
            
            
            (4
            )(33
            )
            
            
            (62
            )
            
            
            (37
            )
            
            
            (156
            )Total
      income tax expense
            
            $
            36
            
            
            $
            72
            
            
            $
            222
            
            
            $
            139Effective
      income tax rate
            
            
            18.3%
            
            
            
            18.8%
            
            
            
            30.0%
            
            
            
            16.5%





(a)
            
            For
      the three months ended September 30, 2008, PPL Energy Supply recorded a $1
      million expense related to income tax reserve changes reflected in "Change
      in federal tax reserves."
              
              For
      the three months ended September 30, 2007, PPL Energy Supply recorded a $2
      million benefit related to income tax reserve changes reflected in "Change
      in federal tax reserves."
              
              For
      the nine months ended September 30, 2008, PPL Energy Supply recorded a $13
      million expense related to income tax reserve changes, which consisted of
      a $5 million expense reflected in "Change in foreign tax reserves," a
      $7 million expense reflected in "Change in federal tax reserves" and a $1
      million expense reflected in "State income taxes."
              
              For
      the nine months ended September 30, 2007, PPL Energy Supply recorded a $30
      million benefit related to income tax reserve changes, which consisted of
      a $31 million benefit reflected in "Change in federal tax reserves,"
      offset by a $1 million expense reflected in "State income
      taxes."(b)
            
            The
      U.K.'s Finance Act 2008, enacted in July 2008, included a phase-out of tax
      depreciation on certain buildings.  As a result, PPL Energy Supply
      recorded an $8 million deferred tax benefit during the third quarter of
      2008 related to the reduction in its deferred tax
liabilities.
              
              The
      U.K.'s Finance Act 2007, enacted in July 2007, included a reduction
      in the U.K.'s statutory income tax rate.  Effective April 1,
      2008, the statutory income tax rate was reduced from 30% to
      28%.  As a result, PPL Energy Supply recorded a $54 million
      deferred tax benefit during the third quarter of 2007 related to the
      reduction in its deferred tax liabilities.(c)
            
            In
      March 2008, PPL Energy Supply recorded a $13 million expense to adjust the
      amount of synthetic fuel tax credits recorded during 2007.  See
      Note 10 for additional information







Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,PPL
      Electric
            
            2008
            
            2007
            
            2008
            
            2007Reconciliation
      of Income Tax ExpenseFederal
      income tax on Income Before Income Taxes at statutory tax rate -
      35%
            
            $
            22
            
            
            $
            20
            
            
            $
            72
            
            
            $
            68Increase
      (decrease) due to:State
      income taxes (a)
            
            
            3
            
            
            
            
            
            
            
            9
            
            
            
            4Amortization
      of investment tax credit
            
            
            (1
            )
            
            
            (1
            )
            
            
            (2
            )
            
            
            (2
            )Stranded
      cost securitization (a)
            
            
            (2
            )
            
            
            (2
            )
            
            
            (5
            )
            
            
            (5
            )Other
      (a)
            
            
            
            
            
            
            (1
            )
            
            
            (2
            )
            
            
            (3
            )(4
            )
            
            
            
            
            
            
            (6
            )Total
      income tax expense
            
            $
            22
            
            
            $
            16
            
            
            $
            72
            
            
            $
            62Effective
      income tax rate
            
            
            34.9%
            
            
            
            28.6%
            
            
            
            35.1%
            
            
            
            32.1%





(a)
            
            For
      the three months ended September 30, 2008, PPL Electric recorded a $2
      million benefit related to income tax reserve changes, which is reflected
      in "Stranded cost securitization."
              
              For
      the three months ended September 30, 2007, PPL Electric recorded a $3
      million benefit related to income tax reserve changes, which consisted of
      a $2 million benefit reflected in "Stranded cost securitization" and a $1
      million benefit reflected in "Other."
              
              For
      the nine months ended September 30, 2008, PPL Electric recorded a $4
      million benefit related to income tax reserve changes, which consisted of
      a $5 million benefit reflected in "Stranded cost securitization" and a $1
      million benefit reflected in "Other," offset by a $2 million expense
      reflected in "State income taxes."
              
              For
      the nine months ended September 30, 2007, PPL Electric recorded a $6
      million benefit related to income tax reserve changes, which consisted of
      a $5 million benefit reflected in "Stranded cost securitization" and
      a $2 million benefit reflected in "Other," offset by a $1 million expense
      reflected in "State income taxes."





Unrecognized
Tax Benefits





Changes
to unrecognized tax benefits were as follows:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007PPLBeginning
      of period (a)
            
            $
            217
            
            
            $
            192
            
            
            $
            204
            
            
            $
            226Additions
      based on tax positions of prior years
            
            
            3
            
            
            
            
            
            
            
            37Reduction
      based on tax positions of prior years
            
            
            (3
            )
            
            
            (5
            )
            
            
            (13
            )
            
            
            (9)Additions
      based on tax positions related to the current year
            
            
            2
            
            
            
            
            
            
            
            9Settlements
            
            
            
            
            
            
            
            
            
            
            (12
            )Lapse
      of applicable statutes of limitations
            
            
            (2
            )
            
            
            (3
            )
            
            
            (6
            )
            
            
            (33
            )Effects
      of foreign currency translation
            
            
            (6
            )
            
            
            1
            
            
            
            (8
            )
            
            
            1End
      of period
            
            $
            211
            
            
            $
            185
            
            
            $
            211
            
            
            $
            185PPL Energy
      SupplyBeginning
      of period (a)
            
            $
            130
            
            
            $
            114
            
            
            $
            130
            
            
            $
            143Additions
      based on tax positions of prior years
            
            
            3
            
            
            
            
            
            
            
            20Reduction
      based on tax positions of prior years
            
            
            (3
            )
            
            
            (5
            )
            
            
            (10
            )
            
            
            (8
            )Additions
      based on tax positions related to the current year
            
            
            2
            
            
            
            
            
            
            
            6Settlements
            
            
            
            
            
            
            
            
            
            
            (12
            )Lapse
      of applicable statutes of limitations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (26
            )Effects
      of foreign currency translation
            
            
            (6
            )
            
            
            1
            
            
            
            (8
            )
            
            
            1End
      of period
            
            $
            126
            
            
            $
            110
            
            
            $
            126
            
            
            $
            110PPLElectricBeginning
      of period
            
            $
            81
            
            
            $
            73
            
            
            $
            68
            
            
            $
            78Additions
      based on tax positions of prior years
            
            
            
            
            
            
            
            
            
            
            17Reduction
      based on tax positions of prior years
            
            
            
            
            
            
            
            
            
            
            (3
            )
            
            
            (1
            )Additions
      based on tax positions related to the current year
            
            
            
            
            
            
            
            
            
            
            3Lapse
      of applicable statutes of limitations
            
            
            (2
            )
            
            
            (3
            )
            
            
            (6
            )
            
            
            (7
            )End
      of period
            
            $
            79
            
            
            $
            70
            
            
            $
            79
            
            
            $
            70





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





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





PPL
            
            PPL
      Energy Supply
            
            PPL
      ElectricTotal
      unrecognized tax benefits
            
            $
            211
            
            
            $
            126
            
            
            $
            79Unrecognized
      tax benefits associated with taxable or deductible temporary
      differences
            
            
            (19
            )
            
            
            10
            
            
            
            (28
            )Unrecognized
      tax benefits associated with business combinations (a)
            
            
            (17
            )
            
            
            (17
            )Total
      indirect effect of unrecognized tax benefits on other tax
      jurisdictions
            
            
            (39
            )
            
            
            (11
            )
            
            
            (27
            )Total
      unrecognized tax benefits and related indirect effects that if recognized
      would decrease the effective tax rate
            
            $
            136
            
            
            $
            108
            
            
            $
            24





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





At
September 30, 2008, it was reasonably possible that during the next 12 months
the total amount of unrecognized tax benefits could increase by as much as $2
million or decrease by up to $99 million for PPL, decrease between $3 million
and $84 million for PPL Energy Supply and decrease by up to $9 million for PPL
Electric.  These increases and decreases could result from subsequent
recognition, derecognition and/or changes in measurement of uncertain tax
positions related to the creditability of foreign taxes, the timing and
utilization of foreign tax credits and the related impact on alternative minimum
tax and other credits, the timing and/or valuation of certain deductions,
intercompany transactions and unitary filing groups.  The events that
could cause these changes are direct settlements with taxing authorities,
litigation, legal or administrative guidance by relevant taxing authorities and
the lapse of an applicable statute of limitation.





At
September 30, 2008, PPL, PPL Energy Supply and PPL Electric had accrued interest
related to tax positions of $32 million, $25 million and $7
million.  At December 31, 2007, PPL, PPL Energy Supply and PPL
Electric had accrued interest and penalties of $31 million, $26 million and $4
million.





PPL and
its subsidiaries recognize interest and penalties in "Income Taxes" on their
Statements of Income.  The following amounts were
recognized:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007PPL
            
            
            
            
            
            $
            1
            
            
            $
            1
            
            
            $
            (4
            )PPL
      Energy Supply
            
            $
            (1
            )
            
            
            1
            
            
            
            (1
            )
            
            
            (4
            )PPL
      Electric
            
            
            1
            
            
            
            
            
            
            
            2





The
changes during the three and nine months ended September
30, 2008, compared with the same periods in 2007, for PPL, PPL Energy
Supply and PPL Electric were primarily the result of additional interest accrued
or reversed related to tax positions of prior years and the lapse of
applicable statutes of limitations, with respect to certain issues.





6.
            Comprehensive
Income





(PPL
and PPL Energy Supply)





The
after-tax components of comprehensive income, including significant tax impacts,
were as follows:





Three
      Months Ended September 30,
              
              Nine
      Months Ended September 30,PPL
              
              2008
              
              2007
              
              2008
              
              2007Net
      Income
              
              $
              203
              
              
              $
              322
              
              
              
              653
              
              
              $
              870Other
      Comprehensive income (loss):Foreign
      currency translation adjustments
              
              
              (145
              )
              
              
              20
              
              
              
              (217
              )
              
              
              34Net
      unrealized (loss) gain on available-for-sale securities
              
              
              (6
              )
              
              
              4
              
              
              
              (28
              )
              
              
              15Net
      unrealized gain (loss) on qualifying derivatives, net of tax (expense)
      benefit of $(453), $(7), $(104), $57
              
              
              665
              
              
              
              10
              
              
              
              166
              
              
              
              (92
              )Equity
      investee comprehensive loss:Defined
      benefit plan
              
              
              
              
              
              
              
              
              
              
              (1
              )Reclassifications
      to net income:Foreign
      currency translation adjustments
              
              
              
              
              
              
              3
              
              
              
              
              
              
              
              3Defined
      benefit plans:Prior
      service costs
              
              
              4
              
              
              
              4
              
              
              
              12
              
              
              
              11Net
      actuarial gain
              
              
              4
              
              
              
              11
              
              
              
              9
              
              
              
              30Transition
      asset
              
              
              
              
              
              
              1
              
              
              
              1
              
              
              
              1Available-for-sale
      securities
              
              
              (1
              )
              
              
              
              
              
              
              
              
              
              
              (3
              )Qualifying
      derivatives, net of tax benefit (expense) of $137, $(5), $135,
      $(7)
              
              
              (202
              )
              
              
              12
              
              
              
              (203
              )
              
              
              28Total
      other comprehensive income (loss)
              
              
              319
              
              
              
              65
              
              
              
              (261
              )
              
              
              27Comprehensive
      income
              
              $
              522
              
              
              $
              387
              
              
              $
              392
              
              
              $
              897PPL Energy
      SupplyNet
      Income
              
              $
              161
              
              
              $
              323
              
              
              $
              522
              
              
              $
              790Other
      Comprehensive income (loss):Foreign
      currency translation adjustments
              
              
              (145
              )
              
              
              20
              
              
              
              (217
              )
              
              
              34Net
      unrealized (loss) gain on available-for-sale
    securities
              
              
              (7
              )
              
              
              4
              
              
              
              (28
              )
              
              
              15Net
      unrealized gain (loss) on qualifying derivatives, net of tax (expense)
      benefit of $(453), $(12), $(103), $54
              
              
              668
              
              
              
              18
              
              
              
              167
              
              
              
              (88
              )Equity
      investee comprehensive loss:Defined
      benefit plan
              
              
              
              
              
              
              
              
              
              
              (1
              )Reclassifications
      to net income:Foreign
      currency translation adjustments
              
              
              
              
              
              
              3
              
              
              
              
              
              
              
              3Defined
      benefit plans:Prior
      service costs
              
              
              3
              
              
              
              2
              
              
              
              9
              
              
              
              8Net
      actuarial gain
              
              
              3
              
              
              
              10
              
              
              
              9
              
              
              
              30Transition
      asset
              
              
              
              
              
              
              1
              
              
              
              1
              
              
              
              1Available-for-sale
      securities
              
              
              (1
              )
              
              
              
              
              
              
              
              
              
              
              (3
              )Qualifying
      derivatives, net of tax benefit (expense) of $137, $(4), $133,
      $(5)
              
              
              (206
              )
              
              
              10
              
              
              
              (205
              )
              
              
              25Total
      other comprehensive income (loss)
              
              
              315
              
              
              
              68
              
              
              
              (265
              )
              
              
              25Comprehensive
      income
              
              $
              476
              
              
              $
              391
              
              
              $
              257
              
              
              $
              815





(PPL
Electric)





PPL
Electric's comprehensive income approximates net income.





7.
            Credit Arrangements and Financing
    Activities





Credit
Arrangements





(PPL
and PPL Energy Supply)





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





In March
2008, PPL Energy Supply increased the capacity of its 364-day reimbursement
agreement from $200 million to $300 million and extended the expiration date of
the agreement to March 2009.  Under the agreement, PPL Energy Supply
can cause the bank to issue up to $300 million of letters of credit but cannot
make cash borrowings.  At September 30, 2008, there were $203
million of letters of credit outstanding under this agreement.





PPL
Energy Supply maintains a $3.4 billion five-year credit facility that expires in
June 2012.  Under this facility, PPL Energy Supply has the ability to
make cash borrowings and to cause the lenders to issue letters of
credit.  At September 30, 2008, there were no cash borrowings and
$274 million of letters of credit outstanding under this facility.  In
October 2008, PPL Energy Supply borrowed $285 million under this facility, which
currently bears interest at 4.55%.  In connection with this borrowing,
one of the participating banks, Lehman Brothers Bank, FSB, became a defaulting
lender, as it no longer is honoring its commitment of approximately $175
million.





PPL
Energy Supply also maintains a $300 million five-year letter of credit and
revolving credit facility expiring in March 2011.  Under this
facility, PPL Energy Supply has the ability to make cash borrowings through
mid-December 2008, and to cause the lenders to issue letters of credit through
the term of the facility.  At September 30, 2008, there were no
cash borrowings and $243 million of letters of credit outstanding under this
facility.  PPL Energy Supply's obligations under this facility are
supported by a $300 million letter of credit issued on PPL Energy Supply's
behalf under a separate $300 million five-year letter of credit and
reimbursement agreement, also expiring in March 2011.





In
September 2008, PPL Energy Supply executed a new $385 million 364-day credit
agreement that expires in September 2009.  Under certain conditions,
PPL Energy Supply may request that the facility's principal amount be increased
by up to $150 million.  Under this facility, PPL Energy Supply has the
ability to make cash borrowings and to cause the lenders to issue letters of
credit.  At September 30, 2008, there were no cash borrowings and no
letters of credit outstanding under this facility.





PPL
Energy Supply maintains a commercial paper program for up to $500 million to
provide an additional financing source to fund its short-term liquidity needs,
if and when necessary.  Commercial paper issuances are supported by
PPL Energy Supply's $3.4 billion five-year credit facility.  PPL
Energy Supply had no commercial paper outstanding at September 30,
2008.





In
January 2008, WPDH Limited extended the expiration date of its £150 million
five-year committed credit facility to January 2013, and it has the option to
extend the expiration date by another year in January 2009.  During
the third quarter of 2008, WPDH Limited made a USD-denominated cash borrowing of
$200 million, which equated to £101 million at the time of borrowing and is
reflected on the Balance Sheet in "Short-term debt."  This borrowing
bears interest at 3.73%.





WPD
(South West) maintains a £150 million five-year committed credit facility that
expires in October 2009 and uncommitted credit facilities of £65
million.  There were no cash borrowings outstanding under any of these
credit facilities at September 30, 2008.





(PPL
and PPL Electric)





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





PPL
Electric maintains a $200 million five-year credit facility that expires in May
2012.  Under this facility, PPL Electric has the ability to make cash
borrowings and to cause the lenders to issue letters of credit.  PPL
Electric had no cash borrowings and $41 million of letters of credit outstanding
under this facility at September 30, 2008.  In October 2008, PPL
Electric borrowed $95 million under this facility, which currently bears
interest at 4.35%.  In connection with this borrowing, one of the
participating banks, Lehman Brothers Bank, FSB, became a defaulting lender, as
it no longer is honoring its commitment of approximately $10
million.





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





PPL
Electric participates in an asset-backed commercial paper program through which
PPL Electric obtains financing by selling and contributing its eligible accounts
receivable and unbilled revenue to a special purpose, wholly-owned subsidiary on
an ongoing basis.  The credit agreement related to PPL Electric's and
the subsidiary's participation in a $150 million asset-backed commercial paper
program expired in July 2008.  In August 2008, PPL Electric and the
subsidiary entered into a new credit agreement governing a similar asset-backed
commercial paper program with a different financial institution and commercial
paper conduit that expires in July 2009.  The borrowing limit under
such program continues to be $150 million.  Borrowings under this
program are subject to customary conditions precedent, as well as the
requirement that PPL Electric discharge a conditional lien that could attach to
the accounts receivable upon a default under PPL Electric's 1945 First Mortgage
Bond Indenture.  This discharge is expected to be completed by the end
of 2008.  At September 30, 2008, $154 million of accounts
receivable and $133 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 the asset-backed commercial paper
program.  PPL Electric's sale to its subsidiary of the accounts
receivable and unbilled revenue is an absolute sale of the assets, and PPL
Electric does not retain an interest in these assets.  However, for
financial reporting purposes, the subsidiary's financial results are
consolidated in PPL Electric's financial statements.  Subject to
market conditions, PPL Electric currently expects that it and the subsidiary
will renew the credit agreement on an annual basis.





(PPL,
PPL Energy Supply and PPL Electric)





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





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





Financing
Activities





(PPL)





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





In August
2008, PPL Gas Utilities prepaid the entire $10 million aggregate principal
amount of its 8.70% Senior Notes due December 2022.  PPL Gas Utilities
paid a premium of $3 million in connection with the prepayment.





(PPL
and PPL Energy Supply)





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





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





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





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





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





(PPL
and PPL Electric)





During
the nine months ended September 30, 2008, PPL Transition Bond Company made
principal payments on transition bonds of $232 million.





In
October 2008, PPL Electric issued $400 million of 7.125% Senior Secured Bonds
due 2013 (7.125% Bonds).  The 7.125% Bonds were issued on the basis of
an equal principal amount of first mortgage bonds issued under the 1945 First
Mortgage Bond Indenture pledged to the Senior Secured Bond Indenture
Trustee.  The 7.125% Bonds may be redeemed any time prior to maturity
at PPL Electric's option at make-whole redemption prices.  PPL
Electric received proceeds of $397 million, net of a discount and underwriting
fees, from the issuance of the 7.125% Bonds.  The proceeds will be
used to partially fund the repayment at maturity of approximately $486 million
outstanding aggregate principal amount of PPL Electric's Senior Secured Bonds,
6-1⁄4% Series, due August 2009.  Prior to such use, the proceeds will
be invested in short-term investments and used for general corporate
purposes.
 
 In
October 2008, PEDFA issued $90 million aggregate principal amount of Pollution
Control Revenue Refunding Bonds, Series 2008 (PPL Electric Utilities Corporation
Project) due 2023 (Series 2008 Bonds) on behalf of PPL Electric in order to
refund $90 million aggregate principal amount of Pollution Control Revenue
Refunding Bonds, Series 2003, which were previously issued by the Lehigh County
Industrial Development Authority on behalf of PPL Electric and matured on
November 1, 2008.  The Series 2008 Bonds are structured as
variable-rate remarketable bonds.  The Series 2008 Bonds bear interest
for the first week at an initial rate of 2.50% and will be remarketed on a
weekly basis until such time that PPL Electric elects to change the interest
rate mode.  PPL Electric may convert the interest rate on the Series
2008 Bonds from time to time to a commercial paper rate, daily rate, weekly rate
or a term rate of at least one year.  The Series 2008 Bonds are
subject to mandatory purchase under certain circumstances, including upon
conversion to a different interest rate mode.  PPL Electric acted as
initial purchaser of the Series 2008 Bonds upon issuance and expects that they
will be remarketed to unaffiliated investors subject to market
conditions.
 
 In
connection with the issuance of the Series 2008 Bonds by PEDFA, PPL Electric
entered into a loan agreement with PEDFA pursuant to which it loaned PPL
Electric the proceeds of the Series 2008 Bonds on payment terms that correspond
to the Series 2008 Bonds.  PPL Electric issued a note to PEDFA to
evidence its obligations under the loan agreement.
 
 Concurrent
with, and as a condition to, the issuance of the Series 2008 Bonds, PPL Electric
issued to the Trustee of the Series 2008 Bonds, its Senior Secured Bonds,
Variable Rate Pollution Control Series 2008, which contain payment and
redemption provisions that correspond to the Series 2008 Bonds.  Such
senior secured bonds were issued on the basis of an equal principal amount of
first mortgage bonds issued under the 1945 First Mortgage Bond Indenture and
pledged to the Senior Secured Bond Indenture Trustee.
  PPL
Electric's senior secured bonds are secured by first mortgage bonds held by the
Senior Secured Bond Indenture Trustee and the lien of the 2001 Senior Secured
Bond Indenture, which is junior to the lien of the 1945 First Mortgage Bond
Indenture.  The 1945 First Mortgage Bond Indenture and the 2001 Senior
Secured Bond Indenture create liens on substantially all of PPL Electric's
distribution properties and certain of its transmission properties, which liens
may be released subject to certain circumstances and conditions, and subject to
certain exceptions and exclusions.
 
 Common Stock Repurchase Program(PPL)





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





Distributions,
Capital Contributions and Related Restrictions





(PPL)





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





(PPL
Energy Supply)





During
the nine months ended September 30, 2008, PPL Energy Supply distributed
$666 million to its parent company, PPL Energy Funding, and received cash
capital contributions of $125 million.





(PPL
Electric)





During
the nine months ended September 30, 2008, PPL Electric paid common stock
dividends of $73 million to PPL.





(PPL
and PPL Electric)





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





8.
            Acquisitions, Development and
  Divestitures





(PPL,
PPL Energy Supply and PPL Electric)





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





Domestic





Development





(PPL
and PPL Energy Supply)





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





In
September 2008, a PPL subsidiary submitted Part I of an application to the DOE
for a federal loan guarantee for the proposed Bell Bend nuclear generating unit
(Bell Bend) to be built adjacent to PPL's Susquehanna plant.  The
subsidiary expects to submit the second part of the loan guarantee application
as required before the December 2008 deadline.




In
October 2008, a PPL subsidiary submitted a COLA to the NRC for Bell
Bend.  Submittal of the COLA by December 2008 met the first
requirement to qualify for federal production tax credits and loan guarantees,
as provided under the Energy Policy Act of 2005.  Another PPL
subsidiary contracted with UniStar Nuclear Services, LLC, an affiliate of
UniStar Nuclear Energy, LLC, a joint venture between Constellation Energy
Nuclear Group, LLC and EDF Development, Inc., to prepare the
application.  The facility for which the application was submitted
will be based on the U.S. Evolutionary Power Reactor design developed by AREVA
NP, Inc. and its affiliates.  PPL and its subsidiaries are currently
authorized by PPL's Board of Directors to spend up to $90 million on the COLA
and other permits necessary for construction, an estimated $60 million of which
is expected to be substantially incurred by the end of 2008.





PPL has
made no decision to proceed with construction of the Bell Bend nuclear
generating unit and expects that such decision will not be made for several
years given the anticipated lengthy NRC license approval
process.  Additionally, PPL has announced that it would likely proceed
to construction only in a joint arrangement with other interested parties and
with a federal loan guarantee or other acceptable financing
structures.  Through September 30, 2008, $41 million of costs
associated with the licensing effort were capitalized as an intangible asset, as
PPL deems it probable that these costs are ultimately
recoverable.





(PPL
and PPL Electric)





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





PPL
Electric has identified the approximately 100-mile route for the Pennsylvania
portion of the line and expects to file an application with the PUC in the
fourth quarter of 2008 for approval to site and construct the line.





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





(PPL
and PPL Energy Supply)





Sale of Telecommunication
Operations





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





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





Acquisition of a Long-term
Tolling Agreement





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





Other





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





International





Sales





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





Other





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





Discontinued
Operations





Sale of Latin American
Businesses





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





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





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





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





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





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





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Operating
      revenues
            
            
            
            
            
            $
            119
            
            
            
            
            
            
            $
            432Operating
      expenses (a)
            
            
            
            
            
            
            70
            
            
            $
            2
            
            
            
            375Operating
      income (loss)
            
            
            
            
            
            
            49
            
            
            
            (2
            )
            
            
            57Other
      income – net
            
            
            
            
            
            
            (19
            )
            
            
            (1
            )
            
            
            (16
            )Interest
      expense (b)
            
            
            
            
            
            
            8
            
            
            
            
            
            
            
            19Income
      (Loss) before income taxes and minority interest
            
            
            
            
            
            
            22
            
            
            
            (3
            )
            
            
            22Income
      tax expense (benefit) (c) (d)
            
            
            
            
            
            
            11
            
            
            
            (8
            )
            
            
            31Minority
      interest
            
            
            
            
            
            
            (2
            )
            
            
            
            
            
            
            (9
            )Gain
      on sale of El Salvadoran business (net of tax expense of $5
      million)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            89Income
      from Discontinued Operations
            
            
            
            
            
            $
            13
            
            
            $
            5
            
            
            $
            89





(a)
            
            The
      three and nine months ended September 30, 2007, include $1 million and $37
      million of impairment charges related to the Bolivian
      businesses.  Also included are fees associated with the
      divestiture of the Latin American businesses of $5 million ($3 million
      after tax) for the three and nine months ended September 30,
      2007.(b)
            
            The
      three and nine months ended September 30, 2007, include $3 million and $7
      million of interest expense allocated pursuant to EITF
      87-24.  The allocation was based on the discontinued operation's
      share of the net assets of PPL Energy Supply.(c)
            
            The
      three and nine months ended September 30, 2007, include U.S. deferred tax
      (credits) charges of $(7) million and $20 million.  As a result
      of PPL's decision to sell its Latin American businesses, it no longer
      qualifies for the permanently reinvested exception to recording deferred
      taxes pursuant to APB Opinion No. 23.(d)
            
            The
      nine months ended September 30, 2008, includes $6 million from the
      recognition of a previously unrecognized tax benefit associated with a
      prior year tax position.





(PPL)





Sale of Gas and Propane
Businesses





In July
2007, PPL completed a review of strategic options for its natural gas
distribution and propane businesses and announced its intention to sell these
businesses, which are included in the Pennsylvania Delivery
segment.  In March 2008, PPL signed a definitive agreement to sell
these businesses for $268 million in cash, adjusted for working capital at the
sale date, pursuant to a stock purchase agreement.  In June 2008, PPL
recorded a pre- and after-tax impairment of $1 million.  In August
2008, PPL Gas Utilities paid a $3 million ($2 million after tax) premium to
prepay the entire $10 million aggregate principal of its 8.70% Senior Notes due
December 2022.  In September 2008, PPL recorded an additional
impairment of $3 million ($2 million after tax).  The sale was
completed in October 2008.  Proceeds of the sale, $303 million after
adjusting for working capital, were
contributed to PPL Energy Supply through its parent, PPL Energy Funding, to be
used for general corporate purposes, including capital
expenditures.





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





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





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Operating
      revenues
            
            $
            26
            
            
            $
            23
            
            
            $
            162
            
            
            $
            161Operating
      expenses (a)
            
            
            32
            
            
            
            23
            
            
            
            148
            
            
            
            145Operating
      (loss) income
            
            
            (6
            )
            
            
            
            
            
            
            14
            
            
            
            16Other
      income-net
            
            
            (3
            )
            
            
            
            
            
            
            (3
            )Interest
      expense
            
            
            1
            
            
            
            1
            
            
            
            4
            
            
            
            4(Loss)
      income before income taxes
            
            
            (10
            )
            
            
            (1
            )
            
            
            7
            
            
            
            12Income
      tax (benefit) expense (b)
            
            
            (5
            )
            
            
            23
            
            
            
            2
            
            
            
            29(Loss)
      income from Discontinued Operations
            
            $
            (5
            )
            
            $
            (24
            )
            
            $
            5
            
            
            $
            (17
            )





(a)
            
            The
      three and nine months ended September 30, 2008, include $3 million and $4
      million of impairment charges.(b)
            
            As
      a result of classifying the natural gas distribution and propane
      businesses as Discontinued Operations and in accordance with EITF 93-17,
      "Recognition of Deferred Tax Assets for a Parent Company's Excess Tax
      Basis in the Stock of a Subsidiary That Is Accounted for as a Discontinued
      Operation," in the third quarter of 2007 PPL recorded a deferred income
      tax charge of $23 million related to its book/tax basis difference in the
      investment in these assets.





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





September 30, 2008
            
            December 31,
      2007Current
      AssetsCash
      and cash equivalents
            
            $
            3Accounts
      receivable
            
            
            9
            
            
            $
            18Fuel,
      materials and supplies
            
            
            25
            
            
            
            18Other
            
            
            10
            
            
            
            7Total
      Current Assets
            
            
            47
            
            
            
            43PP&E
            
            
            220
            
            
            
            213Goodwill
      and other noncurrent assets
            
            
            61
            
            
            
            62Total
      assets held for sale
            
            $
            328
            
            
            $
            318Current
      LiabilitiesAccounts
      payable
            
            $
            9
            
            
            $
            17Other
            
            
            7
            
            
            
            15Total
      Current Liabilities
            
            
            16
            
            
            
            32Long-term
      Debt (a)
            
            
            
            
            
            
            10Deferred
      Credits and Other Noncurrent Liabilities
            
            
            24
            
            
            
            26Total
      liabilities held for sale
            
            $
            40
            
            
            $
            68





(a)
            
            Under
      the terms of the definitive sales agreement, the purchaser is not assuming
      this debt.  Therefore, in 2008 this debt was reclassified from
      "Liabilities held for sale" to "Current Liabilities - Long-term debt" on
      the Balance Sheet and subsequently prepaid in August
  2008.





9.
            Defined Benefits





(PPL
and PPL Energy Supply)





Net
periodic defined benefit costs (credits) were:




Pension
      BenefitsThree
      Months Ended September 30,
            
            Nine
      Months Ended September 30,Domestic
            
            International
            
            Domestic
            
            International2008
            
            2007
            
            2008
            
            2007
            
            2008
            
            2007
            
            2008
            
            2007PPLService
      cost
            
            $
            16
            
            
            $
            15
            
            
            $
            4
            
            
            $
            6
            
            
            $
            46
            
            
            $
            47
            
            
            $
            12
            
            
            $
            18Interest
      cost
            
            
            36
            
            
            
            33
            
            
            
            49
            
            
            
            42
            
            
            
            105
            
            
            
            99
            
            
            
            147
            
            
            
            126Expected
      return on plan assets
            
            
            (46
            )
            
            
            (43
            )
            
            
            (60
            )
            
            
            (57
            )
            
            
            (135
            )
            
            
            (131
            )
            
            
            (180
            )
            
            
            (169
            )Amortization
      of:Transition
      asset
            
            
            (1
            )
            
            
            (1
            )
            
            
            
            
            
            
            
            
            
            
            (3
            )
            
            
            (3
            )Prior
      service cost
            
            
            5
            
            
            
            5
            
            
            
            2
            
            
            
            2
            
            
            
            15
            
            
            
            14
            
            
            
            4
            
            
            
            4Actuarial
      (gain) loss
            
            
            (2
            )
            
            
            
            
            
            
            4
            
            
            
            14
            
            
            
            (6
            )
            
            
            1
            
            
            
            14
            
            
            
            41Net
      periodic pension costs (credits) prior to settlement charge and special
      termination benefits
            
            
            8
            
            
            
            9
            
            
            
            (1
            )
            
            
            7
            
            
            
            22
            
            
            
            27
            
            
            
            (3
            )
            
            
            20Settlement
      charge
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3Special
      termination benefits
            
            
            
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1Net
      periodic defined benefit costs (credits)
            
            $
            8
            
            
            $
            10
            
            
            $
            (1
            )
            
            $
            7
            
            
            $
            22
            
            
            $
            31
            
            
            $
            (3
            )
            
            $
            20PPL Energy
      SupplyService
      cost
            
            $
            1
            
            
            $
            1
            
            
            $
            4
            
            
            $
            6
            
            
            $
            3
            
            
            $
            3
            
            
            $
            12
            
            
            $
            18Interest
      cost
            
            
            2
            
            
            
            1
            
            
            
            49
            
            
            
            42
            
            
            
            5
            
            
            
            4
            
            
            
            147
            
            
            
            126Expected
      return on plan assets
            
            
            (2
            )
            
            
            (2
            )
            
            
            (60
            )
            
            
            (57
            )
            
            
            (6
            )
            
            
            (6
            )
            
            
            (180
            )
            
            
            (169
            )Amortization
      of:Prior
      service cost
            
            
            
            
            
            
            
            
            
            
            2
            
            
            
            2
            
            
            
            
            
            
            
            
            
            
            
            4
            
            
            
            4Actuarial
      loss
            
            
            
            
            
            
            
            
            
            
            4
            
            
            
            14
            
            
            
            
            
            
            
            
            
            
            
            14
            
            
            
            41Net
      periodic pension costs (credits) prior to special termination
      benefits
            
            
            1
            
            
            
            
            
            
            
            (1
            )
            
            
            7
            
            
            
            2
            
            
            
            1
            
            
            
            (3
            )
            
            
            20Special
      termination benefits
            
            
            
            
            
            
            1
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1Net
      periodic defined benefit costs (credits)
            
            $
            1
            
            
            $
            1
            
            
            $
            (1
            )
            
            $
            7
            
            
            $
            2
            
            
            $
            2
            
            
            $
            (3
            )
            
            $
            20





Other
      Postretirement BenefitsThree
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007PPLService
      cost
            
            $
            2
            
            
            $
            2
            
            
            $
            6
            
            
            $
            6Interest
      cost
            
            
            9
            
            
            
            8
            
            
            
            25
            
            
            
            23Expected
      return on plan assets
            
            
            (5
            )
            
            
            (6
            )
            
            
            (15
            )
            
            
            (16
            )Amortization
      of:Transition
      obligation
            
            
            2
            
            
            
            3
            
            
            
            6
            
            
            
            7Prior
      service cost
            
            
            2
            
            
            
            2
            
            
            
            7
            
            
            
            7Actuarial
      loss
            
            
            1
            
            
            
            2
            
            
            
            3
            
            
            
            5Net
      periodic defined benefit costs
            
            $
            11
            
            
            $
            11
            
            
            $
            32
            
            
            $
            32





10.
            Commitments and
Contingencies





Energy
Purchases, Energy Sales and Other Commitments





Energy Purchase
Commitments





(PPL
and PPL Energy Supply)





PPL and
PPL Energy Supply enter into long-term purchase contracts to supply the fuel
requirements for generation facilities.  These contracts include
commitments to purchase coal, emission allowances, limestone, natural gas, oil
and nuclear fuel and extend for terms through 2019.  PPL and PPL
Energy Supply also enter into long-term contracts for the storage and
transportation of natural gas.  The long-term natural gas storage
contracts extend for terms through 2014 for PPL and 2011 for PPL Energy
Supply.  The long-term natural gas transportation contracts extend for
terms through 2032 for PPL and PPL Energy Supply.  Additionally, PPL
and PPL Energy Supply have entered into long-term contracts to purchase power
that extend for terms through 2017, excluding long-term power purchase
agreements for full output of two wind farms.  These wind farm
contracts extend for terms through 2027.





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





(PPL
and PPL Electric)





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





Residential
            
            Small
      Commercial and Small IndustrialJuly
      2007
            
            $
            101.77
            
            
            $
            105.11October
      2007
            
            
            105.08
            
            
            
            105.75March
      2008
            
            
            108.80
            
            
            
            108.76October
      2008
            
            
            112.51
            
            
            
            111.94Average
            
            
            107.04
            
            
            
            107.89





The fifth
competitive solicitation is scheduled for March 2009.





In August
2008, PPL Electric filed a request with the PUC to approve its plan to purchase
the PLR electricity supply that PPL Electric will need for 2011 through
mid-2014.


On
November 3, 2008, PPL Electric proposed several amendments to its plan to
reflect passage of Pennsylvania Act 129 (Act 129).  Act 129, among
other things, creates an energy efficiency and conservation
program.  PPL Electric added provisions to purchase 5% of its default
service supply through five-year contracts and an additional 5% through ten-year
contracts.  It reduced the term of its plan by one year, proposing
that the plan end in May 2013, rather than in May 2014.  Finally, PPL
Electric provided support for several findings that the PUC was required to make
under Act 129.  PPL Electric cannot predict the outcome of this
matter.


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





Energy Sales
Commitments





(PPL
and PPL Energy Supply)





In
connection with its marketing activities or associated with certain of its power
plants, PPL Energy Supply has entered into long-term power sales contracts that
extend for terms through 2016, excluding an insignificant contract extending
through 2023.  All long-term contracts were executed at prices that
approximated market prices at the time of execution.





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





(PPL
Energy Supply)





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





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





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





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





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





Legal
Matters





(PPL,
PPL Energy Supply and PPL Electric)





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





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





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





Montana Hydroelectric
Litigation(PPL
and PPL Energy Supply)





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





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





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





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





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


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





For 2007
and subsequent years, PPL Montana believes it is probable that its hydroelectric
projects will be subject to annual estimated compensation ranging from $300,000
to $6 million.  Given that there was no single amount within that
range more likely than any other, PPL Montana is annually accruing
$300,000.





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





Holtwood Hydroelectric
Project (PPL
and PPL Energy Supply)





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





Regulatory
Issues





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





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





Regulatory
proceedings arising out of the California electricity supply situation have been
filed at the FERC.  The FERC has determined that all sellers of energy
into markets operated by the California ISO and the California Power Exchange,
including PPL Montana, should be subject to refund liability for the period
beginning October 2, 2000 through June 20, 2001, but the FERC has not yet ruled
on the exact amounts that the sellers, including PPL Montana, would be required
to refund.  In decisions in September 2004 and August 2006, the U.S.
Court of Appeals for the Ninth Circuit held that the FERC had the additional
legal authority to order refunds for periods prior to October 2, 2000, and
ordered the FERC to determine whether or not it would be appropriate to grant
such additional refunds.  In February 2008, the FERC initiated
proceedings to determine whether it would be appropriate to grant additional
refunds.  The FERC also instituted settlement proceedings to explore
whether a settlement is possible.





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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





In 2007,
PPL also purchased synthetic fuel from unaffiliated third parties, at prices
below the market price of coal, for use at its coal-fired power
plants.  The resulting fuel cost savings for the nine months ended
September 30, 2007 were $18 million.





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





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





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





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





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





In
September 2007, PPL Electric self-reported to the RFC that PPL Electric had
identified a potential violation of certain reliability requirements and
submitted an accompanying mitigation plan.  In February 2008, the RFC
notified PPL Electric that it had completed its investigation, accepted PPL
Electric's mitigation plan and issued a Notice of Alleged
Violation.  In September 2008, the RFC issued its Notice of Confirmed
Violation concerning this matter.  The RFC's determination is subject
to review and approval by the NERC and the FERC.  At this time, PPL
Electric cannot predict the outcome of these reviews.





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





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





Environmental
Matters - Domestic





(PPL,
PPL Energy Supply and PPL Electric)





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





Air(PPL and PPL Energy
Supply)





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





Clean Air Interstate
Rule





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





In July
2008, the United States Court of Appeals for the D.C. Circuit (the Court)
invalidated CAIR.  The Court did not overturn the existing
cap-and-trade program for sulfur dioxide reductions under the acid rain program
or the existing cap-and-trade program for reductions in nitrogen oxides during
the ozone season.





As a
result of this decision, in the third quarter of 2008, PPL determined that all
of the annual nitrogen oxide allowances PPL EnergyPlus had purchased are no
longer required and have no value, therefore, an impairment charge of $33
million pre-tax ($20 million after tax) was recorded.  Further, PPL
EnergyPlus had also sold put options for annual nitrogen oxide allowances, for
which there is no longer a physical market because of the Court's
decision.  PPL recorded an additional charge of $12 million pre-tax
($7 million after tax) related to these put options.  These charges,
recorded in PPL and PPL Energy Supply's Supply segment, are included in "Other
operation and maintenance" expense on the Statement of Income.  In
addition, the market price of sulfur dioxide allowances has fallen since the
Court's decision was issued.  The book value for these sulfur dioxide
emission allowances was approximately $77 million at September 30, 2008,
but these allowances were not impaired.  PPL will continue to evaluate
its emission allowances for impairment.  The assessment considers the
emission allowances PPL expects to consume in future periods and prevailing
market prices among other factors.  As noted above, the Court's
decision did not impact the seasonal nitrogen oxide allowances, which had a book
value of $10 million at September 30, 2008, which approximated market
value.  PPL has taken actions to preserve its financial position with
respect to certain nitrogen oxide allowance option contracts to which it is a
party, and continues to evaluate the remaining relevant contracts for the
purchase of such allowances.  Finally, as a result of the Court's
decision, PPL also is reviewing aspects of its previously announced program to
install certain pollution control equipment to meet the CAIR
requirements.





In
October 2008, the Court issued an order requesting the parties to submit
responses as to whether the parties would favor a stay of the Court's order
pending alternative rulemaking by the EPA.  PPL cannot predict the
outcome of these proceedings.  This order has created further
uncertainty surrounding the allowance markets and PPL's schedule to install
pollution control equipment in compliance with the CAIR
requirements.





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





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





Mercury





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





Pennsylvania
has adopted its own mercury rules that are more stringent than
CAMR.  Pennsylvania's rules establish mercury emission limits for each
coal-fired generating facility beginning in 2010, and require that mercury
emission allowances under the EPA's cap-and-trade program under CAMR be met at
each unit without the benefit of an emissions trading program, and that tighter
emission limits based on the second phase of the CAMR requirements be
accelerated to begin in 2015.  The cost effectiveness of
Pennsylvania's mercury rule and the timing of the required reductions were based
on the expected scrubbers and SCRs to be installed for compliance with
CAIR.  In addition, the caps in Pennsylvania's rule were based
entirely on the caps in CAMR.  In light of the Court decision
overturning CAMR, in September 2008, PPL filed a complaint with a Pennsylvania
Commonwealth Court seeking to have the Pennsylvania mercury rule rescinded on
the basis that it is unlawful, invalid and unenforceable under the provisions of
the Pennsylvania Air Pollution Control Act.





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





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





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





Regional Haze and
Visibility





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





New Source Review
(NSR)





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





However,
in recent years, the EPA has shifted its position on NSR.  In 2003,
the EPA issued changes to its regulations that clarified what projects are
exempt from NSR regulations as routine maintenance and
repair.  However, these regulations were stayed and subsequently
struck down by the Court.  Furthermore, in April 2007, the U.S.
Supreme Court upheld the annual emissions test under which the EPA had found
emissions increases at the plants included in its enforcement
initiative.  PPL is therefore continuing to operate under the NSR
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 NSR regulations.  The EPA's proposed tests are consistent
with the position of energy companies and industry groups and, if adopted, would
substantially reduce the uncertainties under the current
regulations.  PPL cannot predict whether these proposed new tests will
be adopted.  In the interim, the EPA has not brought substantial new
enforcement actions.  Accordingly, PPL believes it is unlikely the EPA
will pursue the information requests issued to PPL Montana's Corette and
Colstrip plants by EPA Region 8 in 2000 and 2003, and to PPL Generation's
Martins Creek plant by EPA Region 3 in 2002.  However, states and
environmental groups also have brought enforcement actions alleging violations
of NSR regulations by coal-fired plants, and PPL is unable to predict whether
such state or citizen enforcement actions will be brought with respect to any of
PPL affiliates' plants.





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





Finally,
if the EPA regulates carbon dioxide emissions pursuant to the 2007 U.S. Supreme
Court decision on global climate change, then carbon dioxide emissions could
become subject to the NSR provisions of the Clean Air Act.  The
implications are uncertain, as currently no permitting authorities have
implemented the NSR regulations for carbon dioxide emissions.





Opacity





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





Global Climate
Change





There is
a growing concern nationally and internationally about global climate change and
the contribution of greenhouse gas emissions including, most significantly,
carbon dioxide from the combustion of fossil fuels.  This concern has
led to increased federal legislative proposals, actions at state and local
levels, as well as litigation relating to greenhouse gas emissions, including an
April 2007 U.S. Supreme Court decision holding that the EPA has the authority to
regulate greenhouse gas emissions from new motor vehicles under the Clean Air
Act.  As a result of this decision, the EPA issued an "Advance Notice
of Proposed Rulemaking," proposing various alternative approaches to regulate
carbon dioxide emissions.  Also, increased pressure for carbon dioxide
emissions reduction is being initiated by investor and environmental
organizations and the international community.





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





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





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





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





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





Water/Waste(PPL and PPL Energy
Supply)





Martins Creek Fly Ash
Release





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





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





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





Basin Seepage -
Pennsylvania





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





Basin Seepage -
Montana





In May
2003, approximately 50 plaintiffs brought an action against PPL Montana and the
other owners of the Colstrip plant alleging property damage from seepage from
the freshwater and wastewater ponds at Colstrip.  In the first quarter
of 2008, PPL Montana recorded an additional reserve of $7 million ($0.01 per
share, basic and diluted, for PPL) to "Operation and maintenance" on the
Statement of Income.  In July 2008, the plaintiffs and the
owner-defendants remaining after dismissal of NorthWestern due to its
bankruptcy, executed a settlement agreement.  PPL Montana and the
other remaining owner-defendants funded the settlement, concluding the
matter.  PPL Montana's share of the settlement was approximately $8
million.  In June 2008, PPL Montana recorded an insignificant reserve
for its share of potential additional settlements with three property owners
living near the original plaintiffs but who were not parties to the
lawsuit.  PPL Montana may incur additional costs related to the
potential claims, including additional groundwater investigations and any
related remedial measures, which costs are not now determinable, but could be
significant.





In
February 2007, six plaintiffs filed a separate lawsuit in the Montana Sixteenth
Judicial District Court against the Colstrip plant owners asserting similar
property damage claims as were asserted by the plaintiffs to the May 2003
complaint.  The lawsuit is in its initial stages of discovery and
investigation, and PPL Montana is unable to predict the outcome of these
proceedings.  PPL Montana has undertaken certain groundwater
investigation and remediation measures at the Colstrip plant to address
groundwater contamination alleged by the plaintiffs as well as other groundwater
contamination at the plant.  PPL Montana may incur further costs based
on the outcome of this lawsuit and its additional groundwater investigations and
any related remedial measures, which costs are not now determinable, but could
be significant.





Other
Issues





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





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





The EPA
released its 2008 Effluent Guidelines Plan and has chosen not to revise the
steam electric effluent guidelines.  Instead, the EPA plans to
continue to study the industry's wastewater discharges, with a focus on
coal-fired plants and "particular interest" in Flue Gas Desulfurization
wastewater treatment, ash sluice water management and water reuse
opportunities.  The EPA plans to continue to study the industry
through 2009 and 2010 annual reviews, including sampling at selected
plants.  UWAG is working closely with the EPA on the sampling
coordination.





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





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





Superfund
and Other Remediation





(PPL,
PPL Energy Supply and PPL Electric)





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





PPL
Electric has been remediating several sites that were not being addressed under
another regulatory program such as Superfund, but for which PPL Electric may be
liable for remediation.  These include a number of coal gas
manufacturing facilities formerly owned or operated by PPL
Electric.  In addition, PPL Gas Utilities also was remediating various
sites including coal gas manufacturing facilities and potential mercury
contamination from gas meters and regulators and was engaged in a program to
plug abandoned wells.  On October 1, 2008, PPL Gas Utilities was sold
and, with very limited exceptions, the remediation and well-plugging liabilities
were transferred.  These exceptions do not impose material retained
liabilities.





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





The EPA
is evaluating the risks associated with naphthalene, a chemical by-product of
coal gas manufacturing operations.  As a result of the EPA's
evaluation, individual states may establish stricter standards for water quality
and soil cleanup.  This could require several PPL subsidiaries to take
more extensive assessment and remedial actions at former coal gas manufacturing
facilities.  The costs to PPL of complying with any such requirements
are not now determinable, but could be significant.





(PPL
and PPL Energy Supply)





Under the
Pennsylvania Clean Streams Law, subsidiaries of PPL Generation are obligated to
remediate acid mine drainage at former mine sites and may be required to take
additional measures to prevent potential acid mine drainage at previously capped
refuse piles.  One PPL Generation subsidiary is pumping mine water at
two mine sites, and treating water at one of these sites.  Another PPL
Generation subsidiary has installed a passive wetlands treatment system at a
third site.  At September 30, 2008, PPL Energy Supply had accrued
a discounted liability of $35 million to cover the costs of pumping and treating
groundwater at the two mine sites for 50 years and for operating and maintaining
passive wetlands treatment at the third site.  PPL Energy Supply
discounted this liability at a rate of 5.74%.  Expected undiscounted
payments are estimated at $1 million for each of the years from 2008 through
2012, and the expected payments for the work after 2012 are $136
million.





(PPL,
PPL Energy Supply and PPL Electric)





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





Gas Seepage (PPL)





At
September 30, 2008, PPL Gas Utilities owned and operated the Meeker gas storage
field and had a partial ownership interest in the Tioga gas storage field, both
located in north-central Pennsylvania.  PPL Gas Utilities had
previously reported an issue with natural gas observed in several drinking water
wells that the Pennsylvania DEP was working to address.  The
Pennsylvania DEP raised concerns that potential leakage of natural gas from the
Tioga gas storage field could be contributing to this issue.  PPL Gas
Utilities was engaged in a program with the co-owner of the storage field to
install water treatment systems on any residential wells in a specified program
area in which natural gas exceeded 20 parts per million.  PPL Gas
Utilities was also working with the co-owner on a broader study of the
issue.  As a result of the sale of the natural gas distribution and
propane businesses that closed on October 1, 2008, PPL will no longer be
responsible for resolution of this matter.





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





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





Environmental Matters - International(PPL
and PPL Energy Supply)





U.K.





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





Other





Nuclear
Insurance(PPL and PPL Energy
Supply)





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





In the
event of a nuclear incident at the Susquehanna station, PPL Susquehanna's public
liability for claims resulting from such incident would be limited to about
$10.8 billion under provisions of The Price-Anderson Act Amendments under the
Energy Policy Act of 2005.  PPL Susquehanna is protected against this
liability by a combination of commercial insurance and an industry assessment
program.  In the event of a nuclear incident at any of the reactors
covered by The Price-Anderson Act Amendments under the Energy Policy Act of
2005, PPL Susquehanna could be assessed up to $201 million per incident, payable
at $30 million per year.  Effective October 29, 2008, PPL
Susquehanna's public liability for claims will increase to $12.5 billion and the
maximum assessment will increase to $235 million per incident, payable at $35
million per year.


At
September 30, 2008, the property, replacement power and nuclear incident
insurers maintained a minimum A.M. Best rating of at least
A-.


Guarantees and Other
Assurances





(PPL,
PPL Energy Supply and PPL Electric)





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





(PPL)





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





(PPL,
PPL Energy Supply and PPL Electric)





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





Recorded
      Liability at
            
            Exposure
      at
              September 30,
      2008 (a)September 30,
      2008
            
            December
      31, 2007
            
            
            Expiration
      DatePPL
      Energy Supply(b)Letters
      of credit issued on behalf of affiliates
            
            
            
            
            
            
            
            $
            8
            (c)
            
            2009Retroactive
      premiums under nuclear insurance programs
            
            
            
            
            
            
            
            
            38Nuclear
      claims under The Price-Anderson Act Amendments under The Energy Policy Act
      of 2005
            
            
            
            
            
            
            
            
            201
            (d)Indemnifications
      for entities in liquidation and sales of assets
            
            $
            1
            
            $
            1
            
            
            273
            (e)
            
            2009
      to 2012Indemnification
      to operators of jointly-owned facilities
            
            
            
            
            
            
            
            
            6
            (f)
            
            
            (f)Assignment
      of Enron claims
            
            
            
            
            
            
            
            
            
            (g)
            
            
            (g)WPD
      guarantee of pension and other obligations of unconsolidated
      entities
            
            
            2
            
            
            4
            
            
            35
            (h)
            
            2017Tax
      indemnification related to unconsolidated WPD affiliates
            
            
            
            
            
            
            
            
            9
            (i)
            
            2012Guarantee
      of a portion of an unconsolidated entity's debt
            
            
            1
            
            
            
            
            
            22
            (j)
            
            2018





(a)
            
            Represents
      the estimated maximum potential amount of future payments that could be
      required to be made under the guarantee.(b)
            
            Other
      than the letters of credit, all guarantees of PPL Energy Supply apply to
      PPL on a consolidated basis.(c)
            
            Represents
      letters of credit issued at the direction of PPL Energy Supply for the
      benefit of third parties for assurance against nonperformance by
      PPL.  This is not a guarantee by PPL on a consolidated
      basis.(d)
            
            Amount
      is per incident.(e)
            
            PPL
      Energy Supply's maximum exposure with respect to certain indemnifications
      and the expiration of the indemnifications cannot be estimated because, in
      the case of certain of the indemnification provisions, the maximum
      potential liability is not capped by the transaction documents and the
      expiration date is based on the applicable statute of
      limitations.  The exposure noted is only for those cases in
      which the agreements provide for a specific limit on the amount of the
      indemnification.
              
              In
      connection with the liquidation of wholly-owned subsidiaries that have
      been deconsolidated upon turning the entities over to the liquidators,
      certain affiliates of PPL Global have agreed to indemnify the liquidators,
      directors and/or the entities themselves for any liabilities or expenses
      arising during the liquidation process, including liabilities and expenses
      of the entities placed into liquidation.  In some cases, the
      indemnifications are limited to a maximum amount that is based on
      distributions made from the subsidiary to its parent either prior or
      subsequent to being placed into liquidation.  In other cases,
      the maximum amount of the indemnifications is not explicitly stated in the
      agreements.  The indemnifications generally expire two to seven
      years subsequent to the date of dissolution of the
      entities.  The exposure noted only includes those cases in which
      the agreements provide for a specific limit on the amount of the
      indemnification, and the expiration date was based on an estimate of the
      dissolution date of the entities.  During the second quarter of
      2008, $8 million of previously disclosed exposure expired.
              
              PPL
      Energy Supply has provided indemnification to the purchaser of a
      generating facility for losses arising out of any breach of the
      representations, warranties and covenants under the related transaction
      documents and for losses arising with respect to liabilities not
      specifically assumed by the purchaser, including certain pre-closing
      environmental and tort liabilities.  The indemnification other
      than for pre-closing environmental and tort liabilities is triggered only
      if the purchaser's losses reach $1 million in the aggregate, capped at 50%
      of the purchase price (or $95 million), and either expired in May 2007 or
      will expire pursuant to applicable statutes of limitations.  The
      indemnification provision for unknown environmental and tort liabilities
      related to periods prior to PPL Energy Supply's ownership of the real
      property on which the facility is located is capped at $4 million in the
      aggregate and survives for a maximum period of five years after the
      transaction closing.(f)
            
            In
      December 2007, PPL Energy Supply executed revised owners agreements for
      two jointly-owned facilities, the Keystone and Conemaugh generating
      stations.  The agreements require that in the event of any
      default by an owner, the other owners fund contributions for the operation
      of the generating stations, based upon their ownership
      percentage.  The maximum obligation among all owners, for each
      station, is currently $20 million.  The non-defaulting owners,
      who make up the defaulting owner's obligations, are entitled to the
      generation entitlement of the defaulting owner, based upon their ownership
      percentage.  The agreements do not have an expiration
      date.(g)
            
            In
      July 2006, two subsidiaries of PPL Energy Supply assigned their Enron
      claims to an independent third party (claims purchaser).  In
      connection with the assignment, the subsidiaries agreed to repay a pro
      rata share of the purchase price paid by the claims purchaser, plus
      interest, in the event that any of the assigned claims are disallowed
      under certain circumstances.  The bankruptcy court overseeing
      the Enron bankruptcy approved the assigned claims prior to their
      assignment to the claims purchaser.  The subsidiaries' repayment
      obligations will remain in effect until the claims purchaser has received
      all distributions with respect to the assigned claims.  During
      the second quarter of 2008, the exposure expired.(h)
            
            As
      a result of the privatization of the utility industry in the U.K., certain
      electric associations' roles and responsibilities were discontinued or
      modified.  As a result, certain obligations, primarily
      pension-related, associated with these organizations have been guaranteed
      by the participating members.  Costs are allocated to the
      members based on predetermined percentages as outlined in specific
      agreements.  However, if a member becomes insolvent, costs can
      be reallocated to and are guaranteed by the remaining
      members.  At September 30, 2008, WPD has recorded an
      estimated discounted liability based on its current allocated percentage
      of the total expected costs.  Neither the expiration date nor
      the maximum amount of potential payments for certain obligations is
      explicitly stated in the related agreements.  Therefore, they
      have been estimated based on the types of obligations.(i)
            
            Two
      WPD unconsolidated affiliates were refinanced during
      2005.  Under the terms of the refinancing, WPD has indemnified
      the lender against certain tax and other liabilities.  At this
      time, WPD believes that the likelihood of such liabilities arising is
      remote.(j)
            
            Reflects
      principal payments only.  During June 2008, PPL Energy Supply
      provided a guarantee on a portion of new debt issued by an unconsolidated
      entity.  The debt matures on June 30,
      2018.  Previously, PPL Electric provided a guarantee on this
      unconsolidated entity's debt that expired in June 2008, when the related
      debt was repaid.





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





11.
            Related Party
Transactions





Affiliate
Trust(PPL and PPL
Energy Supply)





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





PLR
Contracts(PPL Energy
Supply and PPL Electric)





PPL
Electric has power purchase agreements with PPL EnergyPlus, effective July 2000
and January 2002, in which PPL EnergyPlus will supply PPL Electric's entire PLR
load through December 31, 2009.  Under these contracts, PPL EnergyPlus
provides electricity at the predetermined capped prices that PPL Electric is
authorized to charge its PLR customers.  For both the three months
ended September 30, 2008 and 2007, these purchases totaled $453
million.  For both the nine months ended September 30, 2008 and
2007, these purchases totaled $1.4 billion.  These purchases include
nuclear decommissioning recovery and amortization of an up-front contract
payment and are included in the Statements of Income as "Wholesale energy
marketing to affiliate" by PPL Energy Supply, and as "Energy purchases from
affiliate" by PPL Electric.





Under one
of the PLR contracts, PPL Electric is required to make performance assurance
deposits with PPL EnergyPlus when the market price of electricity is less than
the contract price by more than its contract collateral
threshold.  Conversely, PPL EnergyPlus is required to make performance
assurance deposits with PPL Electric when the market price of electricity is
greater than the contract price by more than its contract collateral
threshold.  PPL Electric estimated that at September 30, 2008,
the market price of electricity would exceed the contract price by approximately
$1.8 billion.  Accordingly, at September 30, 2008, PPL Energy
Supply was required to provide PPL Electric with performance assurance of $300
million, the maximum amount required under the contract.  PPL Energy
Supply's deposit with PPL Electric was $300 million at both September 30,
2008 and December 31, 2007.  This deposit is shown on the Balance
Sheets as "Collateral on PLR energy supply to/from affiliate," a current asset
of PPL Energy Supply and a current liability of PPL Electric.  PPL
Electric pays interest equal to the one-month LIBOR plus 0.5% on this deposit,
which is included in "Interest Expense with Affiliate" on the Statements of
Income.  PPL Energy Supply records the receipt of the interest as
affiliated interest income, which is included in "Interest Income from
Affiliates" on the Statements of Income.  For the three months ended
September 30, 2008 and 2007, interest related to this deposit was $3
million and $4 million.  For the nine months ended September 30,
2008 and 2007, interest related to this deposit was $8 million and $13
million.





In 2001,
PPL Electric made a $90 million up-front payment to PPL EnergyPlus in connection
with the PLR contracts.  The up-front payment is being amortized by
both parties over the term of the PLR contracts.  The unamortized
balance of this payment and other payments under the contract was $15 million
and $24 million at September 30, 2008 and December 31,
2007.  The current and noncurrent balances are reported on the Balance
Sheets as "Deferred revenue on PLR energy supply to affiliate" by PPL Energy
Supply, and as "Prepayment on PLR energy supply from affiliate" by PPL
Electric.





Under
Pennsylvania law and PUC regulations, PPL Electric is required to buy
electricity generation supply for customers who do not choose a competitive
supplier.  PPL Electric has conducted four of its six planned
competitive solicitations for generation supply in 2010, after its existing PLR
contract expires.  Competitive bids have been solicited for 3,400 MW
of generation supply, or two-thirds of PPL Electric's expected supply
requirements for these customers in 2010.  An independent company,
NERA Economic Consulting (NERA), is managing this competitive solicitation
process.  NERA compiles the results and presents them to the
PUC.  See Note 10 for additional information on the results of the
completed solicitations.  Additional bids will be sought twice in 2009
to secure the remainder of supply needed to serve PPL Electric's customers in
2010.





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





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





At
September 30, 2008, PPL Electric has credit exposure to PPL EnergyPlus
under the PLR contracts and the solicitation discussed above, of $1.8
billion.  As a result of netting and collateral arrangements, PPL
Electric's credit exposure was reduced to $1.4 billion.





PPL
Energy Supply has credit exposure to PPL Electric under the PLR
contracts.  At September 30, 2008, PPL Energy Supply's credit
exposure with PPL Electric was $138 million, excluding the effects of netting
arrangements.  As a result of netting arrangements, PPL Energy
Supply's credit exposure was reduced to zero.





NUG
Purchases(PPL Energy
Supply and PPL Electric)





PPL
Electric has a reciprocal contract with PPL EnergyPlus to sell electricity
purchased under contracts with NUGs.  PPL Electric purchases
electricity from the NUGs at contractual rates and sells the electricity at the
same price to PPL EnergyPlus.  For the three months ended
September 30, 2008 and 2007, NUG purchases totaled $29 million and $43
million.  For the nine months ended September 30, 2008 and 2007,
NUG purchases totaled $87 million and $117 million.  These amounts are
included in the Statements of Income as "Wholesale electric to affiliate" by PPL
Electric, and as "Energy purchases from affiliate" by PPL Energy
Supply.





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





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








Three Months Ended
      September 30,
            
            Nine Months Ended
      September 30,2008
            
            2007
            
            2008
            
            2007PPL
      Energy Supply
            
            $
            47
            
            $
            52
            
            $
            152
            
            $
            166PPL
      Electric
            
            
            29
            
            
            28
            
            
            88
            
            
            90





Intercompany
Borrowings





(PPL
Energy Supply)





PPL
Energy Supply had a note receivable from affiliate of $10 million at September
30, 2008, and no such amounts outstanding at December 31,
2007.  Interest is due quarterly at a rate equal to the 1-month LIBOR
plus 1%.  This note is shown on the Balance Sheet as "Note Receivable
from Affiliate."  Interest earned on this note is included in
"Interest Income from Affiliates" on the Statements of Income, and was $1
million and $7 million for the three months ended September 30, 2008 and
2007.  Interest earned for the nine months ended September 30,
2008 and 2007, was $3 million and $10 million.





(PPL Electric)





In August
2004, a PPL Electric subsidiary issued a $300 million demand note to an
affiliate.  There was a $130 million balance on this note outstanding
at September 30, 2008, and a $277 million balance outstanding at
December 31, 2007.  Interest is due quarterly at a rate equal to
the 3-month LIBOR plus 1%.  This note is shown on the Balance Sheet as
"Note receivable from affiliate."  Interest earned on the note is
included in "Interest Income from Affiliate" on the Statements of Income, and
was $1 million and $5 million for the three months ended September 30, 2008
and 2007.  For the nine months ended September 30, 2008 and 2007,
interest earned was $5 million and $14 million.





Intercompany Derivatives(PPL
Energy Supply)





In 2007
and 2008, PPL Energy Supply entered into a combination of average rate forwards
and average rate options with PPL to sell British pounds
sterling.  These hedging instruments have terms identical to average
rate forwards and average rate options entered into by PPL with third parties to
protect the translation of expected income denominated in British pounds
sterling to U.S. dollars.  At September 30, 2008, the total
exposure hedged was £24 million and the net fair value of these positions was $4
million and is reflected in "Current Assets - Price risk management assets" on
the Balance Sheet.  No similar hedging instruments were outstanding at
December 31, 2007.  Gains and losses, both realized and unrealized, on
these types of hedging instruments are included in "Other income - net" on the
Statements of Income.  For the three and nine months ended
September 30, 2008, PPL Energy Supply recorded net gains of $5 million and
$3 million.  "Other income - net" includes net losses of $1 million
and $4 million related to similar average rate forwards and average rate options
for the three and nine months ended September 30, 2007.





In 2007,
PPL Energy Supply entered into forward contracts with PPL to sell Chilean
pesos.  These hedging instruments had terms identical to forward sales
contracts entered into by PPL with third parties to protect the value of its net
investment in Emel as well as a portion of the proceeds in excess of its net
investment expected from the then-anticipated sale of Emel.  None of
these contracts were outstanding at September 30, 2008 or December 31,
2007.  "Other income - net" on the Statements of Income includes
losses of $3 million and $5 million for the three and nine months ended
September 30, 2007, related to these contracts.





In 2007,
PPL Energy Supply also entered into forward contracts with PPL to sell British
pounds sterling to protect the value of a portion of its net investment in
WPD.  These hedging instruments have terms identical to forward sales
contracts entered into by PPL with third parties.  The total notional
amount of the contracts outstanding at September 30, 2008 was £68 million
(approximately $134 million).  The fair value of these positions was
$15 million and $3 million at September 30, 2008 and December 31, 2007, and is
reflected in the foreign currency translation adjustment component of
accumulated other comprehensive loss on the Balance
Sheets.  Additionally, $5 million is reflected in "Current Assets -
Price risk management assets" on the Balance Sheet at September 30, 2008,
and $10 million and $3 million is reflected in "Other Noncurrent Assets - Price
risk management assets" on the Balance Sheets at September 30, 2008 and December
31, 2007.





Trademark Royalties(PPL
Energy Supply)





A PPL
subsidiary owns PPL trademarks and bills certain affiliates for their
use.  PPL Energy Supply was allocated $23 million and $12 million of
this license fee for the three months ended September 30, 2008 and 2007,
and $37 million and $30 million for the nine months ended September 30,
2008 and 2007.  These allocations of the license fee are primarily
included in "Other operation and maintenance" on the Statements of
Income.





12.
            Other Income - net





(PPL,
PPL Energy Supply and PPL Electric)





The
breakdown of "Other Income - net" was:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007PPLOther
      IncomeInterest
      income
            
            $
            7
            
            
            $
            21
            
            
            $
            24
            
            
            $
            48Equity
      earnings
            
            
            1
            
            
            
            1
            
            
            
            3
            
            
            
            3Hyder
      liquidation distributions (Note 8)
            
            
            
            
            
            
            
            
            
            
            3
            
            
            
            6Gain
      on sale of property and equipment
            
            
            
            
            
            
            6
            
            
            
            2
            
            
            
            12Gain
      on transfer of international equity investment
    (Note 8)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5Earnings
      on nuclear plant decommissioning trustinvestments (a)
            
            
            (7
            )
            
            
            3
            
            
            
            (12
            )
            
            
            10Miscellaneous
      - International
            
            
            
            
            
            
            
            
            
            
            1
            
            
            
            3Miscellaneous
      - Domestic
            
            
            1
            
            
            
            1
            
            
            
            4
            
            
            
            4Total
            
            
            2
            
            
            
            32
            
            
            
            25
            
            
            
            91


Other
      DeductionsCharitable
      contributions
            
            
            
            
            
            
            1
            
            
            
            1
            
            
            
            3Hedging
      (gains) losses
            
            
            (4
            )
            
            
            4
            
            
            
            (3
            )
            
            
            8Miscellaneous
      - International
            
            
            2
            
            
            
            1
            
            
            
            5
            
            
            
            2Miscellaneous
      - Domestic
            
            
            3
            
            
            
            3
            
            
            
            5
            
            
            
            7Other
      Income - net
            
            $
            1
            
            
            $
            23
            
            
            $
            17
            
            
            $
            71PPL Energy
      SupplyOther
      IncomeInterest
      income
            
            $
            5
            
            
            $
            17
            
            
            $
            18
            
            
            $
            37Equity
      earnings
            
            
            1
            
            
            
            1
            
            
            
            3
            
            
            
            3Hyder
      liquidation distributions (Note 8)
            
            
            
            
            
            
            
            
            
            
            3
            
            
            
            6Gain
      on sale of property and equipment
            
            
            
            
            
            
            7
            
            
            
            2
            
            
            
            8Gain
      on transfer of international equity investment
    (Note 8)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5Earnings
      on nuclear plant decommissioning trust investments (a)
            
            
            (7
            )
            
            
            3
            
            
            
            (12
            )
            
            
            10Miscellaneous
      - International
            
            
            
            
            
            
            
            
            
            
            1
            
            
            
            3Miscellaneous
      - Domestic
            
            
            1
            
            
            
            
            
            
            
            3
            
            
            
            2Total
            
            
            
            
            
            
            28
            
            
            
            18
            
            
            
            74Other
      DeductionsHedging
      (gains) losses
            
            
            (5
            )
            
            
            4
            
            
            
            (3
            )
            
            
            8Miscellaneous
      - International
            
            
            2
            
            
            
            1
            
            
            
            5
            
            
            
            2Miscellaneous
      - Domestic
            
            
            2
            
            
            
            2
            
            
            
            4
            
            
            
            7Other
      Income - net
            
            $
            1
            
            
            $
            21
            
            
            $
            12
            
            
            $
            57PPL
      ElectricOther
      IncomeInterest
      income
            
            $
            1
            
            
            $
            2
            
            
            $
            5
            
            
            $
            7Gain
      on sale of property
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4Miscellaneous
            
            
            
            
            
            
            1
            
            
            
            
            
            
            
            2Total
            
            
            1
            
            
            
            3
            
            
            
            5
            
            
            
            13Other
      Deductions
            
            
            1
            
            
            
            1
            
            
            
            1
            
            
            
            1Other
      Income - net
            
            $
            
            
            
            $
            2
            
            
            $
            4
            
            
            $
            12





(a)
            
            The
      three and nine months ended September 30, 2008, include charges of $6
      million and $16 million for other-than-temporary impairments of securities
      held in the trust funds.  The amounts for the corresponding
      periods of 2007 were not
significant.





13.
            Fair Value
Measurements





(PPL,
PPL Energy Supply and PPL Electric)





Adoption
of SFAS 157





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





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





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





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





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





(PPL
and PPL Energy Supply)





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





Fair
      Value Measurements UsingTotal
            
            Quoted
      Prices in Active Markets for Identical Assets/Liabilities
              (Level
      1)
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            Significant
      Unobservable Inputs
              (Level
      3)PPLAssetsCash
      and cash equivalents
            
            $
            349
            
            
            $
            338
            
            
            $
            11Restricted
      cash and cash equivalents
            
            
            349
            
            
            
            82
            
            
            
            267Price
      risk management assets:Energy
      commodities
            
            
            1,541
            
            
            
            13
            
            
            
            1,287
            
            
            $
            241Interest
      rate/foreign exchange
            
            
            59
            
            
            
            
            
            
            
            591,600
            
            
            
            13
            
            
            
            1,346
            
            
            
            241Nuclear
      plant decommissioning trust funds:Cash
      and cash equivalents
            
            
            15
            
            
            
            15Equity
      securities
            
            
            184
            
            
            
            184Commingled
      equity index funds
            
            
            111
            
            
            
            
            
            
            
            111Debt
      securities:U.S.
      Treasury
            
            
            81
            
            
            
            
            
            
            
            81Municipality
            
            
            65
            
            
            
            
            
            
            
            65Corporate
            
            
            29
            
            
            
            
            
            
            
            29Other
            
            
            13
            
            
            
            
            
            
            
            13498
            
            
            
            199
            
            
            
            299Auction
      rate securities
            
            
            26
            
            
            
            
            
            
            
            
            
            
            
            26$
            2,822
            
            
            $
            632
            
            
            $
            1,923
            
            
            $
            267LiabilitiesPrice
      risk management liabilities:Energy
      commodities
            
            $
            1,789
            
            
            $
            9
            
            
            $
            1,718
            
            
            $
            62Interest
      rate/foreign exchange
            
            
            77
            
            
            
            
            
            
            
            77$
            1,866
            
            
            $
            9
            
            
            $
            1,795
            
            
            $
            62





PPLEnergy
      SupplyAssetsCash
      and cash equivalents
            
            $
            239
            
            
            $
            228
            
            
            $
            11Restricted
      cash and cash equivalents
            
            
            300
            
            
            
            33
            
            
            
            267Price
      risk management assets:Energy
      commodities
            
            
            1,541
            
            
            
            13
            
            
            
            1,287
            
            
            $
            241Interest
      rate/foreign exchange
            
            
            37
            
            
            
            
            
            
            
            371,578
            
            
            
            13
            
            
            
            1,324
            
            
            
            241Nuclear
      plant decommissioning trust funds:Cash
      and cash equivalents
            
            
            15
            
            
            
            15Equity
      securities
            
            
            184
            
            
            
            184Commingled
      equity index funds
            
            
            111
            
            
            
            
            
            
            
            111Debt
      securities:U.S.
      Treasury
            
            
            81
            
            
            
            
            
            
            
            81Municipality
            
            
            65
            
            
            
            
            
            
            
            65Corporate
            
            
            29
            
            
            
            
            
            
            
            29Other
            
            
            13
            
            
            
            
            
            
            
            13498
            
            
            
            199
            
            
            
            299


Auction
      rate securities
            
            
            21
            
            
            
            
            
            
            
            
            
            
            
            21$
            2,636
            
            
            $
            473
            
            
            $
            1,901
            
            
            $
            262LiabilitiesPrice
      risk management liabilities:Energy
      commodities
            
            $
            1,789
            
            
            $
            9
            
            
            $
            1,718
            
            
            $
            62Interest
      rate/foreign exchange
            
            
            76
            
            
            
            
            
            
            
            76$
            1,865
            
            
            $
            9
            
            
            $
            1,794
            
            
            $
            62


PPL
      ElectricAssetsCash
      and cash equivalents
            
            $
            67
            
            
            $
            67Restricted
      cash and cash equivalents
            
            
            43
            
            
            
            43$
            110
            
            
            $
            110





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





Fair
      Value Measurements Using Significant Unobservable Inputs (Level
      3)Three
      Months Ended
            
            Nine
      Months EndedEnergy
      Commodities, net
            
            Auction
      Rate Securities
            
            Total
            
            Energy
      Commodities, net
            
            Auction
      Rate Securities
            
            TotalPPLBalance
      at beginning of period
            
            $
            274
            
            
            $
            21
            
            
            $
            295
            
            
            $
            134
            
            
            
            
            
            
            $
            134Total realized/unrealized
      gains (losses)Included
      in earnings (a)
            
            
            2
            
            
            
            
            
            
            
            2
            
            
            
            1
            
            
            
            
            
            
            
            1Included
      in other comprehensive income (loss)
            
            
            (97
            )
            
            
            5
            
            
            
            (92
            )
            
            
            43
            
            
            $
            (3
            )
            
            
            40Purchases,
      sales, issuances and settlements, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1
            
            
            
            (11
            )
            
            
            (10
            )Transfers
      in and/or out of Level 3
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            40
            
            
            
            40Balance
      at end of period
            
            $
            179
            
            
            $
            26
            
            
            $
            205
            
            
            $
            179
            
            
            $
            26
            
            
            $
            205The
      amount of total (losses) for the period included in earnings attributable
      to the change in unrealized (losses) relating to assets or liabilities
      still held at end of period (a)
            
            $
            (1
            )
            
            
            
            
            
            $
            (1
            )
            
            $
            (2
            )
            
            
            
            
            
            $
            (2
            )PPL Energy
      SupplyBalance
      at beginning of period
            
            $
            274
            
            
            $
            17
            
            
            $
            291
            
            
            $
            134
            
            
            
            
            
            
            $
            134Total
      realized/unrealized gains (losses)Included
      in earnings (a)
            
            
            2
            
            
            
            
            
            
            
            2
            
            
            
            1
            
            
            
            
            
            
            
            1Included
      in other comprehensive income (loss)
            
            
            (97
            )
            
            
            4
            
            
            
            (93
            )
            
            
            43
            
            
            $
            (3
            )
            
            
            40Purchases,
      sales, issuances and settlements, net
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1
            
            
            
            (11
            )
            
            
            (10
            )Transfers
      in and/or out of Level 3
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35
            
            
            
            35Balance
      at end of period
            
            $
            179
            
            
            $
            21
            
            
            $
            200
            
            
            $
            179
            
            
            $
            21
            
            
            $
            200The
      amount of total (losses) for the period included in earnings attributable
      to the change in unrealized (losses) relating to assets or liabilities
      still held at end of period (a)
            
            $
            (1
            )
            
            
            
            
            
            $
            (1
            )
            
            $
            (2
            )
            
            
            
            
            
            $
            (2
            )





(a)
              
              The
      amounts included in this line for "Energy Commodities, net" are reported
      in "Net energy trading margins," "Wholesale energy marketing," and "Energy
      purchases" on the Statements of Income.(b)
              
              The
      amounts included in this line for "Energy Commodities, net" are reported
      in "Net energy trading margins" and "Unrealized economic activity" within
      "Wholesale energy marketing" and "Energy purchases" on the Statements of
      Income.





Cash and Cash Equivalents
and Restricted Cash and Cash Equivalents





PPL and
its subsidiaries use the market approach to determine the fair value of cash and
cash equivalents and restricted cash and cash equivalents.  The fair
value measurements of money market investments are classified as Level
1.  Deposits
for trading purposes with a NYMEX broker that are invested in short-duration
government-backed securities are classified as Level 2.





Price Risk Management
Assets/Liabilities - Energy Commodities





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





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





Treasury
instruments include forward-starting swaps, fixed-to-floating swaps, forwards
and options for foreign exchange contracts, and cross-currency
swaps.  PPL and PPL Energy Supply generally use the income approach to
measure the fair value of the instruments, using common inputs such as LIBOR and
foreign exchange curves.  Additionally, these calculations of fair
value are corroborated with the counterparty and/or PPL's risk management
group.  As noted above, these fair value measurements also include
adjustments for credit risk.





Nuclear Plant
Decommissioning Trust Funds





PPL and
PPL Energy Supply generally use the market approach to measure the fair value of
the securities held in the nuclear plant decommissioning trust
funds.  The fair value measurements of commingled equity index funds
are based on firm quotes of net asset values per share, which are not obtained
from a quoted price in an active market.  The fair value measurements
of debt securities are generally based on evaluated prices that reflect
observable market information, such as actual trade information of similar
securities, adjusted for observable differences.  When this
information is not available, the fair value of debt securities is measured
using present value techniques, which
incorporate other observable inputs.





Auction Rate
Securities





At
September 30, 2008, the fair values of PPL and PPL Energy Supply's auction
rate securities were $26 million and $21 million.  These securities
are recorded in "Investments - Other" on the Balance Sheet.  PPL's and
PPL Energy Supply's auction rate securities include Federal Family Education
Loan Program's guaranteed student loan revenue bonds as well as various
municipal bond issues, all of which are rated investment grade.





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





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





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





At
September 30, 2008, the estimated fair value of these auction rate securities
was $26 million for PPL, a decline of $3 million from par value, and $21 million
for PPL Energy Supply, a decline of $3 million from par value.  PPL
and PPL Energy Supply intend and have the ability to hold these securities until
they can be liquidated at par value.  Based upon the evaluation of
available information, PPL and PPL Energy Supply believe these investments
continue to be of high credit quality.  PPL and PPL Energy Supply do
not anticipate having to sell these securities in order to fund
operations.  Based on this assessment, the declines in fair value were
deemed temporary and are due to general market conditions.  For the
three months ended September 30, 2008, unrealized gains of $5 million for PPL
and $4 million for PPL Energy Supply have been recorded on these securities in
other comprehensive income.  The unrealized gains resulted from
interest rates resetting on several of the securities at higher
levels.  For the nine months ended September 30, 2008, unrealized
losses of $3 million for both PPL and PPL Energy Supply have been recorded on
these securities in other comprehensive income (loss).





14.
            Derivative Instruments and Hedging
    Activities





(PPL
and PPL Energy Supply)





Fair Value
Hedges





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





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





Cash Flow
Hedges





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





Net
investment hedge activity is reported in the foreign currency translation
adjustment component of other comprehensive income (loss).  These
contracts range in maturity through 2011.  During the three and nine
months ended September 30, 2008, PPL and PPL Energy Supply recognized $7
million and $8 million of net investment hedge gains after
tax.  During the three and nine months ended September 30, 2007,
PPL and PPL Energy Supply recognized $8 million and $12 million of net
investment hedge losses, after tax.  At September 30, 2008, $3
million of accumulated net investment hedge gains, after tax, were included in
the foreign currency translation adjustment component of accumulated other
comprehensive loss, compared to $4 million of losses, after tax, at
December 31, 2007.





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





For the
three months ended September 30, 2008 and 2007, hedge ineffectiveness
recorded for energy derivatives was, after tax, gains of $177 million and $2
million.  The 2008 amount was primarily driven by certain power and
gas cash flow hedges failing hedge effectiveness testing.  As
prescribed by SFAS 133, hedge accounting is not permitted for the quarter in
which this occurs and, accordingly, the entire change in fair value for the
three months ended September 30, 2008, was recorded to the income
statement.  The fair value of these positions increased significantly
due to the sharp decline in power and gas prices during the three months ended
September 30, 2008.  These transactions were not dedesignated as
hedges since prospective regression analysis still supports that these hedges
are expected to be highly effective.





For the
nine months ended September 30, 2008 and 2007, hedge ineffectiveness
associated with energy derivatives was, after tax, a gain of $179 million and a
loss of $2 million.  The significant gain for the nine months ended
September 30, 2008, was due to the reasons noted above for the three months
ended September 30, 2008.





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





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





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007PPLBeginning
      of period
            
            $
            (692
            )
            
            $
            (137
            )
            
            $
            (192
            )
            
            $
            (51
            )Net
      change associated with current period hedging activities and
      other
            
            
            665
            
            
            
            10
            
            
            
            166
            
            
            
            (92
            )Net
      change from reclassification into earnings
            
            
            (202
            )
            
            
            12
            
            
            
            (203
            )
            
            
            28End
      of period
            
            $
            (229
            )
            
            $
            (115
            )
            
            $
            (229
            )
            
            $
            (115
            )PPL Energy
      SupplyBeginning
      of period
            
            $
            (688
            )
            
            $
            (143
            )
            
            $
            (188
            )
            
            $
            (52
            )Net
      change associated with current period hedging activities and
      other
            
            
            668
            
            
            
            18
            
            
            
            167
            
            
            
            (88
            )Net
      change from reclassification into earnings
            
            
            (206
            )
            
            
            10
            
            
            
            (205
            )
            
            
            25End
      of period
            
            $
            (226
            )
            
            $
            (115
            )
            
            $
            (226
            )
            
            $
            (115
            )





At
September 30, 2008, the accumulated net unrealized after-tax losses on
qualifying derivatives that were expected to be reclassified into earnings
during the next 12 months were $41 million for PPL and $39 million for PPL
Energy Supply.  Amounts are reclassified as the energy contracts go to
delivery and as interest payments are made.





Normal Purchase/Normal Sale
Exception





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





LossesSeptember 30,
      2008
            
            December31,
      2007PPL
            
            $
            (123
            )
            
            $
            (327
            )PPL
      Energy Supply
            
            
            (191
            )
            
            
            (393
            )





Economic
Activity





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





Unrealized
      Gains (Losses)Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007RevenuesUnregulated
      retail electric and gas
            
            $
            3
            
            
            
            
            
            
            $
            2Wholesale
      energy marketing
            
            
            1,157
            
            
            
            
            
            
            
            361
            
            
            $
            (99
            )ExpensesFuel
            
            
            14
            
            
            $
            (1
            )
            
            
            16
            
            
            
            (1
            )Energy
      purchases
            
            
            (1,058
            )
            
            
            (7
            )
            
            
            (173
            )
            
            
            127





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





Credit
Concentration





(PPL,
PPL Energy Supply and PPL Electric)





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





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





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





(PPL)





At
September 30, 2008, PPL had credit exposure of $1.7 billion to energy
trading partners, excluding the effects of netting arrangements.  As a
result of netting and collateral arrangements, PPL's credit exposure was reduced
to $426 million.  One of the counterparties accounted for 21% of this
exposure and no other individual counterparty accounted for more than 14% of the
exposure.  The top ten counterparties accounted for $307 million, or
72%, of the total exposure.  Six of these counterparties had an
investment grade credit rating from S&P and accounted for 53% of the top 10
exposure.  Two of the counterparties that are not rated investment
grade have posted collateral in the form of a letter of credit as per the terms
and conditions of their respective contracts, and all four non-rated
counterparties are current on their obligations.





(PPL
Energy Supply)





At
September 30, 2008, PPL Energy Supply had credit exposure of $1.7 billion
to energy trading partners, excluding the effects of netting
arrangements.  As a result of netting and collateral arrangements, PPL
Energy Supply's credit exposure was reduced to $408 million.  One of
the counterparties accounted for 22% of this exposure, and no other individual
counterparty accounted for more than 14% of the exposure.  The top ten
counterparties accounted for $307 million, or 75%, of the total
exposure.  Six of these counterparties had an investment grade credit
rating from S&P and accounted for 53% of the top 10 exposure.  Two
of the counterparties that are not rated investment grade have posted collateral
in the form of a letter of credit as per the terms and conditions of their
respective contracts, and all four non-rated counterparties are current on their
obligations.





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





(PPL
Electric)





At
September 30, 2008, PPL Electric had credit exposure of $18 million as a
result of its two solicitation bids in 2007 and one solicitation bid in 2008 for
the 2010 PLR supply.  The successful bidders were eight external
suppliers, all of which had an investment grade credit rating from
S&P.





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





15.
            Goodwill and Other Intangible
  Assets





Goodwill





(PPL
and PPL Energy Supply)





The
changes in the carrying amounts of goodwill by segment were:





Supply
            
            International
      Delivery
            
            TotalBalance
      at December 31, 2007
            $
            94
            
            
            $
            897
            
            
            $
            991Effect
      of foreign currency exchange rates
            
            
            
            
            
            (102
            )
            
            
            (102
            )Balance
      at September 30, 2008
            $
            94
            
            
            $
            795
            
            
            $
            889





(PPL)





At
September 30, 2008 and December 31, 2007, $55 million of goodwill had been
classified as "Assets held for sale" on the Balance Sheets due to the planned
sale of the natural gas distribution and propane businesses.  These
businesses are a component of the Pennsylvania Delivery segment.  The
sale was completed in October 2008.  See Note 8 for additional
information.





Other
Intangible Assets





(PPL)





The gross
carrying amount and the accumulated amortization of other intangible assets
were:





September
      30, 2008
            
            December
      31, 2007Gross
      Carrying
              Amount
            
            Accumulated
              Amortization
            
            Gross
      Carrying
              Amount
            
            Accumulated
              AmortizationSubject
      to amortization:Land
      and transmission rights
            
            $
            237
            
            
            $
            110
            
            
            $
            235
            
            
            $
            108Emission
      allowances (a)
            
            
            90
            
            
            
            
            
            
            
            123Lease
      arrangement and other (b)
            
            
            349
            
            
            
            46
            
            
            
            109
            
            
            
            41Not
      subject to amortization due to indefinite life:Land
      and transmission rights
            
            
            16
            
            
            
            
            
            
            
            15Easements
            
            
            74
            
            
            
            
            
            
            
            78$
            766
            
            
            $
            156
            
            
            $
            560
            
            
            $
            149





(a)
            
            Removed
      from the Balance Sheets and expensed when consumed or
      sold.    During the third quarter of 2008, PPL
      recorded an impairment charge of $33 million to write-down annual nitrogen
      oxide allowances to fair value, which was determined to be
      zero.  See Note 10 for additional
    information.(b)
            
            "Other"
      includes costs for the development of licenses, the most significant of
      which is the COLA (see Note 8 for additional
      information).   These costs are expected to be amortized
      once the related assets are placed in
service.





Current
intangible assets and long-term intangible assets are included in "Other
intangibles" in their respective areas on the Balance Sheets.





The
increase in "Lease arrangement and other" from December 31, 2007, is primarily
related to an intangible asset with an estimated amortization period of 13
years.





Amortization
expense, excluding consumption of emission allowances, is estimated at $5
million for the remainder of 2008 and $22 million per year for 2009 through
2013.





(PPL
Energy Supply)





The gross
carrying amount and the accumulated amortization of other intangible assets
were:





September
      30, 2008
            
            December
      31, 2007Gross
      Carrying
              Amount
            
            Accumulated
              Amortization
            
            Gross
      Carrying
              Amount
            
            Accumulated
              AmortizationLand
      and transmission rights
            
            $
            42
            
            
            $
            22
            
            
            $
            43
            
            
            $
            22Emission
      allowances (a)
            
            
            90
            
            
            
            
            
            
            
            123Easements
      (b)
            
            
            74
            
            
            
            
            
            
            
            78Lease
      arrangement and other (c)
            
            
            344
            
            
            
            46
            
            
            
            109
            
            
            
            41$
            550
            
            
            $
            68
            
            
            $
            353
            
            
            $
            63





(a)
            
            Removed
      from the Balance Sheets and expensed when consumed or
      sold.   During the third quarter of 2008, PPL Energy Supply
      recorded an impairment charge of $33 million to write-down annual nitrogen
      oxide allowances to fair value, which was determined to be
      zero.  See Note 10 for additional
information.(b)
            
            Not
      subject to amortization due to indefinite life.(c)
            
            "Other"
      includes costs for the development of licenses, the most significant of
      which is the COLA (see Note 8 for additional
      information).  These costs are expected to be amortized once the
      related assets are placed in
service.





Current
intangible assets and long-term intangible assets are included in "Other
intangibles" in their respective areas on the Balance Sheets.





The
increase in "Lease arrangement and other" from December 31, 2007, is primarily
related to an intangible asset with an estimated amortization period of 13
years.





Amortization
expense, excluding consumption of emission allowances, is estimated at $5
million for the remainder of 2008 and $19 million per year for 2009 through
2013.





16.
            Asset Retirement
Obligations





(PPL
and PPL Energy Supply)





The
change in the carrying amounts of the AROs was:





AROs
      at December 31, 2007
            
            $
            376Accretion
      expense
            
            
            22Liabilities
      incurred
            
            
            11Change
      in estimated cash flow on settlement date
            
            
            (10
            )Liabilities
      settled
            
            
            (14
            )Change
      in foreign currency exchange rates
            
            
            (1
            )AROs
      at September 30, 2008
            
            $
            384





Changes
in ARO costs and settlement dates, which affect the carrying value of various
AROs, are reviewed periodically to ensure that any material changes are
incorporated into the latest estimates of the obligation.  In 2008,
PPL Energy Supply changed estimated settlement dates and revised estimates on
several AROs, the most significant being the ash basins at the Montour and
Brunner Island plants.  In addition, PPL Energy Supply incurred
additional liabilities for asbestos-containing material at several
plants.





Funds in
the nuclear plant decommissioning trust are legally restricted for purposes of
settling PPL's and PPL Energy Supply's ARO related to the decommissioning of the
Susquehanna nuclear station.  PPL Electric collects authorized nuclear
decommissioning costs through the CTC; the collection of such costs is scheduled
to end in December 2009.  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.  Once this collection ends, nuclear decommissioning
costs are expected to be recovered through the price of generation in the
competitive marketplace.  The aggregate fair value of the nuclear
plant decommissioning trust funds was $498 million as of September 30,
2008, and $555 million as of December 31, 2007.  See Note 13 for
additional information on the September 30, 2008 fair value and Note 12 for
information regarding the impairment of certain securities held by the
trust.





17.
            Restricted Cash and Cash
  Equivalents





(PPL,
PPL Energy Supply and PPL Electric)





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





September 30,
      2008PPL
            
            PPL
      Energy Supply
            
            PPL
      ElectricCurrent:Deposits
      for trading purposes with NYMEX broker (a)
            
            $
            267
            
            
            $
            267PPL
      Transition Bond Company Indenture reserves (b)
            
            
            43
            
            
            
            
            
            
            $
            43Counterparty
      collateral
            
            
            7
            
            
            
            7Client
      deposits
            
            
            6Other
            
            
            3
            
            
            
            3Total
      current
            
            
            326
            
            
            
            277
            
            
            
            43Noncurrent:Required
      deposits of WPD (c)
            
            
            18
            
            
            
            18Escrowed
      funds related to Exempt Facility Revenue Bonds
            
            
            5
            
            
            
            5Total
      noncurrent
            
            
            23
            
            
            
            23$
            349
            
            
            $
            300
            
            
            $
            43





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





(a)
            
            Represents
      margin deposits related to hedging activities.  The increase in
      2008 is attributable to increases in commodity prices and transaction
      volume.(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.(c)
            
            Primarily
      consists of insurance reserves.(d)
            
            Includes
      a deposit with a financial institution of funds from the asset-backed
      commercial paper program to fully collateralize $41 million of letters of
      credit at December 31, 2007.





18.
            Leases





(PPL
and PPL Energy Supply)





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





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





Remainder
      of 2008
            
            $
            142009
            
            
            982010
            
            
            892011
            
            
            902012
            
            
            872013
            
            
            99Thereafter
            
            
            478$
            955





19.
            New Accounting Standards Pending
  Adoption





(PPL,
PPL Energy Supply and PPL Electric)





FSP
APB 14-1





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





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





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





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





FSP
EITF 03-6-1





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





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





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





SFAS
141(R)





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





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





The
adoption of SFAS 141(R) will impact the accounting for business combinations for
which the acquisition date is on or after January 1, 2009.  As noted
above, it will also impact all changes to tax uncertainties and income tax
valuation allowances established for business combinations that have occurred
prior to January 1, 2009.  Early adoption is
prohibited.  The potential impact of adoption to the financial
statements is not yet determinable, but it could be material.





SFAS
157, as amended





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





SFAS
160





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





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





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





SFAS
161





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





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





PPL CORPORATION AND SUBSIDIARIES





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





Overview





PPL is an
energy and utility holding company with headquarters in Allentown,
Pennsylvania.  In PPL's 2007 Form 10-K, descriptions of its domestic
and international businesses are found in "Item 1. Business -
Background."  Through its subsidiaries, PPL is primarily engaged in
the generation and marketing of electricity in two key markets - the
northeastern and western U.S. - and in the delivery of electricity in
Pennsylvania and the U.K.  PPL's reportable segments are Supply,
International Delivery and Pennsylvania Delivery.  In 2007, PPL sold
its regulated electricity delivery businesses in Latin America, which were
included in the International Delivery segment.  In October, 2008, PPL
completed the sale of its natural gas distribution and propane businesses, which
were included in the Pennsylvania Delivery segment.  See Note 8 to the
Financial Statements for information on the sales.  See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview" in PPL's 2007 Form 10-K for a discussion of PPL's
strategy and the risks and challenges it faces in its business.  See
"Forward-Looking Information," Note 10 to the Financial Statements and the rest
of Item 2 in this Form 10-Q and "Item 1A. Risk Factors" and the rest of Item 7
in PPL's 2007 Form 10-K for more information concerning the material risks and
uncertainties that PPL faces in its businesses and with respect to its future
earnings.





Recent
Market Events


The
turmoil in the financial markets has increased the complexity of maintaining
credit risk within acceptable tolerances, responding to liquidity needs,
measuring derivative and other financial instruments at fair value, and managing
market price risk.
 
 Credit
risk
 
 Credit
risk is the risk that PPL would incur a loss as a result of nonperformance by
counterparties of their contractual obligations.  PPL maintains credit
policies and procedures with respect to counterparty credit (including
requirements that counterparties maintain specified credit ratings) and requires
other assurances in the form of credit support or collateral in certain
circumstances in order to limit counterparty credit risk.  However,
PPL has concentrations of suppliers and customers among electric utilities,
natural gas distribution companies, financial institutions and other energy
marketing and trading companies.  These concentrations may impact
PPL's overall exposure to credit risk, either positively or negatively, as
counterparties may be similarly affected by changes in economic, regulatory or
other conditions.  The volatility and downturn in financial and
commodity markets in the third quarter of 2008 have generally increased PPL's
exposure to credit risk.  See Note 14 to the Financial Statements for
additional information about credit concentration.
 
 In
September 2008, Lehman Brothers Holdings Inc. (Lehman), filed for protection
under Chapter 11 of the Federal Bankruptcy Code.  A subsidiary of
Lehman was a counterparty of PPL.  Lehman was a guarantor of the
subsidiary, and because of the bankruptcy, PPL was allowed to declare an event
of default under the contract with the subsidiary.  At the time of
Lehman's filing, PPL's direct exposure to the subsidiary of Lehman was a net
liability of $3 million, pre-tax, which was liquidated prior to September 30,
2008.  PPL believes that the Lehman bankruptcy has not had and will
not have a material adverse effect on PPL or its subsidiaries.
 
 Due to
the recent market conditions, PPL has increased the amount of credit reserves
related to certain counterparties other than Lehman, but the increase was not
material to PPL's financial statements.  At this time, PPL has not
deemed it probable that any of these counterparties will default.
 
 LiquidityIssues
 
 The
turmoil in financial markets has generally made obtaining new sources of credit
more difficult and more costly for companies.  Despite the tightening
of the credit markets, PPL expects to continue to have adequate sources of
liquidity through operating cash flows, cash and cash equivalents, short-term
investments and its credit facilities.  PPL currently does not expect
to need to access commercial paper markets or debt and equity capital markets
until the fourth quarter of 2009, except to remarket certain bonds at PPL
Electric as discussed in "Financial Condition - Liquidity and Capital Resources
- Financing Activities," but may decide to access capital markets, subject to
market conditions, to enhance its liquidity.
 
 Lehman
Brothers Bank, FSB (Lehman Bank), another subsidiary of Lehman, is no
longer honoring its commitments under PPL Energy Supply's $3.4 billion five-year
credit facility and PPL Electric's $200 million five-year credit
facility.  Lehman Bank's commitments under these facilities total $185
million.  See "Financial Condition - Liquidity
and Capital Resources" for an expanded discussion of PPL's liquidity position
and a discussion of financing transactions completed in October 2008 to prefund
future debt maturities.
 
 Valuations in Inactive
Markets
 
 The
turmoil in the financial markets has generally made it more difficult for
companies to determine the fair value of certain assets and liabilities in
inactive markets.  Management has reviewed the activity in the energy
and financial markets in which PPL transacts, concluding that substantially all
of these markets were active as of September 30, 2008.  However,
the market for auction rate securities remains inactive.  See Note 13
to the Financial Statements and "Financial Condition - Liquidity and Capital
Resources - Auction Rate Securities" for a discussion of these
investments.
 
 Commodity PriceRisk
 
 The
volatility of wholesale energy prices significantly impacted PPL's earnings for
the three and nine months ended September 30, 2008.  See "Statement of
Income Analysis - Domestic Gross Energy Margins - Domestic Gross Energy Margins
By Region" for further discussion.
 
 Securities PriceRisk
 
 Declines
in the market price of debt and equity securities resulted in unrealized losses
that have impacted the asset values of PPL's investments in its nuclear
decommissioning trust funds and in its defined benefit plans.  The
nuclear decommissioning trust funds have experienced negative investment returns
during 2008.  The assets in these funds support the costs to
decommission the Susquehanna nuclear station when its licenses expire in 2022
and 2024, subject to any license extensions.  As a result, the obligation
to decommission the nuclear station is long-term in nature, exposing the assets
held in the funds to price risk.  PPL actively monitors the
performance of the investments held in the funds and periodically reviews the
funds' investment allocations.
 
 PPL's
defined benefit plans have also experienced negative investment returns in
2008.  However, significant increases in bond rates used to determine the
discount rate for these plans may provide for reductions in the gross
benefit obligations of these plans. This may offset some portion of the
decline in asset values when determining the funded status of the plans as well
as other measures at the end of 2008.  Determination of the funded status
of the defined benefit plans, contribution requirements and net periodic defined
benefit costs for future years are subject to changes in assumptions, including
the performance of the assets in the plans, through the annual measurement
dates.  See "Application of Critical Accounting Policies" for "Defined
Benefits" in Part II, Item 7 of the 2007 Form 10-K for a discussion of the
assumptions and sensitivities regarding those assumptions.





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





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





Results of
Operations





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





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





Earnings





Net
income and the related EPS were:





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007Net
      income
            
            $
            203
            
            
            $
            322
            
            
            $
            653
            
            
            $
            870EPS
      - basic
            
            $
            0.54
            
            
            $
            0.85
            
            
            $
            1.75
            
            
            $
            2.27EPS
      - diluted
            
            $
            0.54
            
            
            $
            0.84
            
            
            $
            1.73
            
            
            $
            2.25





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





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





Segment
Results





Net
income by segment was:





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007Supply
            
            $
            98
            
            
            $
            205
            
            
            $
            297
            
            
            $
            454International
      Delivery
            
            
            73
            
            
            
            108
            
            
            
            233
            
            
            
            319Pennsylvania
      Delivery
            
            
            32
            
            
            
            9
            
            
            
            123
            
            
            
            97Total
            
            $
            203
            
            
            $
            322
            
            
            $
            653
            
            
            $
            870





Supply
Segment





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





Supply
segment net income was:





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007Energy
      revenuesExternal
      (a)
            
            $
            1,825
            
            
            $
            566
            
            
            $
            2,027
            
            
            $
            1,256Intersegment
            
            
            453
            
            
            
            453
            
            
            
            1,370
            
            
            
            1,356Energy-related
      businesses
            
            
            140
            
            
            
            185
            
            
            
            369
            
            
            
            536Total
      operating revenues
            
            
            2,418
            
            
            
            1,204
            
            
            
            3,766
            
            
            
            3,148Fuel
      and energy purchasesExternal
      (a)
            
            
            1,781
            
            
            
            436
            
            
            
            1,888
            
            
            
            1,085Intersegment
            
            
            30
            
            
            
            44
            
            
            
            89
            
            
            
            119Other
      operation and maintenance
            
            
            215
            
            
            
            164
            
            
            
            649
            
            
            
            517Depreciation
            
            
            52
            
            
            
            41
            
            
            
            146
            
            
            
            124Taxes,
      other than income
            
            
            9
            
            
            
            6
            
            
            
            18
            
            
            
            24Energy-related
      businesses
            
            
            130
            
            
            
            174
            
            
            
            351
            
            
            
            568Total
      operating expenses
            
            
            2,217
            
            
            
            865
            
            
            
            3,141
            
            
            
            2,437Other
      Income - net
            
            
            (6
            )
            
            
            15
            
            
            
            (2
            )
            
            
            27Interest
      Expense
            
            
            53
            
            
            
            38
            
            
            
            144
            
            
            
            113Income
      Taxes
            
            
            44
            
            
            
            110
            
            
            
            181
            
            
            
            169Minority
      Interest
            
            
            
            
            
            
            1
            
            
            
            1
            
            
            
            2Net
      Income
            
            $
            98
            
            
            $
            205
            
            
            $
            297
            
            
            $
            454





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





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedEastern
      U.S. non-trading margins
            
            $
            (15
            )
            
            $
            (48
            )Western
      U.S. non-trading margins
            
            
            
            
            
            
            5Net
      energy trading margins
            
            
            (89
            )
            
            
            (70
            )Taxes,
      other than income
            
            
            1
            
            
            
            4Depreciation
            
            
            (5
            )
            
            
            (12
            )Other
      operating expenses
            
            
            2
            
            
            
            (10
            )Earnings
      from synfuel projects
            
            
            (9
            )
            
            
            (43
            )Realized
      earnings on nuclear plant decommissioning trust
            
            
            (4
            )
            
            
            (7
            )Financing
      costs, net of interest income
            
            
            (13
            )
            
            
            (22
            )Income
      taxes
            
            
            (3
            )
            
            
            (6
            )Other
            
            
            1
            
            
            
            (3
            )Special
      items
            
            
            27
            
            
            
            55$
            (107
            )
            
            $
            (157
            )





·
            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
      depreciation expense for both periods was due to additions to
      PP&E.·
            Higher
      other operating expenses for the nine months ended September 30,
      2008, were attributable to higher operating costs at the fossil/hydro
      generating stations (including higher outage costs at the Eastern U.S.
      fossil/hydro stations), higher costs of nuclear development and higher
      operating costs in the energy marketing business.  Partially
      offsetting these increases were lower outage and non-outage costs at the
      Susquehanna nuclear station.·
            Lower
      earnings contribution from synfuel projects for both periods was the
      result of the expiration of federal tax credits and closure of the synfuel
      facilities at the end of 2007.·
            Higher
      net financing costs for both periods were primarily due to lower interest
      income and higher interest expense on long-term debt primarily due to new
      issuances.





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





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007Mark-to-market
      adjustments from certain economic activity (a)
            
            $
            67
            
            
            $
            (6
            )
            
            $
            121
            
            
            $
            20Unrealized
      losses on certain nuclear plant decommissioning trust investments (Note
      12)
            
            
            (1
            )
            
            
            
            
            
            
            (5
            )Impairment
      of certain emission allowances (Note 10)
            
            
            (27
            )
            
            
            
            
            
            
            (27
            )Impairment
      of certain transmission rights (b)
            
            
            
            
            
            
            (12
            )
            
            
            
            
            
            
            (12
            )Settlement
      of Wallingford cost-based rates (c)
            
            
            
            
            
            
            33
            
            
            
            
            
            
            
            33Sale
      of domestic telecommunication operations (Note 8)
            
            
            
            
            
            
            (3
            )
            
            
            
            
            
            
            (23
            )Off-site
      remediation of ash basin leak (Note 10)
            
            
            
            
            
            
            
            
            
            
            1Colstrip
      groundwater litigation (Note 10)
            
            
            
            
            
            
            
            
            
            
            (5
            )Synthetic
      fuel tax adjustment (Note 10)
            
            
            
            
            
            
            
            
            
            
            (13
            )PJM
      billing dispute (d)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1
            )Total
            
            $
            39
            
            
            $
            12
            
            
            $
            72
            
            
            $
            17





(a)
            
            See
      Note 14 to the Financial Statements for additional information regarding
      economic activity.(b)
            
            See
      "Other Operation and Maintenance" for more information on the $21 million
      pre-tax impairment.(c)
            
            In
      2003, PPL Wallingford and PPL EnergyPlus sought from the FERC cost-based
      payments based upon the RMR status of four units at the Wallingford,
      Connecticut generating facility.  As a result of a settlement
      agreement, during the third quarter of 2007, PPL recognized $55 million of
      revenue and $4 million of interest income related to the settlement
      agreement, of which $21 million had been previously
    collected.(d)
            
            Represents
      additional interest related to the settlement of this litigation in
      2007.





Outlook





Excluding
special items, PPL projects lower earnings for its Supply segment in 2008
compared with 2007 as a result of the loss of synfuel-related tax benefits,
higher coal commodity and transportation costs, lower expected baseload
generation, higher financing costs and lower expected margins from PPL's
marketing and trading activities.  The decrease in wholesale energy
prices and lack of liquidity in the power markets significantly impacted PPL's
earnings for the three and nine months ended September 30, 2008.  PPL
has taken measures to reduce its exposure to the potential effect of any further
decline in market prices on future trading margins.





PPL
expects 2009 earnings for its Supply segment to be lower than projected 2008
earnings as a result of higher operation and maintenance expenses; higher
depreciation and higher financing costs.  PPL expects these increased
costs to be partially offset by higher energy margins, despite higher expected
coal expense, as a result of higher baseload generation, higher Western energy
sales prices, and higher expected margins from its marketing and trading
activities.





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





International Delivery
Segment





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





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





International
Delivery segment net income was:





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007Utility
      revenues
            
            $
            195
            
            
            $
            204
            
            
            $
            647
            
            
            $
            638Energy-related
      businesses
            
            
            8
            
            
            
            8
            
            
            
            26
            
            
            
            27Total
      operating revenues
            
            
            203
            
            
            
            212
            
            
            
            673
            
            
            
            665Other
      operation and maintenance
            
            
            46
            
            
            
            57
            
            
            
            142
            
            
            
            182Depreciation
            
            
            33
            
            
            
            33
            
            
            
            104
            
            
            
            111Taxes,
      other than income
            
            
            17
            
            
            
            17
            
            
            
            51
            
            
            
            49Energy-related
      businesses
            
            
            4
            
            
            
            4
            
            
            
            10
            
            
            
            13Total
      operating expenses
            
            
            100
            
            
            
            111
            
            
            
            307
            
            
            
            355Other
      Income - net
            
            
            6
            
            
            
            2
            
            
            
            10
            
            
            
            19Interest
      Expense
            
            
            42
            
            
            
            47
            
            
            
            114
            
            
            
            141Income
      Tax (Benefit) Expense
            
            
            (6
            )
            
            
            (39
            )
            
            
            34
            
            
            
            (42
            )Incomefrom
      Discontinued Operations
            
            
            
            
            
            
            13
            
            
            
            5
            
            
            
            89Net
      Income
            
            $
            73
            
            
            $
            108
            
            
            $
            233
            
            
            $
            319





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedU.K.:Delivery
      margins
            
            
            
            
            $
            18Depreciation
            $
            (1
            )
            
            
            4Other
      operating expenses
            
            4
            
            
            
            15Interest
      expense
            
            (1
            )
            
            
            5Interest
      income
            
            (2
            )
            
            
            (5
            )Income
      taxes
            
            9
            
            
            
            21Foreign
      currency exchange rates
            
            (2
            )Hyder
      liquidation distributions (Note 8)
            
            
            
            
            
            (3
            )Gain
      on transfer of equity investment (Note 8)
            
            
            
            
            
            (5
            )Other
            
            
            
            
            
            (2
            )Discontinued
      Operations, net of special item (Note 8)
            
            (11
            )
            
            
            (39
            )Change
      in tax reserves (Note 5)
            
            1
            
            
            
            (30
            )Other
            
            8
            
            
            
            20U.S.
      income taxes
            
            17
            
            
            
            15Special
      items
            
            (57
            )
            
            
            (100
            )$
            (35
            )
            
            $
            (86
            )





·
            The
      U.K.'s earnings for the nine months ended September 30, 2008, were
      favorably impacted by higher delivery margins primarily due to higher
      prices, which include the annual regulatory adjustment for
      inflation.·
            Lower
      U.K. other operating expenses for both periods were primarily due to lower
      pension expense resulting from an improvement in the fair value of pension
      assets and an increase in the discount rate, partially offset by lower
      mortality rates.·
            Lower
      U.K. income taxes for the three and nine months ended September 30,
      2008, were primarily due to the enactment of the U.K.'s Finance Act 2008,
      which included the phase-out of tax depreciation on certain
      buildings.  As a result, a deferred tax benefit was recorded in
      the third quarter of 2008.  Also contributing to the nine-month
      period variance was a favorable U.K. taxing authority determination in
      2008 related to the deductibility of imputed interest on a loan from
      Hyder.·
            Lower
      U.S. income taxes are primarily due to changes in the estimated taxable
      amount of planned cash repatriation.·
            Changes
      in foreign currency exchange rates decreased the U.K.'s portion of revenue
      and expense line items by 4% and 1% for the three and nine months
      ended September 30, 2008, compared with the same periods in
      2007.





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





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Sale
      of Latin American businesses (Note 8)
            
            
            
            
            
            $
            3
            
            
            
            
            
            
            $
            46Change
      in U.K. tax rate (Note 5)
            
            
            
            
            
            
            54
            
            
            
            
            
            
            
            54$
            57
            
            
            
            
            
            
            $
            100





Outlook





Excluding
special items, PPL projects the 2008 earnings of its International Delivery
segment to approximate the results of 2007.





PPL
expects 2009 earnings for its International Delivery segment to be lower than
projected 2008 earnings as a result of the loss of certain U.K. income tax
benefits included in 2008 that are not expected to recur in 2009 and a less
favorable foreign currency exchange rate in the U.K.





Pennsylvania Delivery
Segment





The
Pennsylvania Delivery segment includes the regulated electric and gas delivery
operations of PPL Electric and PPL Gas Utilities.  In 2007, PPL
announced its intention to sell its natural gas distribution and propane
businesses.  In October 2008, the sale was completed.  See
Note 8 to the Financial Statements for additional information.





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





Pennsylvania
Delivery segment net income was:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Operating
      revenuesExternal
            
            $
            813
            
            
            $
            811
            
            
            $
            2,462
            
            
            $
            2,436Intersegment
            
            
            30
            
            
            
            44
            
            
            
            89
            
            
            
            119Total
      operating revenues
            
            
            843
            
            
            
            855
            
            
            
            2,551
            
            
            
            2,555Fuel
      and energy purchasesExternal
            
            
            44
            
            
            
            56
            
            
            
            129
            
            
            
            157Intersegment
            
            
            453
            
            
            
            453
            
            
            
            1,370
            
            
            
            1,356Other
      operation and maintenance
            
            
            103
            
            
            
            103
            
            
            
            310
            
            
            
            297Amortization
      of recoverable transition costs
            
            
            73
            
            
            
            78
            
            
            
            217
            
            
            
            229Depreciation
            
            
            32
            
            
            
            34
            
            
            
            97
            
            
            
            99Taxes,
      other than income
            
            
            51
            
            
            
            50
            
            
            
            155
            
            
            
            150Total
      operating expenses
            
            
            756
            
            
            
            774
            
            
            
            2,278
            
            
            
            2,288Other
      Income - net
            
            
            1
            
            
            
            6
            
            
            
            9
            
            
            
            25Interest
      Expense
            
            
            25
            
            
            
            32
            
            
            
            80
            
            
            
            103Income
      Taxes
            
            
            21
            
            
            
            17
            
            
            
            70
            
            
            
            61Dividends
      on Preferred Securities
            
            
            5
            
            
            
            5
            
            
            
            14
            
            
            
            14(Loss)
      Income from Discontinued Operations
            
            
            (5
            )
            
            
            (24
            )
            
            
            5
            
            
            
            (17
            )Net
      Income
            
            $
            32
            
            
            $
            9
            
            
            $
            123
            
            
            $
            97





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedDelivery
      revenues (net of CTC/ITC amortization, interest expense on transition
      bonds and ancillary charges)
            $
            5
            
            
            $
            21Operating
      expenses
            
            
            
            
            
            (10
            )Other
            
            (1
            )
            
            
            (3
            )Special
      item
            
            19
            
            
            
            18$
            23
            
            
            $
            26





·
            Higher
      delivery revenues were attributable to a PPL Electric base rate increase
      effective January 1, 2008 and normal load growth, partially offset by
      the unfavorable impact of weather on residential and commercial sales in
      2008.·
            Higher
      operating expenses for the nine months ended September 30, 2008, were
      primarily due to increased usage of contractors and increases in
      uncollectible accounts.





The
following after-tax amount, which management considers a special item, also had
an impact on the Pennsylvania Delivery segment earnings.  See the
indicated Note to the Financial Statements for additional
information.





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Sale
      of gas and propane businesses (Note 8)
            
            $
            (4
            )
            
            $
            (23
            )
            
            $
            (5
            )
            
            $
            (23
            )





Outlook





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





PPL
expects 2009 earnings for its Pennsylvania Delivery segment to be comparable to
2008 due to lower delivery margins offset by lower operating costs.





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





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





Residential
            
            Small
      Commercial and Small IndustrialJuly
      2007
            
            $
            101.77
            
            
            $
            105.11October
      2007
            
            
            105.08
            
            
            
            105.75March
      2008
            
            
            108.80
            
            
            
            108.76October
      2008
            
            
            112.51
            
            
            
            111.94Average
            
            
            107.04
            
            
            
            107.89





As a
result, PPL Electric has contracted for two-thirds of the electricity supply it
expects to need for 2010.  If the average prices paid for the supply
purchased so far were to be the same for the remaining two purchases, the
average residential customer's monthly bill in 2010 would increase about 36.1%
over 2009 levels, while monthly bills for small business customers would
increase on average approximately 25.0% and monthly bills for mid-size business
customers would increase on average approximately 44.3%.  The
estimated increases include Pennsylvania gross receipts tax, an adjustment for
line losses, PPL Electric's January 1, 2008 rate increase and a court-ordered
rate adjustment in 2007.  Actual 2010 prices will not be known until
all six supply purchases have been made.  The final two solicitations
will be conducted in 2009.





In
September 2007, the Pennsylvania General Assembly (General Assembly) convened a
special session to address the proposals in the Energy Independence Strategy
(Strategy) proposed by the Pennsylvania Governor earlier in 2007.  In
June 2008, the General Assembly passed, and the Governor signed, a bill that
would create a $650 million fund for clean energy projects, conservation and
energy efficiency initiatives and pollution control projects that would be
funded through revenue bonds and gross receipts tax revenue, which will increase
as rate caps expire.





In August
2008, PPL Electric filed a request with the PUC to approve its plan to purchase
the PLR electricity supply that PPL Electric will need for 2011 through
mid-2014.
 On
November 3, 2008, PPL Electric proposed several amendments to its plan to
reflect passage of Pennsylvania Act 129 (Act 129), as discussed
below.  PPL Electric added provisions to purchase 5% of its default
service supply through five-year contracts and an additional 5% through ten-year
contracts.  It reduced the term of its plan by one year, proposing
that the plan end in May 2013, rather than in
May 2014.  Finally, PPL Electric provided support for several
findings that the PUC was required to make under Act 129.  PPL
Electric cannot predict the outcome of this matter.
 
 In August
2008, PPL Electric also asked the FERC for a change in the way transmission
rates are calculated to support continued investment in its transmission system
by switching to formula-based rates.  Under formula-based rates, a
fixed earnings level is set for the utility, and the utility annually adjusts
its transmission rates, subject to FERC review.  The process offers an
opportunity for public input.  The proposed rate design would ensure
that there is no over-recovery or under-recovery of the actual costs of
providing transmission delivery service.  The rate change request, if
approved, would result in an increase of $0.74 to the monthly bill of an average
PPL Electric residential customer.  PPL Electric is requesting that
the proposed rate take effect November 1, 2008.  This request would
not affect generation charges or distribution rates.  The rate change
request would result in an annual revenue increase of about $20
million.
  On
October 29, 2008, the FERC accepted the proposed rate for filing, effective on
November 1, 2008, subject to refund.  The FERC did not adjust the
requested return on equity of 12.84%, which included 50 basis points for
membership in PJM.  Finally, the FERC set the matter for hearing, but
held the hearings in abeyance to provide time for settlement judge
procedures.  PPL Electric cannot predict the outcome of this
matter.
 
 Since the
introduction of the Strategy in 2007, PPL and PPL Electric have been working
with Pennsylvania legislators, regulators and other stakeholders to develop
constructive measures to help customers transition to market rates after 2009,
including a variety of rate mitigation, educational and energy conservation
programs, consistent with several initiatives being developed by the state
administration and legislature.  In this regard, in November 2007, PPL
Electric requested the PUC to approve a plan under which its residential and
small commercial customers could smooth the impact of price increases when
generation rate caps expire in 2010.  The proposed phase-in plan
provided that customers could pay additional amounts on their electric bills
beginning in mid-2008 and continuing through 2009, and such additional amounts,
plus accrued interest, would be applied to their 2010 and 2011 electric bills,
mitigating the impact of the rate cap expiration.  PPL Electric
requested expedited consideration of the proposal by the PUC.  Ten
parties filed responses to PPL Electric's petition, primarily because the
proposal offered the program on an "opt-out" basis (i.e., customers would be
enrolled automatically and affirmatively have to "opt-out" if they choose not to
participate).  The parties negotiated a settlement
agreement  under which PPL Electric agreed to change the "opt-out"
approach to an "opt-in" approach (i.e., customers would have to affirmatively
enroll) and to make the program available to customers enrolled in budget
billing.  In March 2008, the Administrative Law Judge assigned to this
case recommended that the PUC approve the settlement agreement.  In
August 2008, the PUC approved the settlement agreement.  As a result,
the program was implemented in October 2008.
 
 As part
of the Strategy, the General Assembly passed and the Governor signed into law
Act 129 in October 2008.  The law creates an energy efficiency and
conservation program and smart metering technology requirements, adopts new PLR
electricity supply procurement rules, provides remedies for market misconduct,
and makes changes to the existing Alternative Energy Portfolio
Standard.
 
 Under Act
129, Electric Delivery Companies (EDCs) must develop and file an energy
efficiency and conservation plan with the PUC.  EDCs must contract
with a conservation service provider to implement all or a portion of the
plan.  Act 129 requires reduction in consumption of 1% by 2011, 3% by
2013 and a reduction in peak demand of 4.5% by 2013.  EDCs will be
able to recover costs of implementing a conservation plan.
 
 Act 129
also provides for installation of smart meters under the following
conditions:  for new construction, upon the request of consumers at
their cost, or on a depreciation schedule not exceeding 15 years.  PPL
Electric's current advanced metering technology meets the definition of smart
metering technology in Act 129, but PPL Electric will eventually have to upgrade
its current metering technology to comply with a provision that requires EDCs to
make available to third parties direct meter access and electronic access to
customer meter data.  Under Act 129, EDCs will be able to recover
costs of providing smart metering technology.
 
 Act 129
also requires the default service provider (DSP) to provide electric generation
supply service to customers pursuant to a PUC-approved competitive procurement
plan through auctions, requests for proposal and bilateral contracts at the sole
discretion of the DSP.  Act 129 requires a mix of spot market
purchases, short-term contracts and long-term contracts (4 to 20 years, with
long-term contracts limited to up to 25% of the load unless otherwise approved
by the PUC).  The DSP will be able to recover costs associated with a
competitive procurement plan.
 Under Act
129, the DSP competitive procurement plan must also ensure adequate and reliable
service "at least cost" over time.  Act 129 also grants the PUC
authority to extend long-term power contracts up to 20 years, if necessary, to
achieve the "least cost" standard.
 Act 129
also provides for market misconduct corrective actions.  In the event
that an EDC, its affiliate or a supplier from whom the EDC has purchased power,
is found guilty of market manipulation, the PUC can direct an EDC to take any
and all reasonable action to quantify the effect of the market misconduct on
Pennsylvania ratepayers and seek recompense.
 
 Act 129
makes changes to the Alternative Energy Portfolio Standards by adding
Pennsylvania biomass energy and small hydroelectric plants as Tier 1 alternative
energy sources and requiring the PUC to automatically increase the Tier 1
requirements to account for increases in the additional resources.
 
 Act 129
also requires the Pennsylvania Department of Conservation and Natural Resources
to complete a study to identify suitable geological formations for the location
of a state carbon sequestration network.
 
 Act 129
does not address rate mitigation.  The Governor, Pennsylvania House of
Representatives and Pennsylvania Senate have committed to address rate
mitigation in the next session, which begins in January
2009.


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





Statement
of Income Analysis --





Domestic
Gross Energy Margins





Non-GAAP Financial
Measure





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





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Operating
      Income (a)
            
            $
            391
            
            
            $
            521
            
            
            $
            1,264
            
            
            $
            1,288Adjustments:Energy-related
      businesses, net (b)
            
            
            (14
            )
            
            
            (15
            )
            
            
            (34
            )
            
            
            18Other
      operation and maintenance (a)
            
            
            364
            
            
            
            324
            
            
            
            1,101
            
            
            
            996Amortization
      of recoverable transition costs (a)
            
            
            73
            
            
            
            78
            
            
            
            217
            
            
            
            229Depreciation
      (a)
            
            
            117
            
            
            
            108
            
            
            
            347
            
            
            
            334Taxes,
      other than income (a)
            
            
            77
            
            
            
            73
            
            
            
            224
            
            
            
            223Revenue
      adjustments (c)
            
            
            (1,692
            )
            
            
            (562
            )
            
            
            (2,036
            )
            
            
            (1,519
            )Expense
      adjustments (c)
            
            
            1,028
            
            
            
            (6
            )
            
            
            109
            
            
            
            (184
            )Domestic
      gross energy margins
            
            $
            344
            
            
            $
            521
            
            
            $
            1,192
            
            
            $
            1,385





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





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





Three
      Months Ended Sept. 30,2008
            
            2007
            
            ChangeRevenueUtility
      (a)
            
            $
            1,007
            
            
            $
            1,016
            
            
            $
            (9
            )Unregulated
      retail electric andgas
      (a)
            
            
            43
            
            
            
            28
            
            
            
            15Wholesale
      energy marketing (a)
            
            
            1,915
            
            
            
            517
            
            
            
            1,398Net
      energy trading margins (a)
            
            
            (132
            )
            
            
            20
            
            
            
            (152
            )Revenue
      adjustments (b)WPD
      utility revenue
            
            
            (195
            )
            
            
            (204
            )
            
            
            9Domestic
      delivery component of utility revenue
            
            
            (325
            )
            
            
            (325
            )Other
      utility revenue
            
            
            (12
            )
            
            
            (13
            )
            
            
            1RMR
      revenues
            
            
            
            
            
            
            (52
            )
            
            
            52Mark-to-market
      adjustments from certain economic activity (c)
            
            
            (1,160
            )
            
            
            
            
            
            
            (1,160
            )Gains
      from sale of emission allowances (d)
            
            
            
            
            
            
            32
            
            
            
            (32
            )Total
      revenue adjustments
            
            
            (1,692
            )
            
            
            (562
            )
            
            
            (1,130
            )1,141
            
            
            
            1,019
            
            
            
            122ExpenseFuel
      (a)
            
            
            267
            
            
            
            257
            
            
            
            10Energy
      purchases (a)
            
            
            1,558
            
            
            
            235
            
            
            
            1,323Expense
      adjustments (b)Mark-to-market
      adjustments from certain economic activity (c)
            
            
            (1,046
            )
            
            
            (10
            )
            
            
            (1,036
            )Domestic
      electric ancillaries (e)
            
            
            (15
            )
            
            
            (13
            )
            
            
            (2
            )Gross
      receipts tax (f)
            
            
            28
            
            
            
            28Other
            
            
            5
            
            
            
            1
            
            
            
            4Total
      expense adjustments
            
            
            (1,028
            )
            
            
            6
            
            
            
            (1,034
            )797
            
            
            
            498
            
            
            
            299Domestic
      gross energy margins
            
            $
            344
            
            
            $
            521
            
            
            $
            (177
            )





Nine
      Months Ended Sept. 30,2008
            
            2007
            
            ChangeRevenueUtility
      (a)
            
            $
            3,108
            
            
            $
            3,074
            
            
            $
            34Unregulated
      retail electric andgas
      (a)
            
            
            110
            
            
            
            73
            
            
            
            37Wholesale
      energy marketing (a)
            
            
            2,000
            
            
            
            1,145
            
            
            
            855Net
      energy trading margins (a)
            
            
            (82
            )
            
            
            38
            
            
            
            (120
            )Revenue
      adjustments (b)WPD
      utility revenue
            
            
            (647
            )
            
            
            (638
            )
            
            
            (9
            )Domestic
      delivery component of utility revenue
            
            
            (989
            )
            
            
            (980
            )
            
            
            (9
            )Other
      utility revenue
            
            
            (38
            )
            
            
            (37
            )
            
            
            (1
            )RMR
      revenues
            
            
            
            
            
            
            (52
            )
            
            
            52Mark-to-market
      adjustments from certain economic activity (c)
            
            
            (363
            )
            
            
            99
            
            
            
            (462
            )Gains
      from sale of emission allowances (d)
            
            
            1
            
            
            
            89
            
            
            
            (88
            )Total
      revenue adjustments
            
            
            (2,036
            )
            
            
            (1,519
            )
            
            
            (517
            )3,100
            
            
            
            2,811
            
            
            
            289ExpenseFuel
      (a)
            
            
            718
            
            
            
            692
            
            
            
            26Energy
      purchases (a)
            
            
            1,299
            
            
            
            550
            
            
            
            749Expense
      adjustments (b)Mark-to-market
      adjustments from certain economic activity (c)
            
            
            (157
            )
            
            
            133
            
            
            
            (290
            )Domestic
      electric ancillaries (e)
            
            
            (41
            )
            
            
            (39
            )
            
            
            (2
            )Gross
      receipts tax (f)
            
            
            85
            
            
            
            84
            
            
            
            1Other
            
            
            4
            
            
            
            6
            
            
            
            (2
            )Total
      expense adjustments
            
            
            (109
            )
            
            
            184
            
            
            
            (293
            )1,908
            
            
            
            1,426
            
            
            
            482Domestic
      gross energy margins
            
            $
            1,192
            
            
            $
            1,385
            
            
            $
            (193
            )





(a)
            
            As
      reported on the Statements of Income.(b)
            
            To
      include/exclude the impact of any revenues and expenses not associated
      with domestic gross energy margins, consistent with the way management
      reviews domestic gross energy margins internally.(c)
            
            See
      Note 14 to the Financial Statements for additional information regarding
      economic activity.(d)
            
            Included
      in "Other operation and maintenance" on the Statements of
      Income.(e)
            
            Included
      in "Energy purchases" on the Statements of Income.(f)
            
            Included
      in "Taxes, other than income" on the Statements of
  Income.





Domestic Gross Energy
Margins By Region





Domestic
gross energy margins are generated through PPL's non-trading and trading
activities.  PPL manages its non-trading energy business on a
geographic basis that is aligned with its generation assets.





Three
      Months Ended Sept. 30,2008
            
            2007
            
            ChangeNon-tradingEastern
      U.S.
            
            $
            398
            
            
            $
            424
            
            
            $
            (26
            )Western
      U.S.
            
            
            78
            
            
            
            77
            
            
            
            1Net
      energy trading
            
            
            (132
            )
            
            
            20
            
            
            
            (152
            )Domestic
      gross energy margins
            
            $
            344
            
            
            $
            521
            
            
            $
            (177
            )





Nine
      Months Ended Sept. 30,2008
            
            2007
            
            ChangeNon-tradingEastern
      U.S.
            
            $
            1,057
            
            
            $
            1,138
            
            
            $
            (81
            )Western
      U.S.
            
            
            217
            
            
            
            209
            
            
            
            8Net
      energy trading
            
            
            (82
            )
            
            
            38
            
            
            
            (120
            )Domestic
      gross energy margins
            
            $
            1,192
            
            
            $
            1,385
            
            
            $
            (193
            )





Eastern
U.S.





Eastern
U.S. non-trading margins were $26 million and $81 million lower during the three
and nine months ended September 30, 2008, compared with the same periods in
2007.  The decrease for both periods was primarily due to higher
average fuel prices, which were up 18% and 14%, and lower baseload generation
which was down 12% and 6%, primarily due to unplanned outages at the eastern
coal-fired units and the retirement of the Martins Creek coal units in September
2007.  Partially offsetting these lower margins was a 1.4% increase in
PLR sales prices in accordance with the schedule established by the PUC Final
Order.





Western
U.S.





Western
U.S. non-trading margins were $8 million higher for the nine months ended
September 30, 2008, compared with the same period in 2007.  The
increase is primarily due to higher margins from wholesale activity due to
favorable pricing.





Net
Energy Trading





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





During
the three months ended September 30, 2008, net energy trading margins
decreased by $152 million, compared with the same period in
2007.  This decrease consists of $133 million of lower unrealized
margins and $19 million of lower realized margins, both driven by significant
decreases in power and gas prices.  During the nine months ended
September 30, 2008, net energy trading margins decreased by $120 million,
compared with the same period in 2007.  This decrease consists of $126
million of lower unrealized margins, which were driven by decreases in power and
gas prices, partially offset by improved FTR results.  Realized
margins were $6 million higher during the period, which were driven by improved
FTR results, partially offset by decreases in power and gas prices.





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





Three
      Months EndedSept.
      30,
            
            Nine
      Months Ended Sept. 30,2008
            
            2007
            
            2008
            
            2007GWh
            
            
            4,076
            
            
            
            4,034
            
            
            
            12,943
            
            
            
            9,381Bcf
            
            
            4.3
            
            
            
            2.8
            
            
            
            14.8
            
            
            
            11.0





Utility
Revenues





The
changes in utility revenues were attributable to:





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedDomestic:Retail
      electric revenue (PPL Electric)PLR
            
            $
            (1
            )
            
            $
            14Delivery
            
            
            1
            
            
            
            9Other
            
            
            
            
            
            
            2International:U.K. electric
      delivery revenue
            
            
            (3
            )
            
            
            11U.K.
      foreign currency exchange rates
            
            
            (6
            )
            
            
            (2
            )$
            (9
            )
            
            $
            34





Higher
domestic delivery revenues for both periods were attributable to a base rate
increase effective January 1, 2008.  Normal load growth also
contributed to higher delivery revenues.  Higher PLR revenues for the
nine months ended September 30, 2008, were also attributable to normal load
growth.  The increases in domestic delivery and PLR revenue for both
periods were partially offset by the unfavorable impact of weather on
residential and commercial sales in 2008.





The
decrease in U.K. electric delivery revenues for the three months ended
September 30, 2008, compared with the same period in 2007, excluding
foreign currency exchange rate impacts, was primarily due to a decrease in
engineering recharge and metering services performed for third parties and a
decrease in sales volumes, partially offset by an increase in prices effective
April 1.





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





Energy-related
Businesses





Energy-related
businesses contributed $1 million less to operating income for the three months
ended September 30, 2008, compared with the same period in
2007.  The decrease was primarily attributable to:





·
            a
      $30 million net gain recorded in 2007 on options purchased to hedge the
      risk associated with the phase-out of the synthetic fuel tax
      credits.  No such options were held in 2008; partially offset
      by·
            $19
      million less in operating losses from synfuel projects as PPL's synthetic
      fuel operations have ceased;·
            a
      $6 million increase in earnings in 2008 from PPL's energy services-related
      businesses mainly due to increased construction activity;
    and·
            a
      $5 million impairment in 2007 of domestic telecommunication assets that
      were sold in 2007.





Energy-related
businesses contributed $52 million more to operating income for the nine months
ended September 30, 2008, compared with the same period in
2007.  The increase was primarily attributable to:





·
            $53
      million less in operating losses from synfuel projects as the projects
      ceased operation at the end of 2007;·
            a
      $39 million impairment in 2007 of domestic telecommunication assets that
      were sold in 2007; and·
            a
      $9 million increase in earnings from PPL's energy services-related
      businesses mainly due to increased construction activity; partially offset
      by·
            a
      $44 million net gain recorded in 2007 on options purchased to hedge the
      risk associated with the phase-out of the synthetic fuel tax
      credits.  No such options were held in 2008;
  and·
            $6
      million less in earnings from the domestic telecommunication assets that
      were sold in 2007.





See Note
8 to the Financial Statements for additional information on the impairment and
sale of the domestic telecommunication assets.  See Note 10 to the
Financial Statements for additional information on the synthetic fuel tax
credits and the synfuel projects.





Other
Operation and Maintenance





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedLower
      gains on sale of emission allowances
            
            $
            28
            
            
            $
            84Impairment
      of certain emission allowances (Note 10)
            
            
            45
            
            
            
            45Domestic
      salary expense
            
            
            7
            
            
            
            24Uncollectible
      accounts
            
            
            
            
            
            
            9Colstrip
      groundwater litigation (Note 10)
            
            
            
            
            
            
            8Outage
      costs at Western and Eastern U.S. fossil/hydro stations
            
            
            
            
            
            
            8Contractor
      expense
            
            
            (1
            )
            
            
            4Regulatory
      asset amortization
            
            
            1
            
            
            
            3Emission
      allowance consumption
            
            
            1
            
            
            
            2Off-site
      remediation of ash basin leak (Note 10)
            
            
            
            
            
            
            (2
            )Stock-based
      compensation
            
            
            (3
            )
            
            
            (5
            )Outage
      costs at Susquehanna nuclear station
            
            
            (3
            )
            
            
            (7
            )WPD
      recoverable engineering services
            
            
            (2
            )
            
            
            (14
            )Impairment
      of certain transmission rights (a)
            
            
            (21
            )
            
            
            (21
            )Defined
      benefit costs (Note 9)
            
            
            (9
            )
            
            
            (29
            )Other
            
            
            (3
            )
            
            
            (4
            )$
            40
            
            
            $
            105





(a)
            
            In
      August 2007, Maine Electric Power Company (MEPCO), ISO New England and
      other New England transmission owners submitted a filing to the FERC
      seeking to roll the revenue requirement of the MEPCO transmission
      facilities into the regional transmission rates in New England and to
      change certain rules concerning the use of the transmission line for
      energy and capacity.  PPL protested this proposal and recorded
      an impairment of the transmission rights based on their estimated fair
      value as determined by an internal model and other
    analysis.





Amortization
of Recoverable Transition Costs





Amortization
of recoverable transition costs decreased by $5 million and $12 million during
the three and nine months ended September 30, 2008, compared with the same
period in 2007.  The decreases were primarily attributable to a
scheduled decrease in ITC amortization, a reduction of ITC revenues, the change
in unbilled revenues and the change from recovery of a CTC undercollection in
2007 to the return of a CTC overcollection in 2008.





Depreciation





The
increases in depreciation expense were due to:





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedAdditions
      to PP&E
            
            $
            9
            
            
            $
            26Extension
      of useful lives of certain WPD network assets in 2007
            
            
            
            
            
            
            (13
            )$
            9
            
            
            $
            13





Taxes,
Other Than Income





Taxes,
other than income increased by $4 million during the three months ended
September 30, 2008, compared with the same period in 2007. The increase was
primarily due to a $2 million increase in domestic sales and use tax expense and
a $1 million increase in domestic gross receipts tax expense.





Taxes,
other than income increased by $1 million during the nine months ended September
30, 2008, compared with the same period in 2007.The increase was
primarily due to a $5 million increase in domestic gross receipts tax expense
and a $2 million increase in WPD property taxes.  The increases were
partially offset by a $7 million PPL Montana property tax refund received in
2008.





Other
Income - net





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





Financing
Costs





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedLong-term
      debt interest expense primarily due to new issuances (Note
      7)
            
            $
            5
            
            
            $
            2Short-term
      debt interest expense
            
            
            3
            
            
            
            3Amortization
      of debt issuance costs
            
            
            1
            
            
            
            3Redemption
      of 8.23% Subordinated Debentures in 2007 (Note 11)
            
            
            
            
            
            
            (4
            )Capitalized
      interest
            
            
            2
            
            
            
            (8
            )Hedging
      activities
            
            
            (7
            )
            
            
            (15
            )Other
            
            
            (1
            )$
            3
            
            
            $
            (19
            )





Income
Taxes





The
changes in income taxes were due to:





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedDecrease
      in synthetic fuel and other tax credits
            
            $
            7
            
            
            $
            71U.K.
      Finance Act adjustments (Note 5)
            
            
            46
            
            
            
            46Tax
      reserve adjustments (Note 5)
            
            
            4
            
            
            
            45Lower
      pre-tax book income
            
            
            (70
            )
            
            
            (33
            )Tax
      return adjustments
            
            
            
            
            
            
            (17
            )Tax
      expense on foreign earnings
            
            
            (16
            )
            
            
            (11
            )Domestic
      manufacturing deduction
            
            
            (2
            )
            
            
            (7
            )Other
            
            
            2
            
            
            
            3$
            (29
            )
            
            $
            97





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





Discontinued
Operations





Loss from
Discontinued Operations decreased by $6 million during the three months ended
September 30, 2008, compared with the same period in 2007.  The
decrease was attributable to a $13 million decrease in income from PPL's Latin
American operating businesses that were sold in 2007, offset by a $19 million
increase in earnings from PPL's natural gas distribution and propane businesses,
which was primarily attributable to a $23 million deferred tax charge recognized
in the third quarter of 2007 in connection with the planned sale of the
businesses.





Income
from Discontinued Operations decreased by $62 million during the nine months
ended September 30, 2008, compared with the same period in
2007.  The decrease was primarily attributable to an $84 million
decrease in income from PPL's Latin American operating businesses that were sold
in 2007, which included an $89 million after-tax gain from the sale of its El
Salvadoran business and an after-tax impairment charge of $20 million of its
Bolivian businesses.  Offsetting the decrease was a $22 million
increase in earnings from PPL's natural gas distribution and propane businesses,
primarily attributable to a $23 million deferred tax charge recognized in the
third quarter of 2007 in connection with the planned sale of those
businesses.





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





Financial
Condition





Liquidity
and Capital Resources





In
general, recent turmoil in the financial markets has made obtaining new sources
of credit more difficult and more costly for companies.  During this
challenging period, PPL continues to be focused on maintaining a strong credit
profile and liquidity position.  PPL expects to continue to have
adequate liquidity available through operating cash flows, cash and cash
equivalents, short-term investments and its credit facilities.  PPL
currently does not expect to need to access commercial paper markets or debt and
equity capital markets until the fourth quarter of 2009, except to remarket
certain bonds at PPL Electric as discussed below, but may decide to access
capital markets, subject to market conditions, to enhance its
liquidity.  PPL believes that its cash and cash equivalents,
short-term investments, operating cash flows, and borrowing capacity under its
credit facilities, taken as a whole, provide sufficient resources to fund its
ongoing operating requirements, including liquidity requirements related to
energy trading and marketing activities, as well as estimated future capital
expenditures in the near term.  See "Financing Activities" below for a
discussion of financing transactions completed in October 2008 to prefund future
debt maturities.





PPL had
the following at:





September 30,
      2008
            
            
            December31,
      2007Cash
      and cash equivalents
            
            $
            349
            (a)
            
            $
            430Short-term
      investments (b)
            
            
            82
            
            
            
            108$
            431
            
            
            $
            538Short-term
      debt
            
            $
            200
            
            
            $
            92





(a)
            
            Excludes
      $3 million of cash related to the natural gas distribution and propane
      businesses that is included in "Assets held for sale" on the Balance
      Sheet.(b)
            
            Includes
      $15 million of auction rate securities at December 31,
      2007.  See below for further
  discussion.





The $81
million decrease in PPL's cash and cash equivalents position, which includes the
effects of the cash flows of the Discontinued Operations, was primarily the net
result of:





·
            $1,161
      million of cash provided by operating activities;·
            proceeds
      of $699 million from the issuance of long-term debt;·
            a
      net increase in short-term debt of $109 million (excluding the impact of
      foreign currency translation adjustments);·
            proceeds
      of $19 million from the issuance of common stock;·
            $979
      million of capital expenditures;·
            the
      payment of $365 million of common stock dividends;·
            the
      retirement of $299 million of long-term debt;·
            $272
      million in net expenditures for intangible
    assets;·
            a
      net increase of $70 million in restricted cash and cash
      equivalents;·
            the
      repurchase of PPL common stock for $38 million;·
            $20
      million in net purchases of nuclear plant decommissioning trust
      investments; and·
            $14
      million in net purchases of other
investments.





Auction Rate
Securities





PPL had
auction rate securities totaling $26 million at September 30, 2008, which
were classified as "Investments - Other," and $15 million at December 31, 2007,
which were classified as "Short-term investments" on the Balance
Sheets.  Historically, an active market existed for such investments,
and the auctions provided an opportunity for investors either to hold an
investment at a periodically reset interest rate or to sell the investment at
its par value for immediate liquidity.  In early 2008, investor
concerns about credit and liquidity in the financial markets, generally, as well
as investor concerns over specific insurers that guarantee the credit of certain
of the underlying securities, created uncertainty in the auction rate securities
market and these securities generally failed to be remarketed through their
established auction process.  These auction failures and the resulting
illiquidity continue to impact PPL's auction rate securities.





At
September 30, 2008, PPL concluded that the fair market value of these
auction rate securities was $26 million, a decline of $3 million from par
value.  Because PPL intends and has the ability to hold these auction
rate securities until they can be liquidated at par value, PPL believes that it
does not have significant realized loss exposure.  Based upon the
evaluation of available information, PPL believes these investments continue to
be of high credit quality.  Additionally, PPL does not anticipate
having to sell these securities to fund operations.  As such, the
decline in fair value is deemed temporary due to general market
conditions.  See Note 13 to the Financial Statements for further
discussion of auction rate securities.





Commercial
Paper





Neither
PPL Energy Supply nor PPL Electric had any commercial paper outstanding at
September 30, 2008, and they do not expect to have to issue any commercial paper
through the end of 2008.





Credit
Facilities





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





PPL
Energy Supply and PPL Electric currently do not expect to make any modifications
through the end of 2008, including extending the expiration date, to PPL Energy
Supply's $3.4 billion or PPL Electric's $200 million five-year credit
facilities, both of which expire in 2012.





In
September 2008, PPL Energy Supply executed a new $385 million 364-day credit
agreement that expires in September 2009.  Under certain conditions,
PPL Energy Supply may request that the facility's principal amount be increased
by up to $150 million.  Under this facility, PPL Energy Supply has the
ability to make cash borrowings and to cause the lenders to issue letters of
credit.





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





The
credit agreement related to PPL Electric's and a subsidiary's participation in a
$150 million asset-backed commercial paper program expired in July
2008.  In August 2008, PPL Electric and the subsidiary entered into a
new credit agreement governing a similar asset-backed commercial paper program
with a different financial institution and commercial paper conduit that expires
in July 2009.  The borrowing limit under such program continues to be
$150 million.  Borrowings under this program are subject to customary
conditions precedent, as well as the requirement that PPL Electric discharge a
conditional lien that could attach to the accounts receivable upon a default
under PPL Electric's 1945 First Mortgage Bond Indenture.  See
discussion on the planned discharge in "Financing Activities"
below.





At
September 30, 2008, PPL's total committed borrowing capacity under its credit
facilities and the use of this borrowing capacity were:





Committed
      Capacity
            
            Borrowed
            
            Letters
      of Credit Issued
            
            Available
      CapacityPPL
      Energy Supply Domestic Credit Facilities
            
            $
            4,385
            
            
            
            
            
            
            $
            720
            
            
            $
            3,665PPL
      Electric Credit Facilities
            
            
            350
            
            
            
            
            
            
            
            41
            
            
            
            309Total
      Domestic Credit Facilities (a)
            
            $
            4,735
            
            
            
            
            
            
            $
            761
            
            
            $
            3,974WPDH
      Limited Credit Facility (b)
            
            ₤
            150
            
            
            ₤
            101
            
            
            
            
            
            
            ₤
            49WPD
      (South West) Credit Facilities
            
            
            155
            
            
            
            
            
            
            ₤
            4
            
            
            
            151Total
      International Credit Facilities (c)
            
            ₤
            305
            
            
            ₤
            101
            
            
            ₤
            4
            
            
            ₤
            200





(a)
            
            The
      commitments under PPL's domestic credit facilities are provided by a
      diverse bank group consisting of 24 banks, with no one bank providing more
      than 13% of the total committed capacity.
              
              In
      October 2008, PPL Energy Supply borrowed $285 million under its $3.4
      billion five-year credit facility, and PPL Electric borrowed $95 million
      under its $200 million five-year credit facility.  In connection
      with these borrowings, one of the participating banks, Lehman Brothers
      Bank, FSB, became a defaulting lender under both facilities, as it no
      longer is honoring its commitments of approximately $175 million and $10
      million for PPL Energy Supply and PPL Electric.(b)
            
            During
      the third quarter of 2008, WPDH Limited made a USD-denominated borrowing
      of $200 million, which equated to £101 million at the time of borrowing
      and is reflected on the Balance Sheet in "Short-term debt."  This
      borrowing bears interest at approximately 3.73%.(c)
            
            At
      September 30, 2008, available capacity of the international credit
      facilities is approximately $365
million.





See Note
7 to the Financial Statements for additional information on PPL's credit
facilities.





Financing
Activities





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





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





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





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





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





In August
2008, PPL Gas Utilities prepaid the entire $10 million aggregate principal
amount of its 8.70% Senior Notes due December 2022.  PPL Gas Utilities
paid a premium of approximately $3 million in connection with the
prepayment.





In
October 2008, PPL Electric issued $400 million of 7.125% Senior Secured Bonds
due 2013 (7.125% Bonds).  The 7.125% Bonds were issued on the basis of
an equal principal amount of first mortgage bonds issued under the 1945 First
Mortgage Bond Indenture pledged to the Senior Secured Bond Indenture
Trustee.  The 7.125% Bonds may be redeemed any time prior to maturity
at PPL Electric's option at make-whole redemption prices.  PPL
Electric received proceeds of $397 million, net of a discount and underwriting
fees, from the issuance of the 7.125% Bonds.  The proceeds will be
used to partially fund the repayment at maturity of approximately $486 million
outstanding aggregate principal amount of PPL Electric's Senior Secured Bonds,
6-1⁄4% Series, due August 2009.  Prior to such use, the proceeds will
be invested in short-term investments and used for general corporate
purposes.
  In
October 2008, PEDFA issued $90 million aggregate principal amount of Pollution
Control Revenue Refunding Bonds, Series 2008 (PPL Electric Utilities Corporation
Project) due 2023 (Series 2008 Bonds) on behalf of PPL Electric in order to
refund $90 million aggregate principal amount of Pollution Control Revenue
Refunding Bonds, Series 2003, which were previously issued by the Lehigh County
Industrial Development Authority on behalf of PPL Electric and matured on
November 1, 2008.  The Series 2008 Bonds are structured as
variable-rate remarketable bonds.  The Series 2008 Bonds bear interest
for the first week at an initial rate of 2.50% and will be remarketed on a
weekly basis until such time that PPL Electric elects to change the interest
rate mode.  PPL Electric may convert the interest rate on the Series
2008 Bonds from time to time to a commercial paper rate, daily rate, weekly rate
or a term rate of at least one year.  The Series 2008 Bonds are
subject to mandatory purchase under certain circumstances, including upon
conversion to a different interest rate mode.  PPL Electric acted as
initial purchaser of the Series 2008 Bonds upon issuance and expects that they
will be remarketed to unaffiliated investors subject to market
conditions.
 
 In
connection with the issuance of the Series 2008 Bonds by PEDFA, PPL Electric
entered into a loan agreement with PEDFA pursuant to which it loaned PPL
Electric the proceeds of the Series 2008 Bonds on payment terms that correspond
to the Series 2008 Bonds.  PPL Electric issued a note to PEDFA to
evidence its obligations under the loan agreement.
 
 Concurrent
with, and as a condition to, the issuance of the Series 2008 Bonds, PPL Electric
issued to the Trustee of the Series 2008 Bonds, its Senior Secured Bonds,
Variable Rate Pollution Control Series 2008, which contain payment and
redemption provisions that correspond to the Series 2008 Bonds.  Such
senior secured bonds were issued on the basis of an equal principal amount of
first mortgage bonds issued under the 1945 First Mortgage Bond Indenture and
pledged to the Senior Secured Bond Indenture Trustee.
 
 PPL
Electric's senior secured bonds are secured by first mortgage bonds held by the
Senior Secured Bond Indenture Trustee and the lien of the 2001 Senior Secured
Bond Indenture, which is junior to the lien of the 1945 First Mortgage Bond
Indenture.  The 1945 First Mortgage Bond Indenture and the 2001 Senior
Secured Bond Indenture create liens on substantially all of PPL Electric's
distribution properties and certain of its transmission properties, which liens
may be released subject to certain circumstances and conditions, and subject to
certain exceptions and exclusions.
  Other
than first mortgage bonds delivered to the Senior Secured Bond Indenture Trustee
as the basis for issuance of senior secured bonds, there were $10 million of
first mortgage bonds outstanding at September 30, 2008.  PPL Electric
intends to defease such bonds and to discharge the lien of the 1945 First
Mortgage Bond Indenture later in 2008, and to cancel the related first mortgage
bonds in accordance with the terms of the 2001 Senior Secured Bond Indenture, at
which time such Indenture would become a first mortgage lien, subject to certain
permitted liens and exceptions, on substantially all of PPL Electric's tangible
electric distribution properties and certain of its transmission
properties.
 Leases





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





Common Stock
Dividends





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





Sale of Gas and Propane
Businesses





In March
2008, PPL signed a definitive agreement to sell its natural gas distribution and
propane businesses for $268 million in cash, adjusted for working capital at the
sale date, pursuant to a stock purchase agreement.  The sale was
completed in October 2008.  Proceeds of the sale, $303 million after
adjusting for working capital, were
contributed to PPL Energy Supply through its parent, PPL Energy Funding, to be
used for general corporate purposes, including capital
expenditures.  See Note 8 to the Financial Statements for
additional information.





Rating Agency
Decisions





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





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





Moody's
and S&P did not take any actions related to PPL and its rated subsidiaries
during the nine months ended September 30, 2008.  In March 2008,
Fitch completed a review of its credit ratings for PPL, PPL Capital Funding, PPL
Energy Supply and PPL Electric and affirmed all ratings related to these
entities, with the exception that it lowered the preferred stock rating of PPL
Electric to BBB from BBB+.  Fitch stated in the related press release
that the lower preferred stock rating reflects its junior position in the
capital structure and does not reflect any change in credit
quality.  In May 2008, Fitch changed its outlook for WPDH Limited, WPD
LLP, WPD (South Wales) and WPD (South West) to positive from stable. In August
2008, Fitch affirmed its BBB rating of PPL Montana's 8.903% Pass-Through
Certificates due 2020.




Capital
Expenditures
 The
schedule below shows PPL's capital expenditure projections as of September 30,
2008, for the years 2008 through 2010.  Capital expenditure
projections for the years 2011 and 2012 are still being reviewed as part of the
5-year planning process.  These capital expenditure projections are
preliminary and subject to approval by PPL's Board of Directors, which is
expected to occur prior to year-end.
 
 Projected2008
                
                2009
                
                2010Construction
      expenditures (a)Generating
      facilities
                
                $
                376
                
                $
                276
                
                $
                454Transmission
      and distribution facilities
                
                
                554
                
                
                558
                
                
                975Environmental
                
                
                461
                
                
                199
                
                
                67Other
                
                
                116
                
                
                62
                
                
                68Total
      Construction Expenditures
                
                
                1,507
                
                
                1,095
                
                
                1,564Nuclear
      fuel
                
                
                102
                
                
                151
                
                
                161Total
      Capital Expenditures
                
                $
                1,609
                
                $
                1,246
                
                $
                1,725
 
 (a)
                
                Construction
      expenditures include AFUDC and capitalized interest, which are expected to
      be $191 million for the 2008 through 2010
  period.
 
 PPL's
capital expenditure projections for the years 2008 through 2010 total $4.6
billion.  Capital expenditure plans are revised periodically to
reflect changes in operational, market and regulatory conditions.
 
 For
additional information on PPL's liquidity and capital resources, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," in PPL's 2007 Form 10-K.





Risk
Management - Energy Marketing & Trading and Other





Market
Risk





Commodity
Price Risk (Non-trading)





PPL's
non-trading commodity derivative contracts mature at various times through
2017.  PPL segregates its non-trading activities into two
categories:  hedge activity and economic
activity.  Transactions that are accounted for as hedge activity
qualify for hedge accounting treatment under SFAS 133.  The majority
of PPL's energy transactions qualify for accrual or hedge
accounting.  The economic activity category includes transactions that
address a specific risk, but were not eligible for hedge accounting or for which
hedge accounting was not elected.  Although they do not receive hedge
accounting treatment, these transactions are considered non-trading
activity.  The net fair value of economic positions at
September 30, 2008 and December 31, 2007, including net premiums on
options, was a loss of $36 million and a gain of $67 million.





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





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Fair
      value of contracts outstanding at the beginning of the
    period
            
            $
            (1,054
            )
            
            $
            (244
            )
            
            $
            (305
            )
            
            $
            (111
            )Contracts
      realized or otherwise settled during the period
            
            
            (86
            )
            
            
            (28
            )
            
            
            (173
            )
            
            
            (42
            )Fair
      value of new contracts entered into during the period
            
            
            (55
            )
            
            
            13
            
            
            
            115
            
            
            
            57Changes
      in fair value attributable to changes in valuation techniques
      (a)
            
            
            
            
            
            
            
            
            
            
            55Other
      changes in fair value
            
            
            1,032
            
            
            
            84
            
            
            
            145
            
            
            
            (79
            )Fair
      value of contracts outstanding at the end of the period
            
            $
            (163
            )
            
            $
            (175
            )
            
            $
            (163
            )
            
            $
            (175
            )





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





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





Fair
      Value of Contracts at Period-End
              Gains
      (Losses)Maturity
              Less
      Than
              1
      Year
            
            Maturity
              1-3
      Years
            
            Maturity
              4-5
      Years
            
            Maturity
              in
      Excess
              of
      5 Years
            
            Total
      Fair
              ValueSource
      of Fair ValuePrices
      quoted in active markets for identical instruments
            
            $
            2
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2Prices
      based on significant other observable inputs
            
            
            (61
            )
            
            $
            (370
            )
            
            $
            77
            
            
            $
            8
            
            
            
            (346
            )Prices
      based on significant unobservable inputs
            
            
            3
            
            
            
            1
            
            
            
            44
            
            
            
            133
            
            
            
            181Fair
      value of contracts outstanding at the end of the period
            
            $
            (56
            )
            
            $
            (369
            )
            
            $
            121
            
            
            $
            141
            
            
            $
            (163
            )





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





Commodity
Price Risk (Trading)





PPL's
trading contracts mature at various times through 2014.  The following
chart sets forth PPL's net fair value of trading contracts.  See Note
13 for additional information.





Three
      Months EndedSeptember
      30,
            
            Nine
      Months EndedSeptember
      30,2008
            
            2007
            
            2008
            
            2007Fair
      value of contracts outstanding at the beginning of the
    period
            
            $
            16
            
            
            $
            48
            
            
            $
            16
            
            
            $
            41Contracts
      realized or otherwise settled during the period
            
            
            1
            
            
            
            (7
            )
            
            
            (40
            )
            
            
            (34
            )Fair
      value of new contracts entered into during the period
            
            
            (41
            )
            
            
            14
            
            
            
            (18
            )
            
            
            35Other
      changes in fair value
            
            
            (61
            )
            
            
            11
            
            
            
            (43
            )
            
            
            24Fair
      value of contracts outstanding at the end of the period
            
            $
            (85
            )
            
            $
            66
            
            
            $
            (85
            )
            
            $
            66





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





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





Fair
      Value of Contracts at Period-End
              Gains
      (Losses)Maturity
              Less
      Than
              1
      Year
            
            Maturity
              1-3
      Years
            
            Maturity
              4-5
      Years
            
            Maturity
              in
      Excess
              of
      5 Years
            
            Total
      Fair
              ValueSource
      of Fair ValuePrices
      quoted in active markets for identical instruments
            
            
            
            
            
            $
            2
            
            
            
            
            
            
            
            
            
            
            $
            2Prices
      based on significant other observable inputs
            
            $
            (34
            )
            
            
            (37
            )
            
            $
            (14
            )
            
            
            
            
            
            
            (85
            )Prices
      based on significant unobservable inputs
            
            
            (2
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2
            )Fair
      value of contracts outstanding at the end of the period
            
            $
            (36
            )
            
            $
            (35
            )
            
            $
            (14
            )
            
            
            
            
            
            $
            (85
            )





Commodity
Price Risk Summary





In
accordance with its marketing strategy, PPL often elects not to completely hedge
its generation output or fuel requirements.  PPL estimates that for
its entire portfolio, including all generation, emissions and physical and
financial energy positions, a 10% adverse change in power prices across all
geographic zones and time periods would decrease expected 2008 gross margins by
$45 million.  Similarly, a 10% adverse movement in all fossil fuel
prices would decrease expected 2008 gross margins by $2 million.





VaR
Models





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





Trading
      VaR
            
            Non-Trading
      MTM VaR95%
      Confidence Level, One-Day Holding PeriodPeriod
      End
            $
            10
            
            
            $
            41Average
      for the Period
            
            8
            
            
            
            38High
            
            10
            
            
            
            41Low
            
            7
            
            
            
            33





Interest
Rate Risk





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





At
September 30, 2008, PPL's potential annual exposure to increased interest
expense, based on a 10% increase in interest rates, was $7 million.





PPL is
also exposed to changes in the fair value of its domestic and international debt
portfolios.  PPL estimated that a 10% decrease in interest rates at
September 30, 2008, would increase the fair value of its debt portfolio by
$326 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, 2008, PPL had none of these
instruments outstanding.





PPL also
utilizes various risk management instruments to adjust the mix of fixed and
floating interest rates in its debt portfolio.  The change in fair
value of these instruments, as well as the offsetting change in the value of the
hedged exposure of the debt, is reflected in earnings.  At
September 30, 2008, the fair value of these instruments was a net asset of
$27 million.  PPL estimated that a 10% adverse movement in interest
rates at September 30, 2008, would decrease the net asset by $15
million.





WPDH
Limited holds a net position in cross-currency swaps totaling $527 million to
hedge the interest payments and principal of its U.S. dollar-denominated bonds
with maturity dates ranging from December 2008 to December
2028.  While PPL is exposed to changes in the fair value of these
instruments, any changes in the fair value of these instruments are recorded in
equity and then reclassified into earnings in the same period during which the
item being hedged affects earnings.  The estimated fair value of this
position at September 30, 2008, was a net liability of $60
million.  WPDH Limited estimated that a 10% adverse movement in
foreign currency exchange rates and interest rates at September 30, 2008,
would increase the net liability by $64 million.





Foreign
Currency Risk





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





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





In 2007,
PPL executed forward contracts to sell British pounds sterling to protect the
value of a portion of its net investment in WPD.  The total notional
amount of the contracts outstanding at September 30, 2008 was £68
million.  The settlement dates of these contracts range from March
2009 through June 2011.  At September 30, 2008, the fair value of
these positions was an asset of $15 million.  PPL estimated that
a 10% adverse movement in foreign currency exchange rates at September 30,
2008 would decrease the asset by $11 million.





To
economically hedge the translation of 2008 expected income denominated in
British pounds sterling to U.S. dollars, PPL entered into a combination of
average rate forwards and average rate options to sell British pounds
sterling.  At September 30, 2008, the total exposure hedged was
£24 million.  These forwards and options have termination dates
ranging from October 2008 to December 2008.  At September 30,
2008, the fair value of these positions was a net asset of $4
million.  PPL estimated that a 10% adverse movement in foreign
currency exchange rates at September 30, 2008 would decrease the net asset
position by $4 million.





Nuclear
Plant Decommissioning Trust Funds - Securities Price Risk





In
connection with certain NRC requirements, PPL Susquehanna maintains trust funds
to fund certain costs of decommissioning the Susquehanna nuclear
station.  At September 30, 2008, these funds were invested
primarily in domestic equity securities and fixed-rate, fixed-income securities
and are reflected at fair value on PPL's Balance Sheet.  The mix of
securities is designed to provide returns sufficient to fund Susquehanna's
decommissioning and to compensate for inflationary increases in decommissioning
costs.  However, the equity securities included in the trusts are
exposed to price fluctuation in equity markets, and the values of fixed-rate,
fixed-income securities are exposed to changes in interest rates.  PPL
actively monitors the investment performance and periodically reviews asset
allocation in accordance with its nuclear plant decommissioning trust policy
statement.  At September 30, 2008, a hypothetical 10% increase in
interest rates and a 10% decrease in equity prices would have resulted in an
estimated $33 million reduction in the fair value of the trust
assets.  See Note 21 in PPL's 2007 Form 10-K for additional
information regarding the nuclear plant decommissioning trust
funds.





Related
Party Transactions





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





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





Acquisitions,
Development and Divestitures





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





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





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





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





Environmental
Matters





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





New Accounting
Standards





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





Application of Critical
Accounting Policies





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





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





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





Leasing





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





In
accounting for leases, management makes various assumptions, including the
discount rate, the fair market value of the leased assets and the estimated
useful life, in determining whether a lease should be classified as operating or
capital.  Changes in these assumptions could result in the difference
between whether a lease is determined to be an operating lease or a capital
lease.  If this transaction were to be accounted for as a capital
lease, PPL would have recorded approximately $279 million of additional assets
and $278 million of additional liabilities on the Balance Sheet at
September 30, 2008.





Loss
Accruals





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





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





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





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





SFAS
157





In 2006,
the FASB issued SFAS 157.  Among other things, SFAS 157 provides a
definition of fair value as well as a framework for measuring fair
value.  In February 2008, the FASB amended SFAS 157 through the
issuance of FSP FAS 157-1 and FSP FAS 157-2.  FSP FAS 157-1 amends
SFAS 157 to exclude from its scope, certain accounting pronouncements that
address fair value measurements associated with leases.  FSP FAS 157-2
delays the effective date of SFAS 157 to fiscal years beginning after November
15, 2008, for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).  In October 2008, the FASB amended SFAS 157
through the issuance of FSP FAS 157-3, which was effective upon issuance,
including prior periods for which financial statements have not been
issued.  FSP FAS 157-3 amends SFAS 157 to clarify its application in a
market that is not active.





As
permitted by this guidance, PPL partially applied SFAS 157, as amended by FSP
FAS 157-1 and FSP FAS 157-2, prospectively, effective January 1,
2008.  PPL adopted FSP FAS 157-3, prospectively, effective July 1,
2008.  In the current year, the partial application of  SFAS
157, as amended, affected, or will affect, fair value measurement concepts used
or embedded in PPL's critical accounting policies related to "Price Risk
Management" and "Defined Benefits."  PPL's election to defer the
application of SFAS 157, as amended, for eligible assets and liabilities will
primarily affect the fair value component of PPL's critical accounting policies
related to "Asset Impairment" and "Asset Retirement Obligations" in
2009.  See Notes 2 and 13 to the Financial Statements for additional
information regarding SFAS 157, as amended.





PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES





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





Overview





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





Recent
Market Events





The
turmoil in the financial markets has increased the complexity of maintaining
credit risk within acceptable tolerances, responding to liquidity needs,
measuring derivative and other financial instruments at fair value, and managing
market price risk.
 
 Credit Risk
 
 Credit
risk is the risk that PPL Energy Supply would incur a loss as a result of
nonperformance by counterparties of their contractual
obligations.  PPL Energy Supply maintains credit policies and
procedures with respect to counterparty credit (including requirements that
counterparties maintain specified credit ratings) and requires other assurances
in the form of credit support or collateral in certain circumstances in order to
limit counterparty credit risk.  However, PPL Energy Supply has
concentrations of suppliers and customers among electric utilities, natural gas
distribution companies, financial institutions and other energy marketing and
trading companies.  These concentrations may impact PPL Energy
Supply's overall exposure to credit risk, either positively or negatively,
as counterparties may be similarly affected by changes in economic, regulatory
or other conditions.  The volatility and downturn in financial and
commodity markets in the third quarter of 2008 have generally increased PPL
Energy Supply's exposure to credit risk.  See Notes 11 and 14 to
the Financial Statements for additional information about credit
concentration.
 
 In
September 2008, Lehman Brothers Holdings Inc. (Lehman), filed for protection
under Chapter 11 of the Federal Bankruptcy Code.  A subsidiary of
Lehman was a counterparty of PPL Energy Supply.  Lehman was a
guarantor of the subsidiary, and because of the bankruptcy, PPL Energy Supply
was allowed to declare an event of default under the contract with the
subsidiary.  At the time of Lehman's filing, PPL Energy Supply's
direct exposure to the subsidiary of Lehman was a net liability of $3 million,
pre-tax, which was liquidated prior to September 30, 2008.  PPL Energy
Supply believes that the Lehman bankruptcy has not had and will not have a
material adverse effect on PPL Energy Supply or its subsidiaries.
 
 Due to
the recent market conditions, PPL Energy Supply has increased the amount of
credit reserves related to certain counterparties other than Lehman, but the
increase was not material to PPL Energy Supply's financial
statements.  At this time, PPL Energy Supply has not deemed it
probable that any of these counterparties will default.
 
 LiquidityIssues
 
 The
turmoil in financial markets has generally made obtaining new sources of credit
more difficult and more costly for companies.  Despite the tightening
of the credit markets, PPL Energy Supply expects to continue to have adequate
liquidity available through operating cash flows, cash and cash equivalents,
short-term investments and its credit facilities.  PPL Energy Supply
currently does not expect to need to access commercial paper markets or capital
markets during the remainder of 2008 and 2009, but may decide to access capital
markets, subject to market conditions, to enhance its liquidity.
 
 Lehman
Brothers Bank, FSB (Lehman Bank), another subsidiary of Lehman, is no longer
honoring its commitments under PPL Energy Supply's $3.4 billion five-year credit
facility. Lehman Bank's total commitment under this
facility is approximately $175 million.  See "Financial
Condition - Liquidity and Capital Resources" for an expanded discussion of PPL
Energy Supply's liquidity position.
 
 Valuations in Inactive
Markets
 
 The
turmoil in the financial markets has generally made it more difficult for
companies to determine the fair value of certain assets and liabilities in
inactive markets.  Management has reviewed the activity in the energy
and financial markets in which PPL Energy Supply transacts, concluding that
substantially all of these markets were active as of September 30,
2008.  However, the market for auction rate securities remains
inactive.  See Note 13 to the Financial Statements and "Financial
Condition - Liquidity and Capital Resources - Auction Rate Securities" for
a discussion of these investments.
 
 CommodityPriceRisk
 
 The
volatility of wholesale energy prices significantly impacted PPL Energy Supply's
earnings for the three and nine months ended September 30, 2008.  See
"Statement of Income Analysis -Domestic Gross Energy Margins -Domestic Gross
Energy Margins By Region" for further discussion.
 
 SecuritiesPriceRisk
 
 Declines
in the market price of debt and equity securities resulted in recent unrealized
losses that have impacted the asset values of PPL Energy Supply's investments in
its nuclear decommissioning trust funds and in its defined benefit
plans.  The nuclear decommissioning trust funds have experienced
negative investment returns during 2008.  The assets in these funds
support the cost to decommission the Susquehanna nuclear station when its
licenses expire in 2022 and 2024, subject to any license
extensions.  As a result, the obligation to decommission the nuclear
station is long-term in nature, exposing the assets held in the funds to price
risk.  PPL Energy Supply actively monitors the performance of the
investments held in the funds and periodically reviews the funds' investment
allocations.
 
 PPL
Energy Supply's subsidiaries sponsor various defined benefit plans and
participate in and are allocated defined benefit costs from plans sponsored by
PPL.  These defined benefit plans have also experienced negative
investment returns in 2008.  However, significant increases in bond rates
used to determine the discount rate for these plans may provide for reductions
in the gross benefit obligations of these plans. This may offset some
portion of the decline in asset values when determining the funded status of the
plans as well as other measures at the end of 2008.  Determination of the
funded status of the defined benefit plans, contribution requirements and net
periodic defined benefit costs in future years are subject to changes in
assumptions, including the performance of the assets in the plans, through the
annual measurement dates.  See "Application of Critical Accounting
Policies" for "Defined Benefits" in Part II, Item 7 of the 2007 Form 10-K for a
discussion of the assumptions and sensitivities regarding those
assumptions.
  The
following information should be read in conjunction with PPL Energy Supply's
Condensed Consolidated Financial Statements and the accompanying Notes and with
PPL Energy Supply's 2007 Form 10-K.





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





Results of
Operations





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





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





Earnings





Net
income was:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007$
            161
            
            
            $
            323
            
            
            $
            522
            
            
            $
            790





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





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





Segment
Results





Net
income by segment was:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Supply
            
            $
            88
            
            
            $
            215
            
            
            $
            289
            
            
            $
            471International
      Delivery
            
            
            73
            
            
            
            108
            
            
            
            233
            
            
            
            319Total
            
            $
            161
            
            
            $
            323
            
            
            $
            522
            
            
            $
            790





Supply
Segment





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





Supply
segment net income was:





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Energy
      revenues (a)
            
            $
            2,279
            
            
            $
            1,018
            
            
            $
            3,398
            
            
            $
            2,612Energy-related
      businesses
            
            
            138
            
            
            
            183
            
            
            
            363
            
            
            
            530Total
      operating revenues
            
            
            2,417
            
            
            
            1,201
            
            
            
            3,761
            
            
            
            3,142Fuel
      and energy
              purchases
      (a)
            
            
            1,810
            
            
            
            478
            
            
            
            1,974
            
            
            
            1,202Other
      operation and maintenance
            
            
            241
            
            
            
            181
            
            
            
            695
            
            
            
            561Depreciation
            
            
            48
            
            
            
            39
            
            
            
            136
            
            
            
            116Taxes,
      other than income
            
            
            8
            
            
            
            7
            
            
            
            19
            
            
            
            25Energy-related
      businesses
            
            
            132
            
            
            
            173
            
            
            
            350
            
            
            
            565Total
      operating expenses
            
            
            2,239
            
            
            
            878
            
            
            
            3,174
            
            
            
            2,469Other
      Income - net
            
            
            (1
            )
            
            
            30
            
            
            
            13
            
            
            
            61Interest
      Expense
            
            
            47
            
            
            
            26
            
            
            
            122
            
            
            
            80Income
      Taxes
            
            
            42
            
            
            
            111
            
            
            
            188
            
            
            
            181Minority
      Interest
            
            
            
            
            
            
            1
            
            
            
            1
            
            
            
            2Net
      Income
            
            $
            88
            
            
            $
            215
            
            
            $
            289
            
            
            $
            471





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





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedEastern
      U.S. non-trading margins
            
            $
            (15
            )
            
            $
            (48
            )Western
      U.S. non-trading margins
            
            
            
            
            
            
            5Net
      energy trading margins
            
            
            (89
            )
            
            
            (70
            )Taxes,
      other than income
            
            
            
            
            
            
            4Depreciation
            
            
            (6
            )
            
            
            (12
            )Other
      operating expenses
            
            
            (3
            )
            
            
            (14
            )Other
      income - net (Note 12)
            
            
            (14
            )
            
            
            (21
            )Interest
      expense
            
            
            (13
            )
            
            
            (25
            )Earnings
      from synfuel projects
            
            
            (9
            )
            
            
            (43
            )Realized
      earnings on nuclear plant decommissioning trust
            
            
            (4
            )
            
            
            (7
            )Other
            
            
            (1
            )
            
            
            (6
            )Special
      items
            
            
            27
            
            
            
            55$
            (127
            )
            
            $
            (182
            )





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





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





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Mark-to-market
      adjustments from certain economic activity (a)
            
            $
            67
            
            
            $
            (6
            )
            
            $
            121
            
            
            $
            20Unrealized
      losses on certain nuclear plant decommissioning trust investments (Note
      12)
            
            
            (1
            )
            
            
            
            
            
            
            (5
            )Impairment
      of certain emission allowances (Note 10)
            
            
            (27
            )
            
            
            
            
            
            
            (27
            )Impairment
      of certain transmission rights (b)
            
            
            
            
            
            
            (12
            )
            
            
            
            
            
            
            (12
            )Settlement
      of Wallingford cost-based rates (c)
            
            
            
            
            
            
            33
            
            
            
            
            
            
            
            33Sale
      of domestic telecommunication operations (Note 8)
            
            
            
            
            
            
            (3
            )
            
            
            
            
            
            
            (23
            )Off-site
      remediation of ash basin leak (Note 10)
            
            
            
            
            
            
            
            
            
            
            1Colstrip
      ground water litigation (Note 10)
            
            
            
            
            
            
            
            
            
            
            (5
            )Synthetic
      fuel tax adjustment (Note 10)
            
            
            
            
            
            
            
            
            
            
            (13
            )PJM
      billing dispute (d)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1
            )Total
            
            $
            39
            
            
            $
            12
            
            
            $
            72
            
            
            $
            17





(a)
            
            See
      Note 14 to the Financial Statements for additional information regarding
      economic activity.(b)
            
            See
      "Other Operation and Maintenance" for more information on the $21 million
      pre-tax impairment.(c)
            
            In
      2003, PPL Wallingford and PPL EnergyPlus sought from the FERC cost-based
      payments based upon the RMR status of four units at the Wallingford,
      Connecticut generating facility.  As a result of a settlement
      agreement, during the third quarter of 2007, PPL Energy Supply recognized
      $55 million of revenue and $4 million of interest income related to the
      settlement agreement, of which $21 million had been previously
      collected.(d)
            
            Represents
      additional interest related to the settlement of this litigation in
      2007.





Outlook





Excluding
special items, PPL Energy Supply projects lower earnings for its Supply segment
in 2008 compared with 2007 as a result of the loss of synfuel-related tax
benefits, higher coal commodity and transportation costs, lower expected
baseload generation, higher financing costs and lower expected margins from PPL
Energy Supply's marketing and trading activities.  The decrease in
wholesale energy prices and lack of liquidity in the power markets significantly
impacted PPL Energy Supply's earnings for the three and nine months ended
September 30, 2008.  PPL Energy Supply has taken measures
to reduce its exposure to the potential effect of any further decline in
market prices on future trading margins.





PPL
Energy Supply expects 2009 earnings for its Supply segment to be lower than
projected 2008 earnings as a result of higher operation and maintenance
expenses; higher depreciation and higher financing costs.  PPL Energy
Supply expects these increased costs to be partially offset by higher energy
margins, despite higher expected coal expense, as a result of higher baseload
generation, higher Western energy sales prices, and higher expected margins from
its marketing and trading activities.





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





International Delivery
Segment





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





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





International
Delivery segment net income was:





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007Utility
      revenues
            
            $
            195
            
            
            $
            204
            
            
            $
            647
            
            
            $
            638Energy-related
      businesses
            
            
            8
            
            
            
            8
            
            
            
            26
            
            
            
            27Total
      operating revenues
            
            
            203
            
            
            
            212
            
            
            
            673
            
            
            
            665Other
      operation and maintenance
            
            
            46
            
            
            
            57
            
            
            
            142
            
            
            
            182Depreciation
            
            
            33
            
            
            
            33
            
            
            
            104
            
            
            
            111Taxes,
      other than income
            
            
            17
            
            
            
            17
            
            
            
            51
            
            
            
            49Energy-related
      businesses
            
            
            4
            
            
            
            4
            
            
            
            10
            
            
            
            13Total
      operating expenses
            
            
            100
            
            
            
            111
            
            
            
            307
            
            
            
            355Other
      Income - net
            
            
            6
            
            
            
            2
            
            
            
            10
            
            
            
            19Interest
      Expense
            
            
            42
            
            
            
            47
            
            
            
            114
            
            
            
            141Income  Tax
      (Benefit) Expense
            
            
            (6
            )
            
            
            (39
            )
            
            
            34
            
            
            
            (42
            )Income
      from Discontinued Operations
            
            
            
            
            
            
            13
            
            
            
            5
            
            
            
            89Net
      Income
            
            $
            73
            
            
            $
            108
            
            
            $
            233
            
            
            $
            319





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedU.K.:Delivery
      margins
            
            
            
            
            $
            18Depreciation
            $
            (1
            )
            
            
            4Other
      operating expenses
            
            4
            
            
            
            15Interest
      expense
            
            (1
            )
            
            
            5Interest
      income
            
            (2
            )
            
            
            (5
            )Income
      taxes
            
            9
            
            
            
            21Foreign
      currency exchange rates
            
            (2
            )Hyder
      liquidation distributions (Note 8)
            
            
            
            
            
            (3
            )Gain
      on transfer of equity investment (Note 8)
            
            
            
            
            
            (5
            )Other
            
            
            
            
            
            (2
            )Discontinued
      Operations, net of special item (Note 8)
            
            (11
            )
            
            
            (39
            )Change
      in tax reserves (Note 5)
            
            1
            
            
            
            (30
            )Other
            
            8
            
            
            
            20U.S.
      income taxes
            
            17
            
            
            
            15Special
      items
            
            (57
            )
            
            
            (100
            )$
            (35
            )
            
            $
            (86
            )





·
            The
      U.K.'s earnings for the nine months ended September 30, 2008, were
      favorably impacted by higher delivery margins primarily due to higher
      prices, which include the annual regulatory adjustment for
      inflation.·
            Lower
      U.K. other operating expenses for both periods were primarily due to lower
      pension expense resulting from an improvement in the fair value of pension
      assets and an increase in the discount rate, partially offset by lower
      mortality rates.·
            Lower
      U.K. income taxes for the three and nine months ended September 30,
      2008, were primarily due to the enactment of the U.K.'s Finance Act 2008,
      which included the phase-out of tax depreciation on industrial buildings
      over a four year period.  As a result, a deferred tax benefit
      was recorded in the third quarter of 2008.  Also contributing to
      the nine-month period variance was a favorable U.K. taxing authority
      determination in 2008 related to the deductibility of imputed interest on
      a loan from Hyder.·
            Lower
      U.S. income taxes are primarily due to changes in the estimated taxable
      amount of planned cash repatriation.·
            Changes
      in foreign currency exchange rates decreased the U.K.'s portion of revenue
      and expense line items by 4% and 1% for the three and nine months ended
      September 30, 2008, compared with the same periods in
  2007.





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





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007Sale
      of Latin American businesses (Note 8)
            
            
            
            
            
            $
            3
            
            
            
            
            
            
            $
            46Change
      in U.K. tax rate (Note 5)
            
            
            
            
            
            
            54
            
            
            
            
            
            
            
            54Total
            
            
            
            
            
            $
            57
            
            
            
            
            
            
            $
            100





Outlook





Excluding
special items, PPL Energy Supply projects the 2008 earnings of its International
Delivery segment to approximate the results of 2007.





PPL
Energy Supply expects 2009 earnings for its International segment to be lower
than projected 2008 earnings as a result of the loss of certain U.K. income tax
benefits included in 2008 that are not expected to recur in 2009 and a less
favorable foreign currency exchange rate in the U.K.





Statement
of Income Analysis --





Domestic
Gross Energy Margins





Non-GAAP Financial
Measure





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





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007Operating
      Income (a)
            
            $
            281
            
            
            $
            424
            
            
            $
            953
            
            
            $
            983Adjustments:Utility
      (a)
            
            
            (195
            )
            
            
            (204
            )
            
            
            (647
            )
            
            
            (638
            )Energy-related
      businesses, net (b)
            
            
            (10
            )
            
            
            (14
            )
            
            
            (29
            )
            
            
            21Other
      operation and maintenance (a)
            
            
            287
            
            
            
            238
            
            
            
            837
            
            
            
            743Depreciation
      (a)
            
            
            81
            
            
            
            72
            
            
            
            240
            
            
            
            227Taxes,
      other than
              income
      (a)
            
            
            25
            
            
            
            24
            
            
            
            70
            
            
            
            74Revenue
      adjustments (c)
            
            
            (1,163
            )
            
            
            (24
            )
            
            
            (374
            )
            
            
            123Expense
      adjustments (c)
            
            
            1,038
            
            
            
            5
            
            
            
            142
            
            
            
            (148
            )Domestic
      gross energy margins
            
            $
            344
            
            
            $
            521
            
            
            $
            1,192
            
            
            $
            1,385





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





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





Three
      Months Ended Sept. 30,2008
            
            2007
            
            ChangeRevenueWholesale
      energy marketing (a)
            
            $
            1,915
            
            
            $
            517
            
            
            $
            1,398Wholesale
      energy marketing to affiliate (a)
            
            
            453
            
            
            
            453Unregulated
      retail electric and gas (a)
            
            
            43
            
            
            
            28
            
            
            
            15Net
      energy trading margins (a)
            
            
            (132
            )
            
            
            20
            
            
            
            (152
            )Revenue
      adjustments (b)Miscellaneous
      wholesale energy marketing to affiliate
            
            
            (3
            )
            
            
            (3
            )Miscellaneous
      unregulated retail electric and gas
            
            
            
            
            
            
            (1
            )
            
            
            1Mark-to-market
      adjustments from certain economic activity (c)
            
            
            (1,160
            )
            
            
            
            
            
            
            (1,160
            )Gains
      from sale of emission allowances (d)
            
            
            
            
            
            
            32
            
            
            
            (32
            )RMR
      revenues
            
            
            
            
            
            
            (52
            )
            
            
            52Total
      revenue adjustments
            
            
            (1,163
            )
            
            
            (24
            )
            
            
            (1,139
            )1,116
            
            
            
            994
            
            
            
            122ExpenseFuel
      (a)
            
            
            267
            
            
            
            257
            
            
            
            10Energy
      purchases (a)
            
            
            1,514
            
            
            
            178
            
            
            
            1,336Energy
      purchases from affiliate (a)
            
            
            29
            
            
            
            43
            
            
            
            (14
            )Expense
      adjustments (b)Mark-to-market
      adjustments from certain economic activity (c)
            
            
            (1,046
            )
            
            
            (10
            )
            
            
            (1,036
            )Other
            
            
            8
            
            
            
            5
            
            
            
            3Total
      expense adjustments
            
            
            (1,038
            )
            
            
            (5
            )
            
            
            (1,033
            )772
            
            
            
            473
            
            
            
            299Domestic
      gross energy margins
            
            $
            344
            
            
            $
            521
            
            
            $
            (177
            )





Nine
      Months Ended Sept. 30,2008
            
            2007
            
            ChangeRevenueWholesale
      energy marketing (a)
            
            $
            2,000
            
            
            $
            1,145
            
            
            $
            855Wholesale
      energy marketing to affiliate (a)
            
            
            1,370
            
            
            
            1,356
            
            
            
            14Unregulated
      retail electric and gas (a)
            
            
            110
            
            
            
            73
            
            
            
            37Net
      energy trading margins (a)
            
            
            (82
            )
            
            
            38
            
            
            
            (120
            )Revenue
      adjustments (b)Miscellaneous
      wholesale energy marketing to affiliate
            
            
            (10
            )
            
            
            (11
            )
            
            
            1Miscellaneous
      unregulated retail electric and gas
            
            
            (1
            )
            
            
            (1
            )Miscellaneous
      generation revenues
            
            
            (1
            )
            
            
            (1
            )Mark-to-market
      adjustments from certain economic activity (c)
            
            
            (363
            )
            
            
            99
            
            
            
            (462
            )Gains
      from sale of emission allowances (d)
            
            
            1
            
            
            
            89
            
            
            
            (88
            )RMR
      revenues
            
            
            
            
            
            
            (52
            )
            
            
            52Total
      revenue adjustments
            
            
            (374
            )
            
            
            123
            
            
            
            (497
            )3,024
            
            
            
            2,735
            
            
            
            289ExpenseFuel
      (a)
            
            
            718
            
            
            
            692
            
            
            
            26Energy
      purchases (a)
            
            
            1,169
            
            
            
            393
            
            
            
            776Energy
      purchases from affiliate (a)
            
            
            87
            
            
            
            117
            
            
            
            (30
            )Expense
      adjustments (b)Mark-to-market
      adjustments from certain economic activity (c)
            
            
            (157
            )
            
            
            133
            
            
            
            (290
            )Other
            
            
            15
            
            
            
            15Total
      expense adjustments
            
            
            (142
            )
            
            
            148
            
            
            
            (290
            )1,832
            
            
            
            1,350
            
            
            
            482Domestic
      gross energy margins
            
            $
            1,192
            
            
            $
            1,385
            
            
            $
            (193
            )





(a)
            
            As
      reported on the Statements of Income.(b)
            
            To
      include/exclude the impact of any revenues and expenses not associated
      with domestic gross energy margins, consistent with the way management
      reviews domestic gross energy margins internally.(c)
            
            See
      Note 14 to the Financial Statements for additional information regarding
      economic activity.(d)
            
            Included
      in "Other operation and maintenance" on the Statements of
      Income.





Domestic Gross Energy
Margins By Region





Domestic
gross energy margins are generated through PPL Energy Supply's non-trading and
trading activities.  PPL Energy Supply manages its non-trading energy
business on a geographic basis that is aligned with its generation
assets.





Three
      Months Ended Sept. 30,2008
            
            2007
            
            ChangeNon-tradingEastern
      U.S.
            
            $
            398
            
            
            $
            424
            
            
            $
            (26
            )Western
      U.S.
            
            
            78
            
            
            
            77
            
            
            
            1Net
      energy trading
            
            
            (132
            )
            
            
            20
            
            
            
            (152
            )Domestic
      gross energy margins
            
            $
            344
            
            
            $
            521
            
            
            $
            (177
            )





Nine
      Months Ended Sept. 30,2008
            
            2007
            
            ChangeNon-tradingEastern
      U.S.
            
            $
            1,057
            
            
            $
            1,138
            
            
            $
            (81
            )Western
      U.S.
            
            
            217
            
            
            
            209
            
            
            
            8Net
      energy trading
            
            
            (82
            )
            
            
            38
            
            
            
            (120
            )Domestic
      gross energy margins
            
            $
            1,192
            
            
            $
            1,385
            
            
            $
            (193
            )





Eastern
U.S.





Eastern
U.S. non-trading margins were $26 million and $81 million lower during the three
and nine months ended September 30, 2008, compared with the same periods in
2007.  The decrease for both periods was primarily due to higher
average fuel prices, which were up 18% and 14%, and lower baseload generation
which was down 12% and 6%, primarily due to unplanned outages at the eastern
coal-fired units and the retirement of the Martins Creek coal units in September
2007.  Partially offsetting these lower margins was a 1.4% increase in
PLR sales prices in accordance with the schedule established by the PUC Final
Order.





Western
U.S.





Western
U.S. non-trading margins were $8 million higher for the nine months ended
September 30, 2008, compared with the same period in 2007.  The
increase is primarily due to higher margins from wholesale activity due to
favorable pricing.





Net
Energy Trading





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





During
the three months ended September 30, 2008, net energy trading margins
decreased by $152 million, compared with the same period in
2007.  This decrease consists of $133 million of lower unrealized
margins and $19 million of lower realized margins, both driven by significant
decreases in power and gas prices.  During the nine months ended
September 30, 2008, net energy trading margins decreased by $120 million,
compared with the same period in 2007.  This decrease consists of $126
million of lower unrealized margins, which were driven by decreases in power and
gas prices, partially offset by improved FTR results.  Realized
margins were $6 million higher during the period, which were driven by improved
FTR results, partially offset by decreases in power and gas prices.





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





Three
      Months Ended
              Sept.
      30,
            
            Nine
      Months Ended
              Sept.
      30,2008
            
            2007
            
            2008
            
            2007GWh
            
            
            4,076
            
            
            
            4,034
            
            
            
            12,943
            
            
            
            9,381Bcf
            
            
            4.3
            
            
            
            2.8
            
            
            
            14.8
            
            
            
            11.0





Utility
Revenues





The
changes in utility revenues were attributable to:





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedU.K. electric
      delivery revenue
            
            $
            (3
            )
            
            $
            11U.K.
      foreign currency exchange rates
            
            
            (6
            )
            
            
            (2
            )$
            (9
            )
            
            $
            9





The
decrease in U.K. electric delivery revenues for the three months ended
September 30, 2008, compared with the same period in 2007, excluding
foreign currency exchange rate impacts, was primarily due to a decrease in
engineering recharge and metering services performed for third parties and a
decrease in sales volume, partially offset by an increase in prices effective
April 1.





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





Energy-related
Businesses





Energy-related
businesses contributed $4 million less to operating income for the three months
ended September 30, 2008, compared with the same period in
2007.  The decrease was primarily attributable to:





·
            a
      $30 million net gain recorded in 2007 on options purchased to hedge the
      risk associated with the phase-out of the synthetic fuel tax
      credits.  No such options were held in 2008; partially offset
      by·
            $19
      million less in operating losses from synfuel projects.  PPL
      Energy Supply's synthetic fuel operations have ceased;·
            a
      $6 million increase in earnings in 2008 from PPL Energy Supply's energy
      services-related businesses mainly due to increased construction activity;
      and·
            a
      $5 million impairment in 2007 of domestic telecommunication assets that
      were sold in 2007.





Energy-related
businesses contributed $50 million more to operating income for the nine months
ended September 30, 2008, compared with the same period in
2007.  The increase was primarily attributable to:





·
            $53
      million less in operating losses from synfuel projects as the projects
      ceased operation at the end of 2007;·
            a
      $39 million impairment in 2007 of domestic telecommunication assets that
      were subsequently sold in 2007; and·
            a
      $9 million increase in earnings from PPL Energy Supply's energy
      services-related businesses mainly due to increased construction activity;
      partially offset by·
            a
      $44 million net gain recorded in 2007 on options purchased to hedge the
      risk associated with the phase-out of the synthetic fuel tax
      credits.  No such options were held in 2008;
  and·
            $6
      million less in earnings from the domestic telecommunication assets that
      were sold in 2007.





See Note
8 to the Financial Statements for additional information on the impairment and
sale of the domestic telecommunication assets.  See Note 10 to the
Financial Statements for additional information on the synthetic fuel tax
credits and the synfuel projects.





Other
Operation and Maintenance





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedLower
      gains on sale of emission allowances
            
            $
            28
            
            
            $
            84Impairment
      of certain emission allowances (Note 10)
            
            
            45
            
            
            
            45Royalty
      fees to affiliate
            
            
            11
            
            
            
            7Domestic
      salary expense
            
            
            (6
            )
            
            
            11Colstrip
      groundwater litigation (Note 10)
            
            
            
            
            
            
            8Outage
      costs at Western and Eastern U.S. fossil/hydro stations
            
            
            
            
            
            
            8Uncollectible
      accounts
            
            
            (2
            )
            
            
            3Emission
      allowance consumption
            
            
            1
            
            
            
            2Off-site
      remediation of ash basin leak (Note 10)
            
            
            
            
            
            
            (2
            )Outage
      costs at Susquehanna nuclear station
            
            
            (3
            )
            
            
            (7
            )Allocation
      of corporate service costs (Note 11)
            
            
            (5
            )
            
            
            (14
            )WPD
      recoverable engineering services
            
            
            (2
            )
            
            
            (14
            )Impairment
      of certain transmission rights (a)
            
            
            (21
            )
            
            
            (21
            )Defined
      benefit costs (Note 9)
            
            
            (8
            )
            
            
            (23
            )Other
            
            
            11
            
            
            
            7$
            49
            
            
            $
            94





(a)
            
            In
      August 2007, Maine Electric Power Company (MEPCO), ISO New England and
      other New England transmission owners submitted a filing to the FERC
      seeking to roll the revenue requirement of the MEPCO transmission
      facilities into the regional transmission rates in New England and to
      change certain rules concerning the use of the transmission line for
      energy and capacity.  PPL Energy Supply protested this proposal
      and recorded an impairment of the transmission rights based on their
      estimated fair value as determined by an internal model and other
      analysis.





Depreciation





The
increases in depreciation expense were due to:





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedAdditions
      to PP&E
            
            $
            9
            
            
            $
            26Extension
      of useful lives of certain WPD network assets in 2007
            
            
            
            
            
            
            (13
            )$
            9
            
            
            $
            13





Taxes,
Other Than Income





Taxes,
other than income decreased by $4 million during the nine months ended September
30, 2008, compared with the same period in 2007.The decrease was
primarily due to a $7 million PPL Montana property tax refund received in
2008.





Other
Income - net





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





Interest
Income from Affiliates





Interest
income from affiliates decreased by $7 million and $12 million for the three and
nine months ended September 30, 2008, compared with the same periods in
2007.  The decreases were the result of reduced average balances
outstanding on a note receivable with an affiliate and lower average rates on
this note and the $300 million collateral deposit related to the PLR contract
due to the floating interest rate.





Interest
Expense





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedLong-term
      debt interest expense primarily due to new issuances (Note
    7)
            
            $
            10
            
            
            $
            17Short-term
      debt interest expense
            
            
            3
            
            
            
            5Amortization
      of debt issuance costs
            
            
            2
            
            
            
            4Redemption
      of 8.23% Subordinated Debentures in 2007 (Note 11)
            
            
            
            
            
            
            (4
            )Capitalized
      interest
            
            
            1
            
            
            
            (8
            )Other
            
            
            
            
            
            
            1$
            16
            
            
            $
            15





Income
Taxes





The
changes in income taxes were due to:





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedDecrease
      in synthetic fuel and other tax credits
            
            $
            9
            
            
            $
            73Tax
      reserve adjustments (Note 5)
            
            
            3
            
            
            
            43U.K.
      Finance Act adjustments (Note 5)
            
            
            46
            
            
            
            46Lower
      pre-tax book income
            
            
            (79
            )
            
            
            (45
            )Tax
      return adjustments
            
            
            
            
            
            
            (17
            )Tax
      expense on foreign earnings
            
            
            (16
            )
            
            
            (11
            )Domestic
      manufacturing deduction
            
            
            (2
            )
            
            
            (7
            )Other
            
            
            3
            
            
            
            1$
            (36
            )
            
            $
            83





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





Discontinued
Operations





Income
from Discontinued Operations decreased by $13 million during the three months
ended September 30, 2008, compared with the same period in
2007.  The decrease was attributable to a $13 million decrease in
income from PPL Energy Supply's Latin American operating businesses that were
sold in 2007.





Income
from Discontinued Operations decreased by $84 million during the nine months
ended September 30, 2008, compared with the same period in
2007.  The decrease was attributable to an $84 million decrease in
income from PPL Energy Supply's Latin American operating businesses that were
sold in 2007, which included an $89 million after-tax gain from the sale of its
El Salvadoran business and an after-tax impairment charge of $20 million of its
Bolivian businesses.





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





Financial
Condition





Liquidity
and Capital Resources





In
general, recent turmoil in the financial markets has made obtaining new sources
of credit more difficult and more costly for companies.  During this
challenging period, PPL Energy Supply continues to be focused on maintaining a
strong credit profile and liquidity position.  PPL Energy Supply
expects to continue to have adequate liquidity available through operating cash
flows, cash and cash equivalents, short-term investments and its credit
facilities.  PPL Energy Supply currently does not expect to need to
access commercial paper markets or capital markets during the remainder of 2008
and 2009, but may decide to access capital markets, subject to market
conditions, to enhance its liquidity.  PPL Energy Supply believes that
its cash and cash equivalents, short-term investments, operating cash flows, and
borrowing capacity under its credit facilities, taken as a whole, provide
sufficient resources to fund its ongoing operating requirements, including
liquidity requirements related to energy trading and marketing activities, as
well as estimated future capital expenditures in the near term.





PPL
Energy Supply had the following at:





September 30, 2008
            
            December 31,
      2007Cash
      and cash equivalents
            
            $
            239
            
            
            $
            355Short-term
      investments (a)
            
            
            82
            
            
            
            102$
            321
            
            
            $
            457Short-term
      debt
            
            $
            200
            
            
            $
            51





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





The $116
million decrease in PPL Energy Supply's cash and cash equivalents position was
primarily the net result of:





·
            $834
      million of cash provided by operating activities;·
            proceeds
      of $699 million from the issuance of long-term debt;·
            a
      net increase in short-term debt of $150 million (excluding the impact of
      foreign currency translation adjustments);·
            $125
      million of contributions from Member;·
            $761
      million of capital expenditures;·
            distributions
      to Member of $666 million;·
            $265
      million in net expenditures for intangible
    assets;·
            a
      net increase of $120 million in restricted cash and cash
      equivalents;·
            the
      retirement of $57 million of long-term debt;·
            $20
      million in net purchases of nuclear plant decommissioning trust
      investments; and·
            $14
      million in net purchases of other
investments.





Auction Rate
Securities





PPL
Energy Supply had auction rate securities totaling $21 million at
September 30, 2008, which were classified as "Investments - Other," and $10
million at December 31, 2007, which were classified as "Short-term investments"
on the Balance Sheets.  Historically, an active market existed for
such investments, and the auctions provided an opportunity for investors either
to hold an investment at a periodically reset interest rate or to sell the
investment at its par value for immediate liquidity.  In early 2008,
investor concerns about credit and liquidity in the financial markets,
generally, as well as investor concerns over specific insurers that guarantee
the credit of certain of the underlying securities, created uncertainty in the
auction rate securities market and these securities generally failed to be
remarketed through their established auction process.  These auction
failures and the resulting illiquidity continue to impact PPL Energy Supply's
auction rate securities.





At
September 30, 2008, PPL Energy Supply concluded that the fair market value
of these auction rate securities was $21 million, a decline of $3 million from
par value.  Because PPL Energy Supply intends and has the ability to
hold these auction rate securities until they can be liquidated at par value,
PPL Energy Supply believes that it does not have significant realized loss
exposure.  Based upon the evaluation of available information, PPL
Energy Supply believes these investments continue to be of high credit
quality.  Additionally, PPL Energy Supply does not anticipate having
to sell these securities to fund operations.  As such, the decline in
fair value is deemed temporary due to general market conditions.  See
Note 13 to the Financial Statements for further discussion of auction rate
securities.





Commercial
Paper





PPL
Energy Supply did not have any commercial paper outstanding at September 30,
2008, and it does not expect to have to issue any commercial paper through the
end of 2008.





Credit
Facilities





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





PPL
Energy Supply currently does not expect to make any modifications through the
end of 2008, including extending the expiration date, to its $3.4 billion
five-year credit facility that expires in June 2012.





In
September 2008, PPL Energy Supply executed a new $385 million 364-day credit
agreement that expires in September 2009.  Under certain conditions,
PPL Energy Supply may request that the facility's principal amount be increased
by up to $150 million.  Under this facility, PPL Energy Supply has the
ability to make cash borrowings and to cause the lenders to issue letters of
credit.





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





At
September 30, 2008, PPL Energy Supply's total committed borrowing capacity under
its credit facilities and the use of this borrowing capacity were:





Committed
      Capacity
            
            Borrowed
            
            Letters
      of Credit Issued
            
            Available
      CapacityPPL
      Energy Supply Domestic Credit Facilities (a)
            
            $
            4,385
            
            
            
            
            
            
            $
            720
            
            
            $
            3,665WPDH
      Limited Credit Facility (b)
            
            ₤
            150
            
            
            ₤
            101
            
            
            
            
            
            
            ₤
            49WPD
      (South West) Credit Facility
            
            
            155
            
            
            
            
            
            
            ₤
            4
            
            
            
            151Total
      International Credit Facilities (c)
            
            ₤
            305
            
            
            ₤
            101
            
            
            ₤
            4
            
            
            ₤
            200





(a)
            
            The
      commitments under PPL Energy Supply's domestic credit facilities are
      provided by a diverse bank group consisting of 24 banks, with no one bank
      providing more than 14% of the total committed capacity.
              
              In
      October 2008, PPL Energy Supply borrowed $285 million under its $3.4
      billion five-year credit facility.  In connection with this
      borrowing, one of the participating banks, Lehman Brothers Bank, FSB,
      became a defaulting lender under the facility, as it no longer is honoring
      its commitment of approximately $175 million.(b)
            
            During
      the third quarter of 2008, WPDH Limited made a USD-denominated borrowing
      of $200 million, which equated to £101 million at the time of borrowing
      and is reflected on the Balance Sheet in "Short-term
      debt."  This borrowing bears interest at approximately
      3.73%.(c)
            
            At
      September 30, 2008, available capacity of the international credit
      facilities is approximately $365
million.





See Note
7 to the Financial Statements for additional information on PPL Energy Supply's
credit facilities.





Financing
Activities





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





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





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





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





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





Leases





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





Rating Agency
Decisions





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





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





Moody's
and S&P did not take any actions related to PPL Energy Supply and its rated
subsidiaries during the nine months ended September 30, 2008.  In
March 2008, Fitch completed a review of its credit ratings for PPL Energy Supply
and affirmed all of its ratings.  In May 2008, Fitch changed its
outlook for WPDH Limited, WPD LLP, WPD (South Wales) and WPD (South West) to
positive from stable. In August
2008, Fitch affirmed its BBB rating of PPL Montana's 8.903% Pass-Through
Certificates due 2020.




Capital
Expenditures
  The
schedule below shows PPL Energy Supply's capital expenditure projections as of
September 30, 2008, for the years 2008 through 2010.  Capital
expenditure projections for the years 2011 and 2012 are still being reviewed as
part of the 5-year planning process.  These capital expenditure
projections are preliminary and subject to approval by PPL's Board of Directors,
which is expected to occur prior to year-end.
  Projected2008
                
                2009
                
                2010Construction
      expenditures (a)Generating
      facilities
                
                $
                376
                
                $
                276
                
                $
                454Transmission
      and distribution facilities
                
                
                298
                
                
                293
                
                
                427Environmental
                
                
                461
                
                
                199
                
                
                67Other
                
                
                68
                
                
                6
                
                
                1Total
      Construction Expenditures
                
                
                1,203
                
                
                774
                
                
                949Nuclear
      fuel
                
                
                102
                
                
                151
                
                
                161Total
      Capital Expenditures
                
                $
                1,305
                
                $
                925
                
                $
                1,110
 
 (a)
                
                Construction
      expenditures include AFUDC and capitalized interest, which are expected to
      be $173 million for the 2008 through 2010
  period.
 
 PPL
Energy Supply 's capital expenditure projections for the years 2008 through 2010
total $3.3 billion.  Capital expenditure plans are revised
periodically to reflect changes in operational, market and regulatory
conditions.
 
 For
additional information on PPL Energy Supply's liquidity and capital resources,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations," in PPL Energy Supply's 2007 Form 10-K.
  Risk
Management - Energy Marketing & Trading and Other





Market
Risk





Commodity
Price Risk (Non-trading)





PPL
Energy Supply's non-trading commodity derivative contracts mature at various
times through 2017.  PPL Energy Supply segregates its non-trading
activities into two categories:  hedge activity and economic
activity.  Transactions that are accounted for as hedge activity
qualify for hedge accounting treatment under SFAS 133.  The majority
of PPL Energy Supply's energy transactions qualify for accrual or hedge
accounting.  The economic activity category includes transactions that
address a specific risk, but were not eligible for hedge accounting or for which
hedge accounting was not elected.  Although they do not receive hedge
accounting treatment, these transactions are considered non-trading
activity.  The net fair value of economic positions at
September 30, 2008 and December 31, 2007, including net premiums on
options, was a loss of $36 million and a gain of $67 million.





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





Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,2008
            
            2007
            
            2008
            
            2007Fair
      value of contracts outstanding at the beginning of the
    period
            
            $
            (1,054
            )
            
            $
            (245
            )
            
            $
            (305
            )
            
            $
            (111
            )Contracts
      realized or otherwise settled during the period
            
            
            (86
            )
            
            
            (30
            )
            
            
            (173
            )
            
            
            (50
            )Fair
      value of new contracts entered into during the period
            
            
            (55
            )
            
            
            13
            
            
            
            115
            
            
            
            57Changes
      in fair value attributable to changes in valuation techniques
      (a)
            
            
            
            
            
            
            
            
            
            
            55Other
      changes in fair value
            
            
            1,032
            
            
            
            87
            
            
            
            145
            
            
            
            (71
            )Fair
      value of contracts outstanding at the end of the period
            
            $
            (163
            )
            
            $
            (175
            )
            
            $
            (163
            )
            
            $
            (175
            )





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





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





Fair
      Value of Contracts at Period-End
              Gains
      (Losses)Maturity
              Less
      Than
              1
      Year
            
            Maturity
              1-3
      Years
            
            Maturity
              4-5
      Years
            
            Maturity
              in
      Excess
              of
      5 Years
            
            Total
      Fair
              ValueSource
      of Fair ValuePrices
      quoted in active markets for identical instruments
            
            $
            2
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2Prices
      based on significant other observable inputs
            
            
            (61
            )
            
            $
            (370
            )
            
            $
            77
            
            
            $
            8
            
            
            
            (346
            )Prices
      based on significant unobservable inputs
            
            
            3
            
            
            
            1
            
            
            
            44
            
            
            
            133
            
            
            
            181Fair
      value of contracts outstanding at the end of the period
            
            $
            (56
            )
            
            $
            (369
            )
            
            $
            121
            
            
            $
            141
            
            
            $
            (163
            )





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





Commodity
Price Risk (Trading)





PPL
Energy Supply's trading contracts mature at various times through
2014.  The following chart sets forth PPL Energy Supply's net fair
value of trading contracts.  See Note 13 for additional
information.








Three
      Months Ended
              September
      30,
            
            Nine
      Months Ended
              September
      30,2008
            
            2007
            
            2008
            
            2007Fair
      value of contracts outstanding at the beginning of the
    period
            
            $
            16
            
            
            $
            48
            
            
            $
            16
            
            
            $
            41Contracts
      realized or otherwise settled during the period
            
            
            1
            
            
            
            (7
            )
            
            
            (40
            )
            
            
            (34
            )Fair
      value of new contracts entered into during the period
            
            
            (41
            )
            
            
            14
            
            
            
            (18
            )
            
            
            35Other
      changes in fair value
            
            
            (61
            )
            
            
            11
            
            
            
            (43
            )
            
            
            24Fair
      value of contracts outstanding at the end of the period
            
            $
            (85
            )
            
            $
            66
            
            
            $
            (85
            )
            
            $
            66





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





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





Fair
      Value of Contracts at Period-End
              Gains
      (Losses)Maturity
              Less
      Than
              1
      Year
            
            Maturity
              1-3
      Years
            
            Maturity
              4-5
      Years
            
            Maturity
              in
      Excess
              of
      5 Years
            
            Total
      Fair
              ValueSource
      of Fair ValuePrices
      quoted in active markets for identical instruments
            
            
            
            
            
            $
            2
            
            
            
            
            
            
            
            
            
            
            $
            2Prices
      based on significant other observable inputs
            
            $
            (34
            )
            
            
            (37
            )
            
            $
            (14
            )
            
            
            
            
            
            
            (85
            )Prices
      based on significant unobservable inputs
            
            
            (2
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2
            )Fair
      value of contracts outstanding at the end of the period
            
            $
            (36
            )
            
            $
            (35
            )
            
            $
            (14
            )
            
            
            
            
            
            $
            (85
            )





Commodity
Price Risk Summary





In
accordance with its marketing strategy, PPL Energy Supply often elects not to
completely hedge its generation output or fuel requirements.  PPL
Energy Supply estimates that for its entire portfolio, including all generation,
emissions and physical and financial energy positions, a 10% adverse change in
power prices across all geographic zones and time periods would decrease
expected 2008 gross margins by $45 million.  Similarly, a 10% adverse
movement in all fossil fuel prices would decrease expected 2008 gross margins by
$2 million.





VaR
Models





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





Trading
              VaR
            
            Non-Trading
      MTM VaR95%
      Confidence Level, One-Day Holding PeriodPeriod
      End
            $
            10
            
            
            $
            41Average
      for the Period
            
            8
            
            
            
            38High
            
            10
            
            
            
            41Low
            
            7
            
            
            
            33





Interest
Rate Risk





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





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





PPL
Energy Supply is also exposed to changes in the fair value of its domestic and
international debt portfolios.  PPL Energy Supply estimated that a 10%
decrease in interest rates at September 30, 2008, would increase the fair
value of its debt portfolio by $238 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, 2008, PPL Energy Supply had none of these instruments
outstanding.





PPL and
PPL Energy Supply also utilize various risk management instruments to adjust the
mix of fixed and floating interest rates in PPL Energy Supply's debt
portfolio.  The change in fair value of these instruments, as well as
the offsetting change in the value of the hedged exposure of the debt, is
reflected in earnings.  At September 30, 2008, the fair value of
these instruments was an asset of $2 million.  PPL Energy Supply
estimated that a 10% adverse movement in interest rates at September 30,
2008, would decrease the asset by $1 million.





WPDH
Limited holds a net position in cross-currency swaps totaling $527 million to
hedge the interest payments and principal of its U.S. dollar-denominated bonds
with maturity dates ranging from December 2008 to December
2028.  While PPL Energy Supply is exposed to changes in the fair value
of these instruments, any changes in the fair value of these instruments are
recorded in equity and then reclassified into earnings in the same period during
which the item being hedged affects earnings.  The estimated fair
value of this position at September 30, 2008, was a net liability of $60
million.  WPDH Limited estimated that a 10% adverse movement in
foreign currency exchange rates and interest rates at September 30, 2008,
would increase the net liability by $64 million.





Foreign
Currency Risk





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





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





In 2007,
PPL executed forward contracts to sell British pounds sterling to protect the
value of a portion of PPL Energy Supply's net investment in WPD.  In
connection with these transactions, PPL Energy Supply entered into forward
contracts with PPL that have terms identical to those executed by
PPL.  The total notional amount of the contracts outstanding at
September 30, 2008 was £68 million.  The settlement dates of
these contracts range from March 2009 through June 2011.  At
September 30, 2008, the fair value of these positions was an net asset
of $15 million.  PPL Energy Supply estimated that a 10% adverse
movement in foreign currency exchange rates at September 30, 2008 would
decrease the asset by $11 million.





To
economically hedge the translation of 2008 expected income denominated in
British pounds sterling to U.S. dollars, PPL entered into a combination of
average rate forwards and average rate options to sell British pounds
sterling.  In connection with these transactions, PPL Energy Supply
entered into average rate forwards and average rate options with PPL that have
terms identical to those executed by PPL.  At September 30, 2008,
the total exposure hedged was £24 million.  These forwards and options
have termination dates ranging from October 2008 to December 2008.  At
September 30, 2008, the fair value of these positions was a net asset of $4
million.  PPL Energy Supply estimated that a 10% adverse movement in
foreign currency exchange rates at September 30, 2008 would decrease the
net asset position by $4 million.





Nuclear
Plant Decommissioning Trust Funds - Securities Price Risk





In
connection with certain NRC requirements, PPL Susquehanna maintains trust funds
to fund certain costs of decommissioning the Susquehanna nuclear
station.  At September 30, 2008, these funds were invested
primarily in domestic equity securities and fixed-rate, fixed-income securities
and are reflected at fair value on PPL Energy Supply's Balance
Sheet.  The mix of securities is designed to provide returns
sufficient to fund Susquehanna's decommissioning and to compensate for
inflationary increases in decommissioning costs.  However, the equity
securities included in the trusts are exposed to price fluctuation in equity
markets, and the values of fixed-rate, fixed-income securities are exposed to
changes in interest rates.  PPL actively monitors the investment
performance and periodically reviews asset allocation in accordance with its
nuclear plant decommissioning trust policy statement.  At
September 30, 2008, a hypothetical 10% increase in interest rates and a 10%
decrease in equity prices would have resulted in an estimated $33 million
reduction in the fair value of the trust assets.  See Note 21 in
PPL Energy Supply's 2007 Form 10-K for additional information regarding the
nuclear plant decommissioning trust funds.





Related
Party Transactions





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





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





Acquisitions,
Development and Divestitures





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





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





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





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





Environmental
Matters





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





New Accounting
Standards





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





Application of Critical
Accounting Policies





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





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





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





Leasing





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





In
accounting for leases, management makes various assumptions, including the
discount rate, the fair market value of the leased assets and the estimated
useful life, in determining whether a lease should be classified as operating or
capital.  Changes in these assumptions could result in the difference
between whether a lease is determined to be an operating lease or a capital
lease.  If this transaction were to be accounted for as a capital
lease, PPL Energy Supply would have recorded approximately $279 million of
additional assets and $278 million of additional liabilities on the Balance
Sheet at September 30, 2008.





Loss
Accruals





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





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





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





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





SFAS
157





In 2006,
the FASB issued SFAS 157.  Among other things, SFAS 157 provides a
definition of fair value as well as a framework for measuring fair
value.  In February 2008, the FASB amended SFAS 157 through the
issuance of FSP FAS 157-1 and FSP FAS 157-2.  FSP FAS 157-1 amends
SFAS 157 to exclude from its scope, certain accounting pronouncements that
address fair value measurements associated with leases.  FSP FAS 157-2
delays the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, for nonfinancial assets and nonfinancial liabilities
that are not recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually).  In October 2008, the FASB
amended SFAS 157 through the issuance of FSP FAS 157-3, which was effective upon
issuance, including prior periods for which financial statements have not been
issued.  FSP FAS 157-3 amends SFAS 157 to clarify its application in a
market that is not active.





As
permitted by this guidance, PPL Energy Supply partially applied SFAS 157, as
amended by FSP FAS 157-1 and FSP FAS 157-2, prospectively, effective January 1,
2008.  PPL Energy Supply adopted FSP FAS 157-3, prospectively,
effective July 1, 2008.  In the current year, the partial application
of this standard affected, or will affect, fair value measurement concepts used
or embedded in PPL Energy Supply's critical accounting policies related to
"Price Risk Management" and "Defined Benefits."  PPL Energy Supply's
election to defer the application of SFAS 157, as amended, for eligible assets
and liabilities will primarily affect the fair value component of PPL Energy
Supply's critical accounting policies related to "Asset Impairment" and "Asset
Retirement Obligations" in 2009.  See Notes 2 and 13 to the Financial
Statements for additional information regarding SFAS 157, as
amended.





PPL ELECTRIC UTILITIES CORPORATION AND
SUBSIDIARIES





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





Overview





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





Recent
Market Events





The
turmoil in the financial markets has increased the complexity of maintaining
credit risk within acceptable tolerances, responding to liquidity needs,
measuring financial instruments at fair value, and managing market price
risk.
 
 Credit Risk
 
 Credit
risk is the risk that PPL Electric would incur a loss as a result of
nonperformance by counterparties of their contractual
obligations.  PPL Electric maintains credit policies and procedures
with respect to counterparty credit (including requirements that counterparties
maintain specified credit ratings) and requires other assurances in the form of
credit support or collateral in certain circumstances in order to limit
counterparty credit risk.  However, PPL Electric has concentrations of
suppliers, financial institutions and customers.  These
concentrations may impact PPL Electric's overall exposure to credit
risk, either positively or negatively, as counterparties may be similarly
affected by changes in economic, regulatory or other conditions.  The
volatility and downturn in financial and commodity markets in the third quarter
of 2008 have generally increased PPL Electric's exposure to credit
risk.  See Notes 11 and 14 to the Financial Statements for
additional information about credit concentration.
 
 LiquidityIssues
 
 The
turmoil in financial markets has generally made obtaining new sources of credit
more difficult and more costly for companies.  Despite the tightening
of the credit markets, PPL Electric expects to continue to have adequate
liquidity available through operating cash flows, cash and cash equivalents and
its credit facilities.  PPL Electric does not expect to need to access
commercial paper markets or debt and equity capital markets until the fourth
quarter of 2009, except to remarket certain bonds as discussed in "Financial
Condition - Liquidity and Capital Resources - Financing Activities," but may
decide to access capital markets, subject to market conditions, to enhance its
liquidity.
 
 Lehman
Brothers Bank, FSB (Lehman Bank) is no longer honoring its commitment under PPL
Electric's $200 million five-year credit facility. Lehman Bank's total
commitment under this facility is approximately $10
million.  See "Financial Condition - Liquidity and Capital Resources"
for an expanded discussion of PPL Electric's liquidity position and a discussion
of financing transactions completed in October 2008 to prefund future debt
maturities.
 
 SecuritiesPriceRisk
 
 PPL
Electric participates in and is allocated defined benefit costs from plans
sponsored by PPL.  Declines in the market price of debt and equity
securities resulted in unrealized losses that have impacted the asset values of
PPL's investments in its defined benefit plans.  As a result, PPL's
defined benefit plans have experienced negative investment returns in
2008.  However, significant increases in bond rates used to determine the
discount rate for these plans may provide for reductions in the gross
benefit obligations of these plans. This may offset some portion of the
decline in asset values when determining the funded status of the plans as well
as other measures at the end of 2008.  Determination of the funded status
of the defined benefit plans, contribution requirements and net periodic defined
benefit costs for future years are subject to changes in assumptions, including
the performance of the assets in the plans, through the annual measurement
date.  See "Application of Critical Accounting Policies" for "Defined
Benefits" in Part II, Item 7 of the 2007 Form 10-K for a discussion of the
assumptions and sensitivities regarding those assumptions.





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





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





Results of
Operations





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





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





Earnings





Income
available to PPL was:





Three
      Months Ended September30,
            
            Nine
      Months Ended September30,2008
            
            2007
            
            2008
            
            2007$
            36
            
            
            $
            35
            
            
            $
            119
            
            
            $
            117





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
              
              Nine
      Months EndedDelivery
      revenues (net of CTC/ITC amortization, interest expense on transition
      bonds and ancillary charges)
              
              $
              5
              
              
              $
              21Other
      operation and maintenance expense
              
              
              1
              
              
              
              (6
              )Interest
      income from affiliate
              
              
              (2
              )
              
              
              (5
              )Taxes,
      other than income
              
              
              (1
              )
              
              
              (4
              )Other
      income - net
              
              
              (1
              )
              
              
              (5
              )Other
              
              
              (1
              )
              
              
              1$
              1
              
              
              $
              2
 
 The
period-to-period changes in significant earnings components are explained in the
"Statement of Income Analysis."
 
 PPL
Electric's period-to-period earnings were affected by:
 
 ·
              higher
      delivery revenues attributable to a base rate increase effective January
      1, 2008 and normal load growth, partially offset by the unfavorable impact
      of weather on residential and commercial sales in 2008;·
              higher
      other operation and maintenance expense during the nine months ended
      September 30, 2008, primarily due to increased usage of contractors and
      increases in uncollectible accounts;·
              lower
      interest income from affiliate due to reduced average balances outstanding
      on a note receivable with an affiliate and lower average rates on this
      note due to the floating interest rate;·
              higher
      taxes, other than income, due to increases in gross receipts tax expense
      and sales and use tax expense; and·
              lower
      other income primarily due to lower interest income in 2008 and lower
      gains on property sales during the nine months ended September 30,
      2008.
  Outlook





PPL
Electric projects higher 2008 earnings driven by higher revenues as a result of
the January 1, 2008 distribution rate increase, partially offset by higher
operating expenses.





PPL
Electric expects 2009 earnings to be comparable to 2008 due to lower delivery
margins offset by lower operating costs.





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





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





Residential
            
            Small
      Commercial and Small IndustrialJuly
      2007
            
            $
            101.77
            
            
            $
            105.11October
      2007
            
            
            105.08
            
            
            
            105.75March
      2008
            
            
            108.80
            
            
            
            108.76October
      2008
            
            
            112.51
            
            
            
            111.94Average
            
            
            107.04
            
            
            
            107.89





As a
result, PPL Electric has contracted for two-thirds of the electricity supply it
expects to need for 2010.  If the average prices paid for the supply
purchased so far were to be the same for the remaining two purchases, the
average residential customer's monthly bill in 2010 would increase about 36.1%
over 2009 levels, while monthly bills for small business customers would
increase on average approximately 25.0% and monthly bills for mid-size business
customers would increase on average approximately 44.3%.  The
estimated increases include Pennsylvania gross receipts tax, an adjustment for
line losses, PPL Electric's January 1, 2008 rate increase and a court-ordered
rate adjustment in 2007.  Actual 2010 prices will not be known until
all six supply purchases have been made.  The final two solicitations
will be conducted in 2009.





In
September 2007, the Pennsylvania General Assembly (General Assembly) convened a
special session to address the proposals in the Energy Independence Strategy
(Strategy) proposed by the Pennsylvania Governor earlier in 2007.  In
June 2008, the General Assembly passed, and the Governor signed, a bill that
would create a $650 million fund for clean energy projects, conservation and
energy efficiency initiatives and pollution control projects that would be
funded through revenue bonds and gross receipts tax revenue, which will increase
as rate caps expire.





In August
2008, PPL Electric filed a request with the PUC to approve its plan to purchase
the PLR electricity supply that PPL Electric will need for 2011 through
mid-2014.
 
 On
November 3, 2008, PPL Electric proposed several amendments to its plan to
reflect passage of Pennsylvania Act 129 (Act 129), as discussed
below.  PPL Electric added provisions to purchase 5% of its default
service supply through five-year contracts and an additional 5% through ten-year
contracts.  It reduced the term of its plan by one year, proposing
that the plan end in May 2013, rather than in
May 2014.  Finally, PPL Electric provided support for several
findings that the PUC was required to make under Act 129.  PPL
Electric cannot predict the outcome of this matter.
 
 In August
2008, PPL Electric also asked the FERC for a change in the way transmission
rates are calculated to support continued investment in its transmission system
by switching to formula-based rates.  Under formula-based rates, a
fixed earnings level is set for the utility, and the utility annually adjusts
its transmission rates, subject to FERC review.  The process offers an
opportunity for public input.  The proposed rate design would ensure
that there is no over-recovery or under-recovery of the actual costs of
providing transmission delivery service.  The rate change request, if
approved, would result in an increase of $0.74 to the monthly bill of an average
PPL Electric residential customer.  PPL Electric is requesting that
the proposed rate take effect November 1, 2008.  This request would
not affect generation charges or distribution rates.  The rate change
request would result in an annual revenue increase of about $20
million.
  On
October 29, 2008, the FERC accepted the proposed rate for filing, effective on
November 1, 2008, subject to refund.  The FERC did not adjust the
requested return on equity of 12.84%, which included 50 basis points for
membership in PJM.  Finally, the FERC set the matter for hearing, but
held the hearings in abeyance to provide time for settlement judge
procedures.  PPL Electric cannot predict the outcome of this
matter.
 
 Since the
introduction of the Strategy in 2007, PPL and PPL Electric have been working
with Pennsylvania legislators, regulators and other stakeholders to develop
constructive measures to help customers transition to market rates after 2009,
including a variety of rate mitigation, educational and energy conservation
programs, consistent with several initiatives being developed by the state
administration and legislature.  In this regard, in November 2007, PPL
Electric requested the PUC to approve a plan under which its residential and
small commercial customers could smooth the impact of price increases when
generation rate caps expire in 2010.  The proposed phase-in plan
provided that customers could pay additional amounts on their electric bills
beginning in mid-2008 and continuing through 2009, and such additional amounts,
plus accrued interest, would be applied to their 2010 and 2011 electric bills,
mitigating the impact of the rate cap expiration.  PPL Electric
requested expedited consideration of the proposal by the PUC.  Ten
parties filed responses to PPL Electric's petition, primarily because the
proposal offered the program on an "opt-out" basis (i.e., customers would be
enrolled automatically and affirmatively have to "opt-out" if they choose not to
participate).  The parties negotiated a settlement
agreement  under which PPL Electric agreed to change the "opt-out"
approach to an "opt-in" approach (i.e., customers would have to affirmatively
enroll) and to make the program available to customers enrolled in budget
billing.  In March 2008, the Administrative Law Judge assigned to this
case recommended that the PUC approve the settlement agreement.  In
August 2008, the PUC approved the settlement agreement.  As a result,
the program was implemented in October 2008.
 
 As part
of the Strategy, the General Assembly passed and the Governor signed into law
Act 129 in October 2008.  The law creates an energy efficiency and
conservation program and smart metering technology requirements, adopts new PLR
electricity supply procurement rules, provides remedies for market misconduct,
and makes changes to the existing Alternative Energy Portfolio
Standard.
 
 Under Act
129, Electric Delivery Companies (EDCs) must develop and file an energy
efficiency and conservation plan with the PUC.  EDCs must contract
with a conservation service provider to implement all or a portion of the
plan.  Act 129 requires reduction in consumption of 1% by 2011, 3% by
2013 and a reduction in peak demand of 4.5% by 2013.  EDCs will be
able to recover costs of implementing a conservation plan.
 
 Act 129
also provides for installation of smart meters under the following
conditions:  for new construction, upon the request of consumers at
their cost, or on a depreciation schedule not exceeding 15 years.  PPL
Electric's current advanced metering technology meets the definition of smart
metering technology in Act 129, but PPL Electric will eventually have to upgrade
its current metering technology to comply with a provision that requires EDCs to
make available to third parties direct meter access and electronic access to
customer meter data.  Under Act 129, EDCs will be able to recover
costs of providing smart metering technology.
 
 Act 129
also requires the default service provider (DSP) to provide electric generation
supply service to customers pursuant to a PUC-approved competitive procurement
plan through auctions, requests for proposal and bilateral contracts at the sole
discretion of the DSP.  Act 129 requires a mix of spot market
purchases, short-term contracts and long-term contracts (4 to 20 years, with
long-term contracts limited to up to 25% of the load unless otherwise approved
by the PUC).  The DSP will be able to recover costs associated with a
competitive procurement plan.
 
 Under Act
129, the DSP competitive procurement plan must also ensure adequate and reliable
service "at least cost" over time.  Act 129 also grants the PUC
authority to extend long-term power contracts up to 20 years, if necessary, to
achieve the "least cost" standard.
 
 Act 129
also provides for market misconduct corrective actions.  In the event
that an EDC, its affiliate or a supplier from whom the EDC has purchased power,
is found guilty of market manipulation, the PUC can direct an EDC to take any
and all reasonable action to quantify the effect of the market misconduct on
Pennsylvania ratepayers and seek recompense.
 
 Act 129
makes changes to the Alternative Energy Portfolio Standards by adding
Pennsylvania biomass energy and small hydroelectric plants as Tier 1 alternative
energy sources and requiring the PUC to automatically increase the Tier 1
requirements to account for increases in the additional resources.
 
 Act 129
also requires the Pennsylvania Department of Conservation and Natural Resources
to complete a study to identify suitable geological formations for the location
of a state carbon sequestration network.
 
 Act 129
does not address rate mitigation.  The Governor, Pennsylvania House of
Representatives and Pennsylvania Senate have committed to address rate
mitigation in the next session, which begins in January
2009.


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





Statement
of Income Analysis --





Operating
Revenues





Retail
Electric





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedPLR
            
            $
            (1
            )
            
            $
            14Delivery
            
            
            1
            
            
            
            9Other
            
            
            1
            
            
            
            2$
            1
            
            
            $
            25





Higher
delivery revenues for both periods were attributable to a base rate increase
effective January 1, 2008.  Normal load growth also contributed to
higher delivery revenues.  Higher PLR revenues for the nine months
ended September 30, 2008, were also attributable to normal load
growth.  The increases in delivery and PLR revenues for both periods
were partially offset by the unfavorable impact of weather on residential and
commercial sales in 2008.





Wholesale Electric to
Affiliate





PPL
Electric has a contract to sell to PPL EnergyPlus the electricity that PPL
Electric purchases under contracts with NUGs.  The decreases of $14
million and $30 million in wholesale electric to affiliate for the three and
nine months ended September 30, 2008, compared with the same periods in
2007, were primarily due to the expiration of a NUG contract at the end of
2007.  The nine-month period decrease was partially offset by higher
prices on certain NUG contracts.  Substantially all of the remaining
NUG contracts will expire by 2010.





Energy
Purchases





The
decrease of $11 million in energy purchases for the three months ended
September 30, 2008, compared with the same period in 2007, was primarily
due to the expiration of a NUG contract at the end of 2007.





The
decrease of $27 million in energy purchases for the nine months ended
September 30, 2008, compared with the same period in 2007, was primarily
due to the expiration of a NUG contract as mentioned above, partially offset by
higher prices on certain NUG contracts.  Substantially all of the
remaining NUG contracts will expire by 2010.





Energy
Purchases from Affiliate





There
were offsetting changes of $3 million in energy purchases from affiliate for the
three months ended September 30, 2008, compared with the same period in
2007.  The increase was primarily attributable to higher prices for
energy purchased under the power supply contracts with PPL EnergyPlus that were
needed to support the PLR load, offset by a decrease in that load.





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





Other
Operation and Maintenance





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





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





Amortization
of Recoverable Transition Costs





Amortization
of recoverable transition costs decreased by $5 million and $12 million during
the three and nine months ended September 30, 2008, compared with the same
period in 2007.  The decreases were primarily attributable to a
scheduled decrease in ITC amortization, a reduction of ITC revenues, the change
in unbilled revenues and the change from recovery of a CTC undercollection in
2007 to the return of a CTC overcollection in 2008.





Taxes,
Other Than Income





Taxes,
other than income increased by $2 million during the three months ended
September 30, 2008, compared with the same period in 2007.The increase was
primarily due to a $1 million increase in gross receipts tax expense and a $1
million increase in sales and use tax expense.





Taxes,
other than income increased by $6 million during the nine months ended September
30, 2008, compared with the same period in 2007.The increase was
primarily due to a $4 million increase in gross receipts tax expense and a $1
million increase in sales and use tax expense.





Other
Income - net





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





Interest
Income from Affiliate





Interest
income from affiliate decreased by $4 million and $9 million for the three and
nine months ended September 30, 2008, compared with the same periods in
2007.  The decreases were the result of reduced average balances
outstanding on a note receivable with an affiliate and lower average rates on
this note due to the floating interest rate.





Financing
Costs





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





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedLong-term
      debt interest expense primarily due to the repayment of transition
      bonds
            
            $
            (6
            )
            
            $
            (16
            )Interest
      on PLR contract collateral (Note 11)
            
            
            (1
            )
            
            
            (5
            )Other
            
            
            (1
            )
            
            
            (3
            )$
            (8
            )
            
            $
            (24
            )





Income
Taxes





The
increases in income taxes were due to:





Sept.
      30, 2008 vs. Sept. 30, 2007Three
      Months Ended
            
            Nine
      Months EndedHigher
      pre-tax book income
            
            $
            5
            
            
            $
            8Tax
      reserve adjustments (Note 5)
            
            
            1
            
            
            
            2$
            6
            
            
            $
            10





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





Financial
Condition





Liquidity
and Capital Resources





In
general, recent turmoil in the financial markets has made obtaining new sources
of credit more difficult and more costly for companies.  During this
challenging period, PPL Electric continues to be focused on maintaining a strong
credit profile and liquidity position.  PPL Electric expects to
continue to have adequate liquidity available through operating cash flows, cash
and cash equivalents, and its credit facilities.  PPL Electric
currently does not expect to need to access commercial paper markets or debt and
equity capital markets until the fourth quarter of 2009, except to remarket
certain bonds as discussed below, but may decide to access capital markets,
subject to market conditions, to enhance its liquidity.  PPL Electric
believes that its cash and cash equivalents, operating cash flows, and borrowing
capacity under its credit facilities, taken as a whole, provide sufficient
resources to fund its ongoing operating requirements, as well as estimated
future capital expenditures in the near term.  See "Financing
Activities" below for a discussion of financing transactions completed in
October 2008 to prefund future debt maturities.





PPL
Electric had the following at:





September 30, 2008
            
            December31, 2007Cash
      and cash equivalents
            
            $
            67
            
            
            $
            33Short-term
      debt
            
            
            
            
            
            
            41





The $34
million increase in PPL Electric's cash and cash equivalents position was
primarily the net result of:





·
            $403
      million of cash provided by operating activities;·
            the
      net receipt of $147 million under a demand loan with an
      affiliate;·
            a
      net decrease of $41 million in restricted cash and cash
      equivalents;·
            the
      retirement of $232 million of long-term debt;·
            $193
      million of capital expenditures;·
            the
      payment of $73 million of common stock dividends to
PPL;·
            a
      net decrease of $41 million of short-term debt;·
            the
      payment of $14 million of dividends on preferred securities;
      and·
            $7
      million in expenditures for intangible
assets.





Commercial
Paper





PPL
Electric did not have any commercial paper outstanding at September 30, 2008,
and it does not expect to have to issue any commercial paper through the end of
2008.





Credit
Facilities





The
commitments under PPL Electric's $200 million five-year credit facility that
expires in May 2012 are provided by a diverse bank group consisting of 21 banks,
with no one bank providing more than 17% of the total committed
capacity.  PPL Electric had no cash borrowings and $41 million of
letters of credit outstanding under this facility at September 30,
2008.  In October 2008, PPL Electric borrowed $95 million under the
credit facility.  In connection with this borrowing, one of the
participating banks, Lehman Brothers Bank, FSB, became a defaulting lender under
the facility, as it no longer is honoring its commitment of approximately $10
million.  PPL Electric currently does not expect to make any
modifications in 2008, including extending the expiration date, to this credit
facility.





The
credit agreement related to PPL Electric's and a subsidiary's participation in a
$150 million asset-backed commercial paper program expired in July
2008.  In August 2008, PPL Electric and the subsidiary entered into a
new credit agreement governing a similar asset-backed commercial paper program
with a different financial institution and commercial paper conduit that expires
in July 2009.  The borrowing limit under such program continues to be
$150 million.  Borrowings under this program are subject to customary
conditions precedent, as well as the requirement that PPL Electric discharge a
conditional lien that could attach to the accounts receivable upon a default
under PPL Electric's 1945 First Mortgage Bond Indenture.  See
discussion on the planned discharge in "Financing Activities"
below.





Financing
Activities





In
October 2008, PPL Electric issued $400 million of 7.125% Senior Secured Bonds
due 2013 (7.125% Bonds).  The 7.125% Bonds were issued on the basis of
an equal principal amount of first mortgage bonds issued under the 1945 First
Mortgage Bond Indenture pledged to the Senior Secured Bond Indenture
Trustee.  The 7.125% Bonds may be redeemed any time prior to maturity
at PPL Electric's option at make-whole redemption prices.  PPL
Electric received proceeds of $397 million, net of a discount and underwriting
fees, from the issuance of the 7.125% Bonds.  The proceeds will be
used to partially fund the repayment at maturity of approximately $486 million
outstanding aggregate principal amount of PPL Electric's Senior Secured Bonds,
6-1⁄4% Series, due August 2009.  Prior to such use, the proceeds will
be invested in short-term investments and used for general corporate
purposes.
  In
October 2008, the Pennsylvania Economic Development Financing Authority (PEDFA)
issued $90 million aggregate principal amount of Pollution Control Revenue
Refunding Bonds, Series 2008 (PPL Electric Utilities Corporation Project) due
2023 (Series 2008 Bonds) on behalf of PPL Electric in order to refund $90
million aggregate principal amount of Pollution Control Revenue Refunding Bonds,
Series 2003, which were previously issued by the Lehigh County Industrial
Development Authority on behalf of PPL Electric and matured on November 1,
2008.  The Series 2008 Bonds are structured as variable-rate
remarketable bonds.  The Series 2008 Bonds bear interest for the first
week at an initial rate of 2.50% and will be remarketed on a weekly basis until
such time that PPL Electric elects to change the interest rate
mode.  PPL Electric may convert the interest rate on the Series 2008
Bonds from time to time to a commercial paper rate, daily rate, weekly rate or a
term rate of at least one year.  The Series 2008 Bonds are subject to
mandatory purchase under certain circumstances, including upon conversion to a
different interest rate mode.  PPL Electric acted as initial purchaser
of the Series 2008 Bonds upon issuance and expects that they will be remarketed
to unaffiliated investors subject to market conditions.
 
 In
connection with the issuance of the Series 2008 Bonds by PEDFA, PPL Electric
entered into a loan agreement with PEDFA pursuant to which it loaned PPL
Electric the proceeds of the Series 2008 Bonds on payment terms that correspond
to the Series 2008 Bonds.  PPL Electric issued a note to PEDFA to
evidence its obligations under the loan agreement.
 
 Concurrent
with, and as a condition to, the issuance of the Series 2008 Bonds, PPL Electric
issued to the Trustee of the Series 2008 Bonds, its Senior Secured Bonds,
Variable Rate Pollution Control Series 2008, which contain payment and
redemption provisions that correspond to the Series 2008 Bonds.  Such
senior secured bonds were issued on the basis of an equal principal amount of
first mortgage bonds issued under the 1945 First Mortgage Bond Indenture and
pledged to the Senior Secured Bond Indenture Trustee.
 
 PPL
Electric's senior secured bonds are secured by first mortgage bonds held by the
Senior Secured Bond Indenture Trustee and the lien of the 2001 Senior Secured
Bond Indenture, which is junior to the lien of the 1945 First Mortgage Bond
Indenture.  The 1945 First Mortgage Bond Indenture and the 2001 Senior
Secured Bond Indenture create liens on substantially all of PPL Electric's
distribution properties and certain of its transmission properties, which liens
may be released subject to certain circumstances and conditions, and subject to
certain exceptions and exclusions.


Other
than first mortgage bonds delivered to the Senior Secured Bond Indenture Trustee
as the basis for issuance of senior secured bonds, there were $10 million of
first mortgage bonds outstanding at September 30, 2008.  PPL Electric
intends to defease such bonds and to discharge the lien of the 1945 First
Mortgage Bond Indenture later in 2008, and to cancel the related first mortgage
bonds in accordance with the terms of the 2001 Senior Secured Bond Indenture, at
which time such Indenture would become a first mortgage lien, subject to certain
permitted liens and exceptions, on substantially all of PPL Electric's tangible
electric distribution properties and certain of its transmission
properties.
 Rating Agency
Decisions





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





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





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





Capital
Expenditures





The
schedule below shows PPL Electric's capital expenditure projections as of
September 30, 2008, for the years 2008 through 2010.  Capital
expenditure projections for the years 2011 and 2012 are still being reviewed as
part of the 5-year planning process.  These capital expenditure
projections are preliminary and subject to approval by PPL's Board of Directors,
which is expected to occur prior to year-end.
 
 Projected2008
              
              2009
              
              2010Construction
      expenditures (a)Transmission
      and distribution facilities
              
              $
              239
              
              $
              265
              
              $
              549Other
              
              
              25
              
              
              24
              
              
              31Total
      Capital Expenditures
              
              $
              264
              
              $
              289
              
              $
              580
 
 (a)
              
              Construction
      expenditures include AFUDC, which is expected to be $18 million for the
      2008 through 2010 period.
 
 PPL
Electric 's capital expenditure projections for the years 2008 through 2010
total $1.1 billion.  Capital expenditure plans are revised
periodically to reflect changes in operational, market and regulatory
conditions.
 
 For
additional information on PPL Electric's liquidity and capital resources, see
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations," in PPL Electric's 2007 Form 10-K.


Risk
Management





Market
Risk





Commodity
Price Risk - PLR Contracts through 2009





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





Commodity
Price Risk - PLR Contracts subsequent to 2009





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





Interest
Rate Risk





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





PPL
Electric is also exposed to changes in the fair value of its debt
portfolio.  PPL Electric estimated that a 10% decrease in interest
rates at September 30, 2008, would increase the fair value of its debt
portfolio by $44 million.





Related
Party Transactions





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





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





Environmental
Matters





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





New Accounting
Standards





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





Application of Critical
Accounting Policies





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





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





In 2006,
the FASB issued SFAS 157.  Among other things, SFAS 157 provides a
definition of fair value as well as a framework for measuring fair
value.  In February 2008, the FASB amended SFAS 157 through the
issuance of FSP FAS 157-1 and FSP FAS 157-2.  FSP FAS 157-1 amends
SFAS 157 to exclude from its scope, certain accounting pronouncements that
address fair value measurements associated with leases.  FSP FAS 157-2
delays the effective date of SFAS 157 to fiscal years beginning after November
15, 2008, for nonfinancial assets and nonfinancial liabilities that are not
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).  In October 2008, the FASB amended SFAS 157
through the issuance of FSP FAS 157-3, which was effective upon issuance,
including prior periods for which financial statements have not been
issued.  FSP FAS 157-3 amends SFAS 157 to clarify its application in a
market that is not active.





As
permitted by this guidance, PPL Electric partially applied SFAS 157, as amended,
by FSP FAS 157-1 and FSP FAS 157-2, prospectively, effective January 1,
2008.  PPL Electric adopted FSP FAS 157-3, prospectively,
effective July 1, 2008.  In the current year, the partial application
of this standard will affect fair value measurement concepts embedded in PPL
Electric's critical accounting policy related to "Defined
Benefits."  See Notes 2 and 13 to the Financial Statements for
additional information regarding SFAS 157, as amended.





PPL
CORPORATION


PPL
ENERGY SUPPLY, LLC


PPL
ELECTRIC UTILITIES CORPORATION





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





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





Item
4.  Controls and Procedures





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








Item
4(T).  Controls and Procedures





PPL
      Energy Supply, LLC and PPL Electric Utilities
  Corporation(a)
            
            Evaluation
      of disclosure controls and procedures.The
      registrants' principal executive officers and principal financial
      officers, based on their evaluation of the registrants' disclosure
      controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
      the Securities Exchange Act of 1934) have concluded that, as of
      September 30, 2008, the registrants' disclosure controls and
      procedures are effective to ensure that material information relating to
      the registrants and their consolidated subsidiaries is recorded,
      processed, summarized and reported within the time periods specified by
      the SEC's rules and forms, particularly during the period for which this
      quarterly report has been prepared.  The aforementioned
      principal officers have concluded that the disclosure controls and
      procedures are also effective to ensure that information required to be
      disclosed in reports filed under the Exchange Act is accumulated and
      communicated to management, including the principal executive and
      principal financial officers, to allow for timely decisions regarding
      required disclosure.(b)
            
            Change
      in internal controls over financial reporting.The
      registrants' principal executive officers and principal financial officers
      have concluded that there were no changes in the registrants' internal
      control over financial reporting during the registrants' 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 ProceedingsFor
      additional information regarding various pending administrative and
      judicial proceedings involving regulatory, environmental and other
      matters, which information is incorporated by reference into this Part II,
      see:·
            
            "Item
      3. Legal Proceedings" in PPL's, PPL Energy Supply's and PPL Electric's
      2007 Form 10-K; and·
            
            Note
      10 of the registrants' "Combined Notes to Condensed Consolidated Financial
      Statements" in Part I of this
report.








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








Item
      6.  Exhibits[_]10(a)
            -
            Amendment
      No. 4 to Amended and Restated Incentive Compensation Plan, dated as of
      August 26, 200812(a)
            -
            PPL
      Corporation and Subsidiaries Computation of Ratio of Earnings to Combined
      Fixed Charges and Preferred Stock Dividends12(b)
            -
            PPL
      Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to
      Fixed Charges12(c)
            -
            PPL
      Electric Utilities Corporation and Subsidiaries Computation of Ratio of
      Earnings to Combined Fixed Charges and Preferred Stock
      Dividends[_]
      - Filed pursuant to Item 601(b)(10)(iii) of Regulation
  S-K.Certifications
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the
      quarterly period ended September 30, 2008, filed by the following
      officers for the following companies:31(a)
            -
            James
      H. Miller for PPL Corporation31(b)
            -
            Paul
      A. Farr for PPL Corporation31(c)
            -
            James
      H. Miller for PPL Energy Supply, LLC31(d)
            -
            Paul
      A. Farr for PPL Energy Supply, LLC31(e)
            -
            David
      G. DeCampli for PPL Electric Utilities Corporation31(f)
            -
            J.
      Matt Simmons, Jr. for PPL Electric Utilities
CorporationCertifications
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the
      quarterly period ended September 30, 2008, furnished by the following
      officers for the following companies:32(a)
            -
            James
      H. Miller for PPL Corporation32(b)
            -
            Paul
      A. Farr for PPL Corporation32(c)
            -
            James
      H. Miller for PPL Energy Supply, LLC32(d)
            -
            Paul
      A. Farr for PPL Energy Supply, LLC32(e)
            -
            David
      G. DeCampli for PPL Electric Utilities Corporation32(f)
            -
            J.
      Matt Simmons, Jr. for PPL Electric Utilities
  Corporation








SIGNATURES





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











PPL
      Corporation(Registrant)PPL Energy Supply,
      LLC(Registrant)PPL Electric Utilities
      Corporation(Registrant)Date:  November
      4, 2008
            /s/  J.
      Matt Simmons, Jr.J.
      Matt Simmons, Jr.Vice
      President and Controller(Principal
      Accounting Officer)