<PAGE>

                                 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 period ended June 30, 2001
                                      -------------

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 For the transition period from_________ to ___________


<TABLE>
<CAPTION>
  Commission File          Registrant; State of Incorporation;                             IRS Employer
  Number                   Address and Telephone Number                                    Identification No.
  ------                   ----------------------------                                    ------------------
<S>                      <C>                                                             <C>
  1-11459                  PPL Corporation                                                 23-2758192
                           (Exact name of Registrant as specified in its charter)
                           (Pennsylvania)
                           Two North Ninth Street
                           Allentown, PA  18101-1179
                           (610) 774-5151

  1-905                    PPL Electric Utilities Corporation                              23-0959590
                           (Exact name of Registrant as specified in its charter)
                           (Pennsylvania)
                           Two North Ninth Street
                           Allentown, PA  18101-1179
                           (610) 774-5151

  333-50350                PPL Montana, LLC                                                54-1928759
                           (Exact name of Registrant as specified in its charter)
                           (Delaware)
                           303 North Broadway - Suite 400
                           Billings, MT 59101
                           (406) 869-5100
</TABLE>

Indicate by check mark whether the registrant (1) has 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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

    PPL Corporation                              Yes      X          No
                                                    -------            -------
    PPL Electric Utilities Corporation           Yes      X          No
                                                    -------            -------
    PPL Montana, LLC                             Yes      X          No
                                                    -------            -------
        PPL Montana, LLC's initial Registration Statement on Form S-4 became
effective on March 2, 2001.

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, 146,040,132 shares
                                                 outstanding at July 31,
                                                 2001, excluding 30,993,637
                                                 shares held as treasury
                                                 stock

    PPL Electric Utilities Corporation           Common stock, no par value,
                                                 102,230,382 shares
                                                 outstanding and all held by
                                                 PPL Corporation at July 31,
                                                 2001, excluding 55,070,000
                                                 shares held as treasury
                                                 stock

    PPL Montana, LLC                             PPL Corporation indirectly
                                                 holds all of the member
                                                 interests in PPL Montana,
                                                 LLC.
<PAGE>

                                PPL Corporation
                      PPL Electric Utilities Corporation
                                      And
                               PPL Montana, LLC
                               ----------------

                                   FORM 10-Q
                      FOR THE QUARTER ENDED JUNE 30, 2001

                               Table of Contents
                               -----------------

<TABLE>
<CAPTION>
                                                                                                                           Page
                                                                                                                           ----
<S>                                                                                                                      <C>
GLOSSARY OF TERMS AND ABBREVIATIONS

FORWARD-LOOKING INFORMATION                                                                                                   1

PART I.  FINANCIAL INFORMATION

  PPL Corporation and Subsidiaries

      Item 1.   Financial Statements

                Consolidated Statement of Income                                                                              4

                Consolidated Statement of Cash Flows                                                                          5

                Consolidated Balance Sheet                                                                                    6

                Consolidated Statement of Shareowners' Common Equity and Comprehensive Income                                 8

                Notes to Consolidated Financial Statements                                                                    9

      Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations                        22

      Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                   28

  PPL Electric Utilities Corporation and Subsidiaries

      Item 1.   Financial Statements

                Consolidated Statement of Income                                                                             30

                Consolidated Statement of Cash Flows                                                                         31

                Consolidated Balance Sheet                                                                                   32

                Consolidated Statement of Shareowner's Common Equity and Comprehensive Income                                34

                Notes to Consolidated Financial Statements                                                                   35

      Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations                        39

      Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                   42
</TABLE>
<PAGE>

                          Table of Contents (cont'd)
                          -------------------------

<TABLE>
<CAPTION>
                                                                                                                             Page
                                                                                                                             ----
<S>                                                                                                                      <C>
        PPL Montana, LLC and Subsidiaries

            Item 1.   Financial Statements

                      Consolidated Statement of Income                                                                         44

                      Consolidated Statement of Cash Flows                                                                     45

                      Consolidated Balance Sheet                                                                               46

                      Consolidated Statement of Member's Equity and Comprehensive Income                                       47

                      Notes to Consolidated Financial Statements                                                               48

            Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations                    54

            Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                               58


   PART II. OTHER INFORMATION

            Item 1.   Legal Proceedings                                                                                        59

            Item 4.   Submission of Matters to a Vote of Security Holders                                                      59

            Item 6.   Exhibits and Reports on Form 8-K                                                                         59

   SIGNATURES                                                                                                                  61

   COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES                                                                           63
</TABLE>
<PAGE>

                      GLOSSARY OF TERMS AND ABBREVIATIONS



BG&E - Baltimore Gas & Electric Company.

CEMAR - Companhia Energetica do Maranhao, a Brazilian electric distribution
company in which PPL Global has a majority ownership interest.

CGE - Compania General Electricidad, SA, a distributor of energy in Chile and
Argentina, in which PPL Global has a minority ownership interest.

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

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

Customer Choice Act - (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 - Pennsylvania Department of Environmental Protection.

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

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

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

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

DRIP - Dividend reinvestment plan.

Emel - Empresas Emel, S.A., a Chilean electric distribution holding company of
which PPL Global has majority ownership.

EPA - Environmental Protection 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) - federal agency that regulates
interstate transmission and wholesale sales of electricity and related matters.

Hyder - Hyder limited, a subsidiary of WPDL and previous owner of South Wales
Electricity plc. In March 2001, South Wales Electricity plc was sold to WPDH.

ICP - Incentive Compensation Plan.

IRS - Internal Revenue Service.

ISO - Independent System Operator.

LIBOR - London Interbank Offered Rate.

Mirant - Mirant Corporation, formerly Southern Energy Inc., a diversified energy
company based in Atlanta. PPL Global and Mirant jointly own WPDH and WPD
Investment Holdings Ltd, the parent company of WPDL.

Montana Power - The Montana Power Company, a Montana-based company engaged in
diversified energy and communication-related businesses. Montana Power sold its
generating assets to PPL Montana in December 1999.

MPSC - Montana Public Service Commission.

NOx - nitrogen oxide.

NPDES - National Pollutant Discharge Elimination System.

NRC (Nuclear Regulatory Commission) - federal agency that regulates operation of
nuclear power facilities.

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

PCB (Polychlorinated Biphenyl) - additive to oil used in certain electrical
equipment up to the late-1970s. Now classified as a hazardous chemical.

PEPS Units (Premium Equity Participating Security Units) - securities issued by
PPL Capital Funding Trust I, consisting of a trust preferred security and a
forward contract to purchase PPL Corporation common stock.
<PAGE>

PJM (PJM Interconnection, LLC) - operates the electric transmission network and
electric energy market in the mid-Atlantic region of the U.S.

PLR - provider of last resort, referring to PPL Electric providing electricity
to retail customers within its delivery territory who have chosen not to shop
for electricity under the Customer Choice Act.

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

PPL Capital Funding - PPL Capital Funding, Inc., a PPL financing subsidiary.

PPL Capital Funding Trust I - a PPL Capital Funding subsidiary.

PPL Electric - PPL Electric Utilities Corporation, a regulated 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, which is a subsidiary of
PPL and the parent of PPL Energy Supply.

PPL EnergyPlus - PPL EnergyPlus, LLC, an unregulated subsidiary of PPL Energy
Supply, which markets wholesale and retail electricity, and supplies energy and
energy services in newly deregulated markets.

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

PPL Gas Utilities - PPL Gas Utilities Corporation, a regulated subsidiary of PPL
specializing in natural gas distribution, transmission and storage services, and
the sale of propane.

PPL Generation - PPL Generation, LLC, an unregulated subsidiary of PPL Energy
Supply which, effective July 1, 2000, owns and operates U.S. generating
facilities through various subsidiaries.

PPL Global - PPL Global, LLC, an unregulated subsidiary of PPL Energy Supply,
which invests in and develops domestic and international power projects, and
owns and operates international projects.

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


PPL Maine - PPL Maine, LLC, formerly Penobscot Hydro, LLC, which is a subsidiary
of PPL Generation.

PPL Martins Creek - PPL Martins Creek, LLC, a fossil generation subsidiary of
PPL Generation.

PPL Montana - PPL Montana, LLC, an unregulated subsidiary which generates
electricity for wholesale sales in Montana and the Northwest, and a subsidiary
of PPL Generation.

PPL Montour - PPL Montour, LLC, a fossil generation subsidiary of PPL
Generation.

PPL Services - PPL Services Corporation, an unregulated subsidiary of PPL which
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 wholly-owned
subsidiary of PPL Electric, formed to issue transition bonds under the Customer
Choice Act.

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

RMC - Risk Management Committee.

RTO - regional transmission organization.

SCR - selective catalytic reduction.

SEC - Securities and Exchange Commission.

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

SNCR - selective non-catalytic reduction.

SO2 - sulfur dioxide.

Superfund - federal and state environmental legislation that addresses
remediation of contaminated sites.

Synfuel projects - production facilities that manufacture synthetic fuel from
coal or coal byproducts. Favorable federal tax credits are available on
qualified synfuel products.

UGI - UGI Corporation.
<PAGE>

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

WPDH - WPD Holdings UK, a jointly owned subsidiary of PPL Global and Mirant.
WPDH owns WPD and Westen Power Distribution (South Wales) plc.

WPDL - Western Power Distribution Limited, a wholly owned subsidiary of WPD
Investment Holdings Ltd. which is a jointly owned subsidiary of PPL Global and
Mirant. WPDL owns 100% of the common shares of Hyder.
<PAGE>

                          Forward-looking Information

Certain 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 Electric and PPL Montana believe that
the expectations and assumptions reflected in these statements are reasonable,
there can be no assurance that these expectations will prove to have been
correct. These forward-looking statements involve a number of risks and
uncertainties, and actual results may differ materially from the results
discussed in the forward-looking statements. In addition to the specific factors
discussed in the Management's Discussion and Analysis of the Financial Condition
and Results of Operations sections herein, the following are among the important
factors that could cause actual results to differ materially from the
forward-looking statements: market demand and prices for energy, capacity and
fuel; weather variations affecting customer energy usage; competition in retail
and wholesale power markets; the effect of any business or industry
restructuring; the profitability and liquidity of PPL and its subsidiaries; new
accounting requirements or new interpretations or applications of existing
requirements; operating performance of plants and other facilities;
environmental conditions and requirements; system conditions and operating
costs; development of new projects, markets and technologies; performance of new
ventures; political, regulatory or economic conditions in states or countries
where PPL or its subsidiaries conduct business; receipt of necessary
governmental approvals; capital market conditions; stock price performance;
foreign exchange rates; 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
Electric and PPL Montana 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 Electric or PPL Montana 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 Electric and PPL Montana undertake no obligations to update
the information contained in such statement to reflect subsequent developments
or information.

                                       1
<PAGE>

                     (THIS PAGE LEFT BLANK INTENTIONALLY.)

                                       2
<PAGE>

                       PPL CORPORATION AND SUBSIDIARIES

                                       3
<PAGE>

PPL CORPORATION AND SUBSIDIARIES
--------------------------------
Part 1. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
----------------------------

In the opinion of PPL, the unaudited financial statements included herein
reflect all adjustments necessary to present fairly the Consolidated
Balance Sheet as of June 30, 2001 and December 31, 2000, and the
Consolidated Statement of Income, Consolidated Statement of Cash Flows
and Consolidated Statement of Shareowners' Common Equity and
Comprehensive Income for the periods ended June 30, 2001 and 2000.

CONSOLIDATED STATEMENT OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, except per share data)

<TABLE>
<CAPTION>
                                                                                    Three Months Ended     Six Months Ended
                                                                                         June 30,              June 30,
                                                                                 ------------------------ ----------------------
                                                                                    2001         2000        2001        2000
                                                                                 -----------  ----------- ----------- ----------
<S>                                                                              <C>          <C>         <C>         <C>
 Operating Revenues
   Retail electric and gas.....................................................   $   792       $   711   $  1,748    $ 1,556
   Wholesale energy marketing and trading......................................       437           491        906        953
   Energy related businesses...................................................       180            95        321        201
                                                                                 -----------  ----------- ----------- ----------
   Total.......................................................................     1,409         1,297      2,975      2,710
                                                                                 -----------  ----------- ----------- ----------

 Operating Expenses
   Operation
      Fuel.....................................................................       127           109        314        254
      Energy purchases.........................................................       427           484        823        947
      Other....................................................................       198           146        382        315
      Amortization of recoverable transition costs.............................        55            46        126        109
   Maintenance.................................................................        88            75        142        124
   Depreciation................................................................        64            70        127        138
   Taxes, other than income....................................................        39            43         80         94
   Energy related businesses...................................................       162            83        276        168
                                                                                 -----------  ----------- ----------- ----------
   Total.......................................................................     1,160         1,056      2,270      2,149
                                                                                 -----------  ----------- ----------- ----------

 Operating Income..............................................................       249           241        705        561

 Other Income - net............................................................         5             8          9          7
                                                                                 -----------  ----------- ----------- ----------

 Income Before Interest, Income Taxes and Minority Interest....................       254           249        714        568

 Interest Expense..............................................................        88            92        192        180
                                                                                 -----------  ----------- ----------- ----------

 Income Before Income Taxes and Minority Interest..............................       166           157        522        388

 Income Taxes..................................................................        35            58        161        140

 Minority Interest.............................................................         1                        3          1
                                                                                 -----------  ----------- ----------- ----------

 Net Income Before Dividends on Preferred Securities...........................       130            99        358        247

 Dividends - Preferred Securities..............................................        13             7         19         13
                                                                                 -----------  ----------- ----------- ----------

 Net Income Available for Common Stock.........................................   $   117       $    92   $    339    $   234
                                                                                 ===========  =========== =========== ==========

 Earnings Per Share of Common Stock
   Basic.......................................................................   $  0.80       $  0.64   $   2.33    $  1.63
   Diluted.....................................................................   $  0.80       $  0.64   $   2.31    $  1.63

 Dividends Declared per Share of Common Stock..................................   $ 0.265       $ 0.265   $   0.53    $  0.53
</TABLE>

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

                                       4
<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                                 Six Months Ended
                                                                                                     June 30,
                                                                                             -------------------------
                                                                                                2001            2000
                                                                                             ---------       ---------
<S>                                                                                          <C>             <C>
Net Cash Provided by Operating Activities.................................................   $     203       $     254

Cash Flows From Investing Activities
     Expenditures for property, plant and equipment.......................................        (207)           (214)
     Investment in electric energy projects...............................................        (190)           (418)
     Sale of nuclear fuel to trust........................................................                          27
     Repayment of notes receivable from affiliates........................................         210
     Other investing activities - net.....................................................          (3)
                                                                                             ---------       ---------
        Net cash used in investing activities.............................................        (190)           (605)
                                                                                             ---------       ---------

Cash Flows From Financing Activities
     Issuance of company-obligated mandatorily redeemable preferred securities............         575
     Issuance of long-term debt...........................................................                         800
     Issuance of common stock.............................................................          42              13
     Retirement of long-term debt.........................................................        (350)           (275)
     Deposit of funds for the retirement of long-term debt................................          (5)
     Termination of nuclear fuel lease....................................................                        (154)
     Payment of common and preferred dividends............................................         (90)            (86)
     Net increase (decrease) in short-term debt...........................................        (473)            128
     Payments on capital lease obligations................................................                         (11)
     Other financing activities - net.....................................................         (24)             18
                                                                                             ---------       ---------
        Net cash provided by (used in) financing activities...............................        (325)            433
                                                                                             ---------       ---------

Net Increase (Decrease) In Cash and Cash Equivalents......................................        (312)             82
Cash and Cash Equivalents at Beginning of Period..........................................         480             133
                                                                                             ---------       ---------
Cash and Cash Equivalents at End of Period................................................   $     168       $     215
                                                                                             =========       =========
</TABLE>

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

                                       5
<PAGE>

CONSOLIDATED BALANCE SHEET
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                               June 30,      December 31,
                                                                                                 2001            2000
                                                                                             ------------    ------------
Assets
<S>                                                                                          <C>             <C>
Current Assets
     Cash and cash equivalents...........................................................       $     168       $     480
     Accounts receivable (less reserve:  2001, $67; 2000, $70)...........................             550             588
     Notes receivable from affiliated companies..........................................                             114
     Unbilled revenues...................................................................             237             279
     Fuel, materials and supplies - at average cost......................................             243             197
     Prepayments.........................................................................              78              40
     Deferred income taxes...............................................................              49              75
     Unrealized derivative gains.........................................................             256              79
     Other...............................................................................              99              93
                                                                                                ---------       ---------
                                                                                                    1,680           1,945
                                                                                                ---------       ---------

Investments
     Investments in unconsolidated affiliates - at equity................................             736             800
     Investments in unconsolidated affiliates - at cost..................................             130              46
     Nuclear plant decommissioning trust fund............................................             273             268
     Other...............................................................................              52              47
                                                                                                ---------       ---------
                                                                                                    1,191           1,161
                                                                                                ---------       ---------

Property, Plant and Equipment - net
     Electric utility plant in service
         Transmission and distribution...................................................           2,811           2,841
         Generation......................................................................           2,341           2,177
         General.........................................................................             295             294
                                                                                                ---------       ---------
                                                                                                    5,447           5,312
     Construction work in progress.......................................................             258             261
     Nuclear fuel........................................................................             114             123
                                                                                                ---------       ---------
         Electric utility plant..........................................................           5,819           5,696
     Gas and oil utility plant...........................................................             190             177
     Other property......................................................................              72              75
                                                                                                ---------       ---------
                                                                                                    6,081           5,948
                                                                                                ---------       ---------

Regulatory and Other Noncurrent Assets
     Recoverable transition costs........................................................           2,299           2,425
     Other...............................................................................             911             881
                                                                                                ---------       ---------
                                                                                                    3,210           3,306
                                                                                                ---------       ---------

                                                                                                $  12,162       $  12,360
                                                                                                =========       =========
</TABLE>

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

                                       6
<PAGE>

CONSOLIDATED BALANCE SHEET
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                              June 30,      December 31,
                                                                                                2001            2000
                                                                                             ---------      ------------

Liabilities and Equity
<S>                                                                                          <C>             <C>
Current Liabilities
    Short-term debt.......................................................................   $     564        $     902
    Notes payable to affiliated companies.................................................                          135
    Long-term debt........................................................................         353              317
    Above market NUG contracts............................................................          90               93
    Accounts payable .....................................................................         387              506
    Taxes.................................................................................         104              223
    Interest..............................................................................          37               42
    Dividends ............................................................................          52               45
    Unrealized derivative losses..........................................................         197               84
    Other ................................................................................         156              164
                                                                                             ---------        ---------
                                                                                                 1,940            2,511
                                                                                             ---------        ---------

Long-term Debt............................................................................       4,081            4,467
                                                                                             ---------        ---------

Deferred Credits and Other Noncurrent Liabilities
    Deferred income taxes and investment tax credits......................................       1,409            1,412
    Above market NUG contracts............................................................         537              581
    Other.................................................................................         964              976
                                                                                             ---------        ---------
                                                                                                 2,910            2,969
                                                                                             ---------        ---------

Commitments and Contingent Liabilities....................................................
                                                                                             ---------        ---------

Minority Interest.........................................................................          58               54
                                                                                             ---------        ---------

Company-obligated Mandatorily Redeemable Preferred Securities of
     Subsidiary Trust Holding Solely Company Debentures...................................         825              250
                                                                                             ---------      -----------

Preferred Stock
    With sinking fund requirements........................................................          46               47
    Without sinking fund requirements.....................................................          50               50
                                                                                             ---------        ---------
                                                                                                    96               97
                                                                                             ---------        ---------
Shareowners' Common Equity
    Common stock..........................................................................           2                2
    Capital in excess of par value........................................................       1,937            1,895
    Treasury stock........................................................................        (836)            (836)
    Earnings reinvested...................................................................       1,260              999
    Accumulated other comprehensive income................................................         (75)             (36)
    Capital stock expense and other.......................................................         (36)             (12)
                                                                                             ---------        ---------
                                                                                                 2,252            2,012
                                                                                             ---------        ---------

                                                                                             $  12,162        $  12,360
                                                                                             =========        =========
</TABLE>

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

                                       7
<PAGE>

CONSOLIDATED STATEMENT OF SHAREOWNERS' COMMON EQUITY AND
COMPREHENSIVE INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                        Three Months Ended      Six Months Ended
                                                                                             June 30,               June 30,
                                                                                       -------------------    -------------------
                                                                                         2001       2000        2001       2000
                                                                                       --------   --------    --------   --------
<S>                                                                                    <C>        <C>         <C>        <C>
Common stock at beginning of period..............................................      $      2   $      2    $      2   $      2
                                                                                       --------   --------    --------   --------
Common stock at end of period....................................................             2          2           2          2
                                                                                       --------   --------    --------   --------

Capital in excess of par value at beginning of period............................         1,919      1,860       1,895      1,860
       Common stock issued.......................................................            18         13          42         13
                                                                                       --------   --------    --------   --------
Capital in excess of par value at end of period..................................         1,937      1,873       1,937      1,873
                                                                                       --------   --------    --------   --------

Treasury stock at beginning of period............................................          (836)      (836)       (836)      (836)
                                                                                       --------   --------    --------   --------
Treasury stock at end of period..................................................          (836)      (836)       (836)      (836)
                                                                                       --------   --------    --------   --------

Earnings reinvested at beginning of period.......................................         1,182        758         999        654
       Net income available for common stock (b).................................           117         92         339        234
       Cash dividends declared on common stock...................................           (39)       (38)        (78)       (76)
                                                                                       --------   --------    --------   --------
Earnings reinvested at end of period.............................................         1,260        812       1,260        812
                                                                                       --------   --------    --------   --------

Accumulated other comprehensive income (loss) at beginning of period.............          (253)       (35)        (36)       (55)
       Unrealized (loss) on available-for-sale securities (b)....................            (1)                    (3)
       Foreign currency translation adjustments (b)..............................           (46)       (28)        (71)        (8)
       Unrealized gain on qualifying derivatives (b).............................           225                     35
                                                                                       --------   --------    --------   --------
Accumulated other comprehensive income (loss) at end of period...................           (75)       (63)        (75)       (63)
                                                                                       --------   --------    --------   --------

Capital stock expense and other at beginning of period...........................           (12)       (12)        (12)       (12)
       Issuance costs and other charges to issue PEPS Units......................           (24)                   (24)
                                                                                       --------   --------    --------   --------
Capital stock expense and other at end of period.................................           (36)       (12)        (36)       (12)
                                                                                       --------   --------    --------   --------

Total Shareowners' Common Equity.................................................      $  2,252   $  1,776    $  2,252   $  1,776
                                                                                       ========   ========    ========   ========

Common stock shares at beginning of period (a)...................................       145,623    143,697     145,041    143,697
       Common stock issued through the DRIP, ICP and structured
           equity program........................................................           410        603         992        603
                                                                                       --------   --------    --------   --------
Common stock shares at end of period.............................................       146,033    144,300     146,033    144,300
                                                                                       ========   ========    ========   ========

(a)    In thousands.  $.01 par value,  390 million shares  authorized.  Each
       share entitles the  holder  to one  vote on any  question  presented
       to any  shareowners' meeting
(b)    Statement of Comprehensive Income:
       Net income available for common stock.....................................      $    117   $     92    $    339   $    234
       Other comprehensive income, net of tax:
           Foreign  currency  translation  adjustments,  net of tax  (benefit)
           of $(3), $(9), $(13), $(7)............................................           (46)       (28)        (71)        (8)
           Unrealized  gain on  qualifying  derivatives,  net of tax  (benefit)
           of $149, $17..........................................................           225                     35
           Unrealized (loss) on available-for-sale securities, net of tax
           (benefit) of $(0), $(2)...............................................            (1)                    (3)
                                                                                       --------   ---------   --------   --------
           Total other comprehensive income (loss)...............................           178        (28)        (39)        (8)
                                                                                       --------   ---------   --------   --------
       Comprehensive Income......................................................      $    295   $     64    $    300   $    226
                                                                                       ========   =========   ========   ========
</TABLE>

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

                                       8
<PAGE>

                                PPL CORPORATION

                  Notes to Consolidated Financial Statements
                  ------------------------------------------


Terms and abbreviations appearing in Notes to Consolidated Financial Statements
are explained in the glossary.

1.  Interim Financial Statements

Certain information in footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the U.S., has been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the SEC. These financial statements should be read in
conjunction with the financial statements and notes included in PPL's Annual
Report to the SEC on Form 10-K for the year ended December 31, 2000. Note 17 to
the Financial Statements in that report describes the corporate realignment
effected on July 1, 2000.

Certain amounts in the June 30, 2000 and December 31, 2000 financial statements
have been reclassified to conform to the presentation in the June 30, 2001
financial statements.

2.  Segment and Related Information

PPL's reportable segments are Supply, Delivery, International and Corporate. The
Supply group includes the domestic energy marketing and generation operations of
PPL EnergyPlus and PPL Generation, respectively. The Supply group also includes
domestic development operations. The Delivery group includes the regulated
electric and gas delivery operations of PPL Electric and PPL Gas Utilities. The
International group includes the following operations of PPL Global: the
acquisition and development of international energy projects, and the ownership
and operation of international energy projects. The majority of PPL Global's
international investments are located in the U.K., Chile, El Salvador and
Brazil. Corporate includes interest expense not directly allocated to the
segments. In prior periods such interest was allocated for segment reporting
purposes. Segments, other than Corporate, include direct charges, as well as an
allocation of indirect corporate costs, for services provided by PPL Services.
These services costs include functions such as financial, legal, human
resources, and information services.

Previously, there was a "Development" group that included the activities now
reflected in the "International" group and the domestic development operations,
now part of the "Supply" group.

Previously reported information has been restated to conform to the current
presentation. Financial data for PPL's business segments are as follows
(millions of dollars):

                             Three Months        Six Months
                            Ended June 30,     Ended June 30,
                           ------------------ -----------------
                             2001     2000     2001     2000
                           ------------------ -------- --------
Income Statement data
Revenues from external
 customers

   Supply...............   $  944   $  891   $1,982   $1,880
   Delivery.............      326      277      692      599
   International........      139      129      301      231
                           ------   ------   ------   ------
                            1,409    1,297    2,975    2,710
                           ======   ======   ======   ======

Intersegment revenues
   N/A - There are no intersegment revenues.

Net Income
  Supply................       93       67      259      171
  Delivery..............       21       21       62       53
  International.........       15       11       38       23
  Corporate.............      (12)      (7)     (20)     (13)
                            -----    -----    -----    -----
                            $ 117    $  92      339    $ 234
                            =====    =====    =====    =====

                             June 30, 2001    December 31, 2000
                             -------------    -----------------
Balance Sheet data
Total assets
   Supply....................   $ 3,371           $ 3,348
   Delivery..................     5,724             6,049
   International.............     2,097             2,246
   Corporate.................       970               717
                                -------           -------
                                $12,162           $12,360
                                =======           =======

3   Investment in Unconsolidated Affiliates - at Equity

PPL's investments in unconsolidated affiliates accounted for under the equity
method were $736 million and $800 million at June 30, 2001 and December 31,
2000, respectively. The most significant investment was PPL Global's investment
in WPDH, which was $455 million at June 30, 2001 and $479 million at December
31, 2000. At June 30, 2001, PPL Global had a 51% equity ownership interest in
WPDH, but shared joint control with Mirant. Accordingly, PPL Global accounts for
its investment in WPDH (and other investments where it has majority ownership
but lacks voting control) under the equity method of accounting.

Summarized below is information from the financial statements of unconsolidated
affiliates, as included in PPL's consolidated financial statements under the
equity method for the periods noted (millions of dollars):

                                       9
<PAGE>

                             Three Months        Six Months
                            Ended June 30,     Ended June 30,
                           ----------------   -----------------
                             2001     2000     2001     2000
                           ----------------   -------- --------
Income Statement data

Revenues................    $ 156    $ 111    $ 332    $ 252
Operating Income........       80       62      167      127
Net Income..............       65       41      144       85

                                   June 30,    December 31,
                                     2001         2000
                                     ----         ----
Balance Sheet Data
Current Assets.................... $  868       $  396
Noncurrent Assets.................  4,533        4,904
Current Liabilities...............    443          409
Noncurrent Liabilities............  3,541        3,365

4.  Earnings Per Share

Basic EPS is calculated by dividing earnings available to common shareowners
("Net Income Available for Common Stock" on the Consolidated Statement of
Income) by the weighted average number of common shares outstanding during the
period. In the calculation of diluted EPS, weighted average shares outstanding
are increased for additional shares that would be outstanding if potentially
dilutive securities were converted to common stock.

Potentially dilutive securities for PPL consist of stock options granted under
the incentive compensation plans, stock units representing common stock granted
under directors compensation programs, and PEPS Units.

The basic and diluted earnings per share calculations, and the reconciliation of
the shares used in the calculations, are shown below:

                                 Three Months          Six Months
                                Ended June 30,       Ended June 30,
                              ------------------  -------------------
                                2001     2000        2001     2000
                              ------------------  ---------- --------

(Millions of Dollars or Thousands of Shares)

Net Income Available for Common
Stock (Numerator)........  $    117  $     92    $    339  $     234

Shares (Denominator)
Number of shares on
which basic earnings per
share is calculated =
Weighted-average shares
outstanding during the
period...................   145,901   144,137     145,608    143,948

Add: Incremental shares
attributable to stock
options..................       730        36         794          8

Add: Incremental shares
attributable to stock
units....................        69        61          69         61

Number of shares on
which diluted earnings per
share is calculated......   146,700   144,234     146,471    144,017

Basic EPS................  $    .80  $    .64    $   2.33  $    1.63

Diluted EPS..............  $    .80  $    .64    $   2.31  $    1.63


In May 2001, PPL issued 23 million PEPS Units that contain a purchase contract
component for PPL's common stock, as detailed in Note 7. The PEPS Units will
only be dilutive if the average price of PPL's common stock exceeds $65.03 for
any period. Therefore, they were excluded from the diluted earnings per share
calculations for the three and six months ended June 30, 2001.

Stock options to purchase 607,790 and 1,975,750 common shares for the three and
six months ended June 30, 2000, respectively, were not included in those
periods' computations of diluted earnings per share because the exercise price
of the options was greater than the average market price of the common shares.
Therefore, the effect would have been antidilutive.

5.  Financial Instruments

PPL enters into forward-starting interest rate swaps with various counterparties
to hedge interest rate risk associated with anticipated debt issuances. These
swaps obligate PPL to pay a specific fixed rate of interest on the notional
amount of each swap in exchange for a floating rate of interest on the notional
amount, to be determined on the effective date. If interest rates rise, the
swaps increase in value and offset a higher rate of interest on new debt. At
June 30, 2001, PPL had entered into $625 million notional amount of interest
rate swaps with maturities of five to ten years at fixed rates varying from
5.39% to 6.189%. These swaps are scheduled to start in July through October
2001, but PPL intends to terminate them as the associated debt is issued. Any
gains or losses realized when the debt is issued, and the swaps are terminated,
will be amortized over the life of the new debt. The estimated fair value of
these agreements, which represents the amount PPL would receive if it had
terminated these agreements at June 30, 2001, was $11 million.

PPL has also entered into current-starting interest rate swap agreements whereby
PPL agreed to pay a fixed rate of interest and receive a floating rate of
interest. These swaps economically adjust the mix of fixed and floating rate
debt by converting floating rate notes to fixed rate notes. As of June 30, 2001,
PPL had entered into, and had outstanding, $175 million notional amount of such
swaps that mature in 2002. The estimated fair value of these agreements, which
represents the amount

                                       10
<PAGE>

PPL would pay if it had terminated these agreements at June 30, 2001, was $2
million.

During the first quarter of 2001, PPL completed the forward purchase of 51
million euros to pay for certain equipment in 2002 and 2003. The estimated value
of these forward purchases as of June 30, 2001, being the amount PPL would have
to pay to terminate them, was $5 million. Any gains or losses realized when the
transactions close will be amortized over the life of the equipment. PPL also
entered into forward contracts to sell British pounds sterling in anticipation
of the repayment during the second quarter of 2001 of loans to purchase the
Hyder shares. A total of 78 million British pounds sterling were sold forward
for the second quarter. In March 2001, PPL realized gains of $3 million on
maturing positions and entered into new forward sales of a small notional
amount.

6.  Sales to Other Electric Utilities

Under FERC-approved interconnection and power supply agreements, PPL EnergyPlus
supplied capacity and energy to UGI. This agreement was terminated in February
2001.

PPL EnergyPlus had a contract to provide BG&E with 129,000 kilowatts, or 6.6%,
of PPL Susquehanna's share of capacity and related energy from the Susquehanna
station. PPL EnergyPlus provided 407 million kWh to BG&E through May 2001, at
which point the contract ended.

PPL Montana provides power to Montana Power under two wholesale transition sales
agreements. These agreements expire in December 2001 and June 2002. In April
2001, PPL announced that PPL EnergyPlus had offered to provide Montana Power
with 500 megawatts of energy for five years beginning July 1, 2002. PPL
EnergyPlus would sell this energy at 4 cents per kWh to the extent that the
energy is produced by certain designated units of PPL Montana. See Note 14 for
further discussion regarding the proposed supply agreement.

7.  Credit Arrangements and Financing Activities

PPL Electric and PPL Capital Funding issue commercial paper and borrow from
banks to provide short-term funds. PPL Capital Funding's commercial paper is
guaranteed by PPL. Bank borrowings generally bear interest at rates negotiated
at the time of the borrowing. At June 30, 2001, PPL Electric and PPL Capital
Funding had $440 million of short-term debt outstanding at interest rates
ranging from 4.20% to 4.55% per annum.

In December 2000 and in January 2001, PPL Capital Funding entered into two
separate three month $200 million credit facilities. In March 2001, both
facilities were extended to June 2001. At March 31, 2001, PPL Capital Funding
had borrowed $200 million under each facility at floating rates tied to either
one, two or three month LIBOR. These funds were used for general corporate
purposes, including making loans to PPL subsidiaries to reduce their debt
balances. In May 2001, PPL Capital Funding repaid its borrowings under both
facilities and the credit facilities were terminated.

In order to enhance liquidity, and as a credit back-stop to the commercial paper
programs, PPL Electric, PPL Capital Funding and PPL (as guarantor for PPL
Capital Funding) shared a 364-day $750 million credit facility and a five-year
$300 million credit facility, each with a group of banks. During June 2001,
these credit facilities were terminated and replaced with a $400 million PPL
Electric 364-day revolving credit facility and two PPL Energy Supply credit
facilities: a $600 million 364-day facility and a $500 million three-year
facility. In addition, in June 2001, PPL Capital Funding entered into a 364-day
revolving credit facility with PPL Energy Supply. PPL has guaranteed PPL Capital
Funding's obligations under this agreement. At June 30, 2001, no borrowings were
outstanding under any of these facilities.

At March 31, 2001, PPL Capital Funding had caused lenders under its credit
facilities to issue letters of credit in the amount of $186 million and $22
million on behalf of PPL Montana and Griffith Energy, LLC, respectively. During
the second quarter of 2001, the letters of credit in support of PPL Montana were
cancelled and replaced by letters of credit issued directly by lenders under PPL
Montana's credit facility.

PPL Montana has a $100 million three-year credit facility to provide working
capital. As of June 30, 2001, no borrowings were outstanding under this
facility. However, PPL Montana had caused the lenders under such facility to
issue letters of credit on its behalf in the aggregate amount of $21 million.
PPL Montana is required to reimburse such lenders for any drawings under such
letters of credit. In April 2001, PPL Montana also entered into a new $150
million 364-day credit facility. As of June 30, 2001, no borrowings were
outstanding under this facility. In the event that PPL Montana were to draw down
under this facility and cause lenders to issue letters of credit on its behalf,
PPL Montana would be required to reimburse the issuing lenders. PPL has executed
a commitment to the lenders under PPL Montana's $150 million credit facility
that PPL will provide (or cause PPL Energy Supply to provide if PPL Energy
Supply has an investment grade rating on its senior unsecured debt) letters of
credit at such times and in such amounts as are necessary to permit PPL Montana
to remain in compliance with its fixed price forward energy contracts or its
derivative financial instruments entered into to manage energy price risks, to
the extent that PPL Montana cannot provide such letters of credit under its
existing credit agreements.

                                       11
<PAGE>

At June 30, 2001, PPL Capital Funding had issued approximately $1.5 billion of
medium-term notes, of which $1.3 billion were issued at fixed rates between
5.75% and 8.375%, and $175 million at floating rates tied to three-month LIBOR.
There were no issuances of medium-term notes in the first half of 2001.

In March 2001, PPL Electric deposited with its Mortgage Trustee $5 million for
the purpose of retiring, on July 1, 2001, all of its outstanding First Mortgage
Bonds, 9-3/8% Series due 2021, at par value through the maintenance and
replacement fund provisions of its Mortgage. These bonds have been retired.

In March 2001, PPL Electric made a payment of $9.6 million to buy back an option
related to its 6-1/8% Reset Put Securities due 2006. The option would have
permitted a third party to remarket these securities, at higher interest rates,
in May 2001. PPL Electric recorded this charge, net of the $1.8 million balance
remaining on the third party option. The net charge of $7.8 million is included
in "Interest Expense" on the Consolidated Statement of Income for the six months
ended June 30, 2001. PPL Electric retired the $200 million, 6-1/8% Reset Put
Securities in May 2001.

During the first six months of 2001, PPL Transition Bond Company made principal
payments on bonds totaling $129 million.

In December 2000, PPL initiated a Structured Equity Shelf Program for the
issuance of up to $100 million in PPL common stock in small amounts on a
periodic basis. As of June 30, 2001, PPL had issued $16 million of common stock
under this program.

In May 2001, PPL issued 23 million of 7.75% PEPS Units for $575 million. Each
PEPS Unit had an issue price of $25 and consists of a contract to purchase
shares of PPL common stock on or prior to May 18, 2004 and a trust preferred
security of PPL Capital Funding Trust I with a stated liquidation amount of $25.
Each purchase contract yields 0.46% per year in contract adjustment payments,
paid quarterly, on the $25 stated amount of the PEPS Unit and requires the
holders of the contracts to purchase a number of shares of PPL common stock on
or prior to May 18, 2004. The number of shares required to be purchased will
depend on the average market price of PPL's common stock prior to the purchase
date, subject to certain limitations. The holders' obligations to purchase
shares under the purchase contracts may be settled by applying the proceeds of a
remarketing of the trust preferred securities, which have been pledged to secure
these obligations. Each trust preferred security yields 7.29% per year, paid
quarterly, until May 18, 2004. The Trust's sole source of funds for
distributions are from payments of interest on the 7.29% subordinated notes of
PPL Capital Funding, due May 18, 2006, issued to the Trust. The trust preferred
securities will be remarketed during the period beginning on the third business
day immediately preceeding February 18, 2004, and ending prior to the third
business day preceeding May 18, 2004. The interest rate on the subordinated
notes and the yield on the trust preferred securities will be reset at a rate
that will be equal to or greater than 7.29%. PPL has unconditionally guaranteed
the payment of principal and interest on the subordinated notes issued to the
Trust by PPL Capital Funding. PPL has also guaranteed the payments on the trust
preferred securities, to the extent that the Trust has funds available for
payment.

The $575 million of trust preferred securities are included in "Company-
obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust
Holding Solely Company Debentures" on the Consolidated Balance Sheet at June 30,
2001. Net proceeds of $558 million were received, after giving effect to $17
million of issuance expenses. PPL used these proceeds to pay down short-term
debt. The $17 million of issuance expenses were charged to "Capital stock
expense and other" on the Consolidated Balance Sheet, as well as $7 million for
the present value of the estimated liability for contract adjustment payments.

In June 2001, a subsidiary of PPL Generation agreed to partner with an
independent party in a synfuel project. The independent party will install and
operate synthetic fuel production equipment at the Brunner Island and Montour
generating stations. This project is expected to result in annual savings in
fuel costs for PPL Generation. The investment in this project was not
significant.

8.  Acquisitions, Development and Divestitures

Domestic Generation Project

In January 2001, PPL Montour acquired an additional interest in the coal-fired
Conemaugh Power Plant from Potomac Electric Power Company. Under the terms of
the acquisition agreement, PPL Montour and a subsidiary of Allegheny Energy,
Inc. jointly acquired a 9.72% interest in the 1,711-megawatt plant. PPL Montour
paid $78 million for this additional 83-megawatt interest. The purchase
increased PPL Montour's ownership interest to 16.25% in the two-unit plant.

In April 2001, PPL Global announced plans to develop a power plant near
University Park in Chicago, Illinois at an expected cost of approximately $305
million. The plant would be a 540-megawatt, simple-cycle, natural gas-fired
electric generation facility and is expected to be in service by the summer of
2002. PPL Susquehanna also announced plans to increase the capacity of its
Susquehanna nuclear plant by 100 megawatts with the installation of more
efficient steam turbines on each of the two units. These improvements will be
made in the spring of 2003 and 2004 and are expected to cost approximately $120
million.

                                       12
<PAGE>

International Distribution Projects

In January 2001, PPL Global purchased an additional 5.6% of CGE from the Claro
group, bringing its total investment to $141 million, or about 8.5%. CGE
provides electricity delivery service to 1.4 million customers in Chile, and
natural gas delivery service to 200,000 customers in Santiago.

In May 2001, WPDL successfully completed the sale of Hyder's water business,
Welsh Water, to the Welsh firm Glas Cymru Cyfyngedig for one British pound
sterling and the assumption of all of Welsh Water's debt.

Energy Related Businesses

In February 2001, a subsidiary of PPL Energy Services Northeast, Inc. (formerly
Western Massachusetts Holdings, Inc.) executed an agreement acquiring certain
service assets from mechanical contracting and engineering subsidiaries of
NiSource Inc. for an amount that was not significant. Assets acquired include
contracts in process, accounts receivable, fixed assets and intangibles.

In April 2001, PPL Energy Services Northeast acquired two additional mechanical
contracting and engineering firms: Elmsford Sheet Metal Works, Inc. and Westech
International Inc. The purchase prices for these companies, both based in New
York, were not significant.

9.  Commitments and Contingent Liabilities

Wholesale Energy Commitments

As part of the purchase of generation assets from Montana Power, PPL Montana
agreed to supply electricity under two wholesale transition service agreements.
In addition, PPL Montana assumed a power purchase agreement and another power
sales agreement. In accordance with purchase accounting guidelines, PPL Montana
recorded a liability of $118 million as the estimated fair value of the
contracts at the acquisition date. The supply and purchase contracts are
prospectively amortized over the contract terms as adjustments to "Wholesale
energy marketing and trading" revenues and "Energy purchases" respectively, on
the Consolidated Statement of Income. The unamortized balance at June 30, 2001
was $89 million and is included in "Other" in the "Deferred Credits and Other
Noncurrent Liabilities" section of the Consolidated Balance Sheet.

Liability for Above Market NUG Contracts

At June 30, 1998, PPL Electric recorded an $854 million loss accrual for above
market contracts with NUGs. Effective January 1999, PPL Electric began reducing
this liability as an offset to "Energy purchases" on the Consolidated Statement
of Income. This reduction is based on the estimated timing of the purchases from
the NUGs and projected market prices for this generation. The final existing NUG
contract expires in 2014. In connection with the corporate realignment,
effective July 1, 2000, the remaining balance of this liability was transferred
to PPL EnergyPlus. The liabilities associated with these above market NUG
contracts were $627 million at June 30, 2001.

Commitments - Acquisitions and Development Activities

PPL Global and its subsidiaries have committed additional capital and extended
loans to certain affiliates, joint ventures and partnerships in which they have
an interest. At June 30, 2001, PPL Global and its subsidiaries had approximately
$1 billion of such commitments. The majority of these commitments are for the
lease of turbine generators and related equipment for domestic generation
projects.

Nuclear Insurance

PPL Susquehanna is a member of certain insurance programs which provide coverage
for property damage to members' nuclear generating stations. Facilities at the
Susquehanna station are insured against property damage losses up to $2.75
billion under these programs. PPL Susquehanna is also a member of an insurance
program which provides coverage for the cost of replacement power during
prolonged outages of nuclear units caused by certain specified conditions. Under
the property and replacement power insurance programs, PPL Susquehanna could be
assessed retroactive premiums in the event of the insurers' adverse loss
experience. At June 30, 2001, this maximum assessment was about $20 million.

PPL Susquehanna's public liability for claims resulting from a nuclear incident
at the Susquehanna station is limited to about $9.5 billion under provisions of
The Price Anderson Amendments Act of 1988. PPL Susquehanna is protected against
this liability by a combination of commercial insurance and an industry
assessment program. In the event of a nuclear incident at any of the reactors
covered by The Price Anderson Amendments Act of 1988, PPL Susquehanna could be
assessed up to $176 million per incident, payable at $20 million per year.

Environmental Matters

Air
---

The Clean Air Act deals, in part, with acid rain, attainment of federal ambient
ozone standards and toxic air emissions. PPL subsidiaries are in substantial
compliance with the Clean Air Act.

                                       13
<PAGE>

The DEP has finalized regulations requiring further seasonal (May-June) NOx
reductions to 80% from 1990 levels starting in 2003. These further reductions
are based on the requirements of the Northeast Ozone Transport Region Memorandum
of Understanding and two EPA ambient ozone initiatives: the September 1998 EPA
State Implementation Plan (SIP) call (i.e., EPA's requirement for states to
revise their SIPs) issued under Section 110 of the Clean Air Act, requiring
reductions from 22 eastern states, including Pennsylvania; and the EPA's
approval of petitions filed by Northeastern states, requiring reductions from
sources in 12 Northeastern states and Washington D.C., including PPL sources.
The EPA's SIP-call was substantially upheld by the D.C. Circuit Court of Appeals
in an appeals proceeding.

Although the Court extended the implementation deadline to May 2004, the DEP has
not changed its rules accordingly. PPL expects to achieve the 2003 NOx
reductions with the recent installation of SCR technology on the Montour units
and possibly SCR or SNCR on a Brunner Island unit.

The EPA has also developed a revised ambient ozone standard and a new standard
for ambient fine particulates. These standards were challenged and remanded to
the EPA by the D.C. Circuit Court of Appeals in 1999. However, on appeal to the
United States Supreme Court, the D.C. Circuit Court's decision was reversed in
part and remanded to the D.C. Circuit Court. The new particulates standard, if
finalized, may require further reductions in SO2 for certain PPL subsidiaries
and year-round NOx reductions commencing in 2010-2012 at SIP-call levels in
Pennsylvania, and at slightly less stringent levels in Montana. The revised
ozone standard, if finalized, is not expected to have a material effect on
facilities of PPL subsidiaries.

Under the Clean Air Act, the EPA has been studying the health effects of
hazardous air emissions from power plants and other sources, in order to
determine what emissions should be regulated, and has determined that mercury
emissions must be regulated. In this regard, the EPA is expected to develop
regulations by 2004.

In 1999, the EPA initiated enforcement actions against several utilities,
asserting that older, coal-fired power plants operated by those utilities have,
over the years, been modified in ways that subject them to more stringent "New
Source" requirements under the Clean Air Act. The EPA has since issued notices
of violation and commenced enforcement activities against other utilities. At
this time, PPL is unable to predict whether such EPA enforcement actions will be
brought with respect to any of its affiliates' plants. However, the EPA regional
offices that regulate plants in Pennsylvania (Region III) and Montana (Region
VIII) have indicated an intention to issue information requests to all utilities
in their jurisdiction, and the Region VIII office has issued such a request to
PPL Montana's Corette plant. PPL has responded to the information request. PPL
cannot presently predict what, if any, action the EPA might take. The EPA has
reportedly suspended further enforcement activity pending an interagency review
of the "New Source" program. Should the EPA initiate one or more enforcement
actions against PPL, compliance with any such EPA enforcement actions could
result in additional capital and operating expenses in amounts which are not now
determinable, but which could be significant.

The New Jersey Department of Environment Protection and some New Jersey
residents have raised environmental concerns with respect to the Martins Creek
Plant, particularly with respect to SO2 emissions. PPL Martins Creek is
discussing these concerns with the New Jersey Department of Environmental
Protection. The cost of addressing these concerns is not now determinable, but
could be significant.

Water/Waste
-----------

The final NPDES permit for the Montour plant contains stringent limits for iron
discharges. The results of a toxic reduction study show that additional water
treatment facilities or operational changes are needed at this station. A plan
for these changes is being developed and will be submitted to the DEP in the
fall of 2001.

In 2000, the EPA significantly tightened the water quality standard for arsenic.
However, the EPA has now withdrawn the standard in order to further study the
matter. A tightened standard may require PPL subsidiaries to further treat
wastewater and/or take abatement action at several of its power plants, the cost
of which is not now determinable, but which could be significant.

The EPA's proposed requirements for new or modified water intake structures will
affect where generating facilities are built, will establish intake design
standards, and could lead to requirements for cooling towers at new power
plants. These proposed regulations are expected to be finalized by November
2001. The rule could require new or modified cooling towers at one or more PPL
subsidiary stations. Another new rule, expected to be finalized in 2003, will
address existing structures. Each of these rules could impose significant costs
on PPL, which are not now determinable.

Superfund and Other Remediation
-------------------------------

In 1995, PPL Electric entered into a consent order with the DEP to address a
number of sites where it may be liable for remediation. This may include
potential PCB contamination at certain PPL Electric substations and pole sites;
potential contamination at a number of coal gas manufacturing facilities
formerly owned and operated

                                       14
<PAGE>

by PPL Electric; and oil or other contamination which may exist at some of PPL
Electric's former generating facilities. In connection with the July 1, 2000
corporate realignment, PPL Electric's generation facilities were transferred to
subsidiaries of PPL Generation. As of June 30, 2001, work has been completed on
over 80% of the sites included in the consent order.

In 1996, PPL Gas Utilities entered into a similar consent order with the DEP to
address a number of sites where subsidiaries of PPL Gas Utilities may be liable
for remediation. The sites primarily include former coal gas manufacturing
facilities. Subsidiaries of PPL Gas Utilities are also investigating the
potential for any mercury contamination from gas meters and regulators. Any
sites will likely be addressed under the consent order.

At June 30, 2001, PPL Electric and PPL Gas Utilities had separately accrued $5
million and $14 million, respectively, representing the estimated amounts they
will have to spend for site remediation, including those sites covered by each
company's consent orders mentioned above.

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

Under the Montana Power acquisition agreement, PPL Montana is indemnified by
Montana Power for any pre-acquisition environmental liabilities. However, this
indemnification is conditioned on certain circumstances that could result in PPL
Montana and Montana Power sharing in certain costs within limits set forth in
the agreement.

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.

General
-------

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

Credit Support for Affiliated Companies

PPL provides certain guarantees for its subsidiaries. Specifically, PPL
guarantees all of the debt of PPL Capital Funding. As of June 30, 2001, PPL had
guaranteed $1.5 billion of medium-term notes and $425 million of commercial
paper issued by PPL Capital Funding. PPL had also guaranteed certain obligations
of PPL EnergyPlus for up to $839 million under power purchase and sales
agreements. PPL had also guaranteed certain obligations of other subsidiaries,
totaling $588 million at June 30, 2001.

10. Related Party Transactions

PPL Global provided temporary financing to WPDL and WPDH in connection with the
acquisition of Hyder. The outstanding loan receivables and accrued interest,
154.5 million British pounds sterling (approximately $220 million), were repaid
in May 2001.

At December 31, 2000, PPL Global had a $135 million note payable to an affiliate
of WPDH. The note was denominated in U.S. dollars, and provided for interest at
market rates. PPL Global repaid this note in January 2001.

See Note 14 for information regarding the agreement whereby PPL EnergyPlus will
supply electricity to PPL Electric, to meet PPL Electric's PLR obligation.

11. Adoption of SFAS 133

PPL adopted SFAS 133, "Accounting for Derivative Instrument and Hedging
Activities," on January 1, 2001. SFAS 133 requires that every derivative
instrument be recorded on the balance sheet as an asset or liability measured at
its fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
133 requires that as of the date of initial adoption, the difference between the
fair market value of derivative instruments recorded on the balance sheet and
the previous carrying amount of those derivatives be reported in net income or
other comprehensive income, as appropriate.

In accordance with the transition provisions of SFAS 133, PPL recorded a
cumulative-effect adjustment of $11 million in earnings to recognize the
difference between the carrying values and fair values of derivatives not
designated as hedging instruments. The pre-tax adjustments are included as an
increase to "Wholesale energy market and trading" revenues and a decrease to
"Energy purchases" on the Consolidated Statement of Income for the six months
ended June 30, 2001. PPL also recorded a cumulative-effect charge of $182
million in "Accumulated other comprehensive income" in the Shareowners' Common
Equity section of the

                                       15
<PAGE>

Consolidated Balance Sheet to recognize the difference between the carrying
values and fair values of derivatives designated as cash flow hedging
instruments. During the twelve months ended December 31, 2001, PPL expects to
reclassify $145 million into earnings from the transition adjustment that was
recorded in other comprehensive income.

Accounting for Derivatives and Hedging Activities

All derivatives are recognized on the balance sheet at their fair value.
According to SFAS 133, fair value is defined as the amount at which an asset
(liability) could be bought (incurred) or sold (settled) in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. On the date the derivative contract is entered into, PPL
designates the derivative as:

 .    A hedge of the fair value of a recognized asset or liability or of an
     unrecognized firm commitment ("fair value" hedge),

 .    A hedge of a forecasted transaction or of the variability of cash flows to
     be received or paid related to a recognized asset or liability ("cash flow"
     hedge),

 .    A foreign-currency fair-value or cash flow hedge ("foreign currency"
     hedge),

 .    A hedge of a net investment in a foreign operation, or

 .    A non-hedge derivative.

Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a fair value hedge, along with the loss or gain
on the hedged asset or liability that is attributable to the hedged risk, are
recorded in current period earnings along with the loss or gain on the hedged
asset or liability that is attributable to the hedged risk. Changes in the fair
value of a derivative that is highly effective as, and that is designated as and
qualifies as, a cash flow hedge are recorded in other comprehensive income,
until earnings are affected by the variability of cash flows being hedged.
Changes in the fair value of derivatives that are designated as and qualify as
foreign currency hedges are recorded in either current period earnings or other
comprehensive income, depending on whether the hedge transaction is a fair value
hedge or a cash flow hedge. If however, a derivative is used as a hedge of a net
investment in a foreign operation, its changes in fair value, to the extent
effective as a hedge, are recorded in the cumulative translation adjustment
account within equity. Changes in the fair value of derivatives that are not
designated as hedging instruments are reported in current period earnings.

PPL formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objective and strategy for undertaking
various hedge transactions. This process includes linking all derivatives that
are designated as fair value, cash flow or foreign currency hedges to specific
assets and liabilities on the balance sheet or to specific firm commitments or
forecasted transactions. PPL formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items.

PPL discontinues hedge accounting prospectively when it is determined that the
derivative is no longer effective in offsetting changes in the fair value or
cash flows of a hedged item; when the derivative expires or is sold, terminated
or exercised; or when the derivative is dedesignated as a hedge instrument
because it is unlikely that a forecasted transaction will occur or management
determines that designation of the derivative as a hedge instrument is no longer
appropriate.

When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in its fair
value. When hedge accounting is voluntarily discontinued so that the forecasted
transaction can be re-hedged with a new hedging instrument, the derivative will
continue to be carried on the balance sheet at its fair value, and gains and
losses that were accumulated in other comprehensive income will remain until the
hedged forecasted transaction impacts earnings. In all other situations in which
hedge accounting is discontinued, the derivative will be carried at its fair
value on the balance sheet, with changes in its fair value recognized in current
period earnings.

Derivative Instruments and Hedging Activities

PPL's primary market risk exposures are associated with commodity prices,
interest rate risk and currency exchange rates. PPL actively manages the market
risk inherent in its commodity, debt and foreign currency positions. The PPL
Board of Directors has adopted risk management policies to manage the risk
exposures related to energy prices, interest rates and foreign currency exchange
rates. These policies monitor and assist in controlling these market risks and
use derivative instruments to manage some associated commodity, debt, and
foreign currency activities. As of June 30, 2001, PPL held derivative
instruments designated as cash flow hedging instruments.

PPL's derivative activities are subject to the management, direction and control
of the RMC. The

                                      16
<PAGE>

RMC is composed of the chief financial officer and other officers of PPL. The
RMC reports to the Board of Directors on the scope of its derivative activities.
The RMC sets forth risk-management philosophy and objectives through a corporate
policy, provides guidelines for derivative-instrument usage, and establishes
procedures for control and valuation, counterparty credit approval, and the
monitoring and reporting of derivative activity.

Market risk is the adverse effect on the value of a transaction that results
from a change in commodity prices, interest rates or currency exchange rates.
The market risk associated with commodity price, interest rate and foreign
exchange contracts is managed by the establishment and monitoring of parameters
that limit the types and degree of market risk that may be undertaken.

PPL utilizes forward contracts, futures contracts, options and swaps as part of
its risk management strategy to minimize unanticipated fluctuations in earnings
caused by commodity price, interest rate and foreign currency volatility.

PPL maintains a commodity price risk management strategy that uses derivative
instruments to minimize significant, unanticipated earnings fluctuations caused
by commodity price volatility. Fluctuations in electricity, natural gas and oil
commodity prices cause firm commitments for the purchase or sale of these
commodities to develop unrealized gains or losses when compared to current
commodity prices; and actual cash outlays for the purchase of electricity, gas
and oil to differ from anticipated cash outlays. PPL uses forwards, futures,
swaps and options to hedge these risks.

PPL maintains an interest rate risk management strategy that uses derivative
instruments to minimize significant, unanticipated earnings fluctuations caused
by interest rate volatility. Specific goals are to lower the cost of its
borrowed funds and adjust the fixed versus variable composition of its debt
portfolio as warranted. Interest rate fluctuations create an unrealized
appreciation or depreciation in the market value of PPL's debt when compared to
its cost. Gains or losses on derivative instruments that are linked to the debt,
however, will generally offset the effect of this unrealized appreciation or
depreciation in market value. Additionally, interest rate fluctuations can
create an increase or decrease in the interest expense associated with future
anticipated debt issuances. Gains or losses on derivative instruments that are
linked to the anticipated future debt issuance, however, will generally offset
the effect of this increased or decreased future borrowing cost.

PPL maintains a foreign currency risk management strategy that uses derivative
instruments to protect against unanticipated fluctuations in earnings and cash
flows caused by volatility in currency exchange rates. Movements in foreign
currency exchange rates pose a risk to PPL's operations since exchange rate
changes may affect cross-border transactions that involve equipment purchases
made in foreign currencies. Additionally, various subsidiary investments and
repatriated dividends are denominated in foreign currency, thereby creating
exposures to changes in exchange rates. PPL uses foreign-currency forward
exchange contracts to hedge these risks.

By using derivative instruments to hedge exposures to changes in commodity
rates, interest rates and exchange rates, PPL exposes itself to credit risk.
Credit risk is the failure of the counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative contract is positive,
the counterparty owes PPL, which creates repayment risk for PPL. When the fair
value of the derivative contract is negative, PPL owes the counterparty and,
therefore does not possess repayment risk. PPL attempts to mitigate the credit
(or repayment) risk in derivative instruments by entering into transactions with
counterparties who meet credit rating criteria, limiting the amount of exposure
to each counterparty, and monitoring the financial condition of its
counterparties. Additionally, in certain circumstances, PPL obtains credit
enhancements and/or enters into bilateral collateral arrangements.

Fair Value Hedges

PPL enters into financial contracts to hedge a portion of the fair values of
firm commitments to transport fuel to its generating facilities. For the six
months ended June 30, 2001, PPL had no derivative instruments designated as fair
value hedges.

Cash Flow Hedges

PPL enters into physical and financial contracts, including forwards, futures
and swaps, to hedge the price risk associated with electric, gas and oil
commodities. These contracts range in maturity through 2008. For the three and
six months ended June 30, 2001, PPL recorded net-of-tax gains of $219 million
and $22 million, respectively (reported in "Accumulated other comprehensive
income" in the Shareowners' Common Equity section of the Consolidated Balance
Sheet). The most significant portion of these gains is attributable to forward
sales contracts and financial swaps in which PPL has reserved and stands ready
to deliver energy from the planned output of its generating units. In these
cases, PPL will realize a margin that represents the difference between the
sales price and the average cost of generation.

As a result of an unplanned outage and changes in other economic conditions, PPL
discontinued certain cash flow hedges which resulted in net gains of $33 million
and $4 million for the three and six months ended

                                      17
<PAGE>

June 30, 2001, respectively (reported in "Wholesale energy marketing and
trading" revenues in the Consolidated Statement of Income). Additionally, PPL
recognized a $5 million credit to income resulting from cash flow hedge
ineffectiveness.

As of June 30, 2001, the deferred net gains on derivative instruments in
accumulated other comprehensive income that are expected to be reclassified into
earnings during the next twelve months were $15 million. Transactions and events
that are expected to occur over the next twelve months and will necessitate
reclassifying these derivative gains to earnings include the sale of
electricity, and the purchase and sale of natural gas and the purchase of
oil, all of which are facilitated through physical or financial contracts. PPL
expects the majority of these gains to be largely offset by the inverse changes
in the market value of the underlying commodities such as the electricity
generated and the physical gas and oil purchased.

PPL enters into financial interest rate swaps contracts to hedge interest
expense associated with both existing and anticipated debt issuances. These
swaps range in maturity through 2008. For the three and six months ended June
30, 2001, PPL recognized net-of-tax gains of $8 million and $6 million,
respectively (reported as a credits to "Accumulated other comprehensive income"
in the Shareowners' Common Equity section of the Balance Sheet). PPL expects
these gains to be offset through higher interest rates incurred on the issuance
of anticipated debt.

As of June 30, 2001, the deferred net gains on derivative instruments in
accumulated other comprehensive income that are expected to be reclassified into
earnings during the next twelve months were $1 million. Transactions and events
that are expected to occur over the next twelve months and will necessitate
reclassifying these derivative gains to earnings include the related
amortization associated with the issuance of debt and the repricing of variable
rate debt.

PPL enters into foreign currency forward contracts to hedge exchange rates
associated with firm commitments denominated in foreign currencies. These
forwards range in maturity through 2003. For the three and six months ended June
30, 2001, PPL recognized net-of-tax losses of $1 million and $3 million,
respectively (reported as charges to "Accumulated other comprehensive income" in
the Shareowners' Common Equity section of the Balance Sheet). PPL expects these
losses to be offset by an inverse change in the exchange rate of the underlying
commodity, the firm commitment. PPL expects none of these losses to be
reclassified into earnings over the next twelve months.

Implementation Issues

On June 29, 2001, the FASB issued definitive guidance on Derivatives
Implementation Group issue C15: "Scope Exceptions: Normal Purchases and Normal
Sales Exception for Option-Type Contracts and Forward Contracts in Electricity."
Issue C15 provides additional guidance on the classification and application of
SFAS 133 relating to purchases and sales of electricity utilizing forward
contracts and options. This guidance became effective as of July 1, 2001.

Purchases and sales of forward electricity and option contracts that require
physical delivery and which are expected to be used or sold by the reporting
entity in the normal course of business would generally be considered "normal
purchases and normal sales" under SFAS 133. These transactions are outside of
the scope of SFAS 133 and therefore are not required to be marked to fair value
in the financial statements. As a result, Issue C15 guidance applies to forward
transactions classified as cash flow hedges with an after tax gain of $35
million carried in the "Accumulated other comprehensive income" in the
Shareowners' Common Equity section of the Consolidated Balance Sheet, which will
no longer be designated as cash flow hedges, and will be removed from common
equity as the contracts deliver through 2008. Additionally, Issue C15 guidance
applies to forward transactions classified as non-hedge with a before tax gain
of $2 million reported in current earnings as of June 30, 2001. PPL is still
interpreting and evaluating the impact that the application of this guidance
will have upon option contracts classified as non-hedge with an insignificant
before tax gain reported in current earnings as of June 30, 2001.

Unrealized Gains/Losses on Derivatives Qualified as Hedges
(Millions of Dollars)
(After tax)

                                                          June 30, 2001
                                                          -------------
                                                 Three Months        Six Months
                                                     Ended              Ended
                                                 ------------        ----------
Unrealized losses on derivatives
qualified as hedges, beginning of
period:.....................................     $       (190)       $        0

Unrealized gains (losses) arising
during period:
    Cumulative effect of change in
    accounting principle at
    January 1, 2001.........................                               (182)

    Other unrealized gains .................              250               225

    Less: reclassification for gains
    included in net income..................               25                 8
                                                 ------------       -----------
Other comprehensive income..................              225                35
                                                 ------------       -----------


Unrealized gains  on derivatives
qualified as hedges, end of
period                                           $         35       $        35
                                                 ============       ===========

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<PAGE>

12. New Accounting Standards

SFAS 141

On June 30, 2001, the FASB issued SFAS 141, "Business Combinations," which
eliminates the pooling-of-interest method of accounting for business
combinations and requires the use of the purchase method. In addition, it
requires the reassessment of intangible assets to determine if they are
appropriately classified either separately or within goodwill. SFAS 141 is
effective for business combinations initiated after June 30, 2001. PPL adopted
SFAS 141 on July 1, 2001, with no material impact on net income.

SFAS 142

On June 30, 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," which eliminates the amortization of goodwill and other acquired
intangible assets with indefinite economic useful lives. SFAS 142 requires an
annual impairment test of goodwill and other intangible assets that are not
subject to amortization. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The impact of adopting SFAS 142 is not yet determinable, but
may be material.

SFAS 143

On June 30, 2001, the FASB approved SFAS 143, "Accounting for Asset Retirement
Obligations," on the accounting for obligations associated with the retirement
of long-lived assets. SFAS 143 requires a liability to be recognized in the
financial statements for retirement obligations meeting specific criteria.
Measurement of the initial obligation is to approximate fair value with an
equivalent amount recorded as an increase in the value of the capitalized asset.
The asset will be depreciated in accordance with normal depreciation policy and
the liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The potential impact of adopting SFAS 143 is not yet
determinable, but may be material.

13. Sales to California Independent System Operator and to Other Pacific
    Northwest Purchasers

Through subsidiaries, PPL has made approximately $18 million of sales to the
California Independent System Operator ("Cal ISO"), for which PPL has not yet
been paid in full. Given the myriad of electricity supply problems presently
faced by the California electric utilities and the Cal ISO, PPL cannot predict
when it will receive payment. As of June 30, 2001, PPL has fully reserved for
possible underrecoveries of payments for these sales.

Litigation arising out of the California electricity supply situation has been
filed at the FERC and in California courts against sellers of energy to the Cal
ISO. The plaintiffs and intervenors in these proceedings allege abuses of market
power, manipulation of market prices, unfair trade practices and violations of
state antitrust laws, among other things, and seek price caps on wholesale sales
in California and other western power markets, refunds of excess profits
allegedly earned on these sales, and other relief, including treble damages and
attorney's fees. Certain of PPL's subsidiaries have intervened in the FERC
proceedings in order to protect their interests, but have not been named as
defendants in any of the court actions. In addition, attorneys general in
several western states, including California, have begun investigations related
to the electricity supply situation in California and other western states. FERC
currently is considering whether to order refunds for sales made into California
markets, including sales made by PPL subsidiaries. FERC also is considering
whether to order refunds for sales made in the Pacific Northwest, including
sales made by PPL subsidiaries. PPL cannot predict whether any of its
subsidiaries will eventually be the target of any governmental investigation or
named in these lawsuits, refund proceedings or other lawsuits, the outcome of
any such proceeding or whether the ultimate impact on PPL or its subsidiaries of
the electricity supply situation in California and other western states will be
material.

14. Subsequent Events

Strategic Initiative

In April 2001, PPL announced a plan to confirm the structural separation of PPL
Electric from PPL and PPL's other affiliated companies, in a transaction that
enables PPL Electric to reduce business risk by securing a supply contract
adequate for it to meet its PLR obligations, enables PPL EnergyPlus to lock in
an electric supply agreement at current favorable prices, and enables PPL to
raise capital at attractive rates for its unregulated businesses, while allowing
PPL to retain valuable advantages related to operating both energy supply and
energy delivery businesses.

The strategic initiative is designed to substantially reduce PPL Electric's
exposure to volatility in energy prices through 2009 and to reduce its business
and financial risk profile by, among other things, limiting its business
activities to the transmission and distribution of electricity and businesses
related to or arising out of the electric transmission and distribution
businesses.

Under this initiative, PPL Electric is taking the following steps:

 .    PPL Electric has obtained a long-term electric supply contract, at prices
     generally equal to the pre-

                                      19
<PAGE>

     determined "capped" rates under the 1998 PUC settlement order it is
     authorized to charge its PLR customers, to satisfy its PLR obligations to
     retail customers from 2002 through 2009;


 .    PPL Electric will limit its businesses to electric transmission and
     distribution and activities relating to or arising out of those businesses;

 .    PPL Electric will adopt amendments to its Articles of Incorporation and
     Bylaws containing corporate governance and operating provisions designed to
     reinforce its corporate separateness from affiliated companies;

 .    PPL Electric will appoint an independent director to its Board of Directors
     and require the unanimous consent of the Board of Directors, including the
     consent of the independent director, to amendments to these corporate
     governance and operating provisions or to the commencement of any
     insolvency proceeding, including any filing of a voluntary petition in
     bankruptcy or other similar actions;

 .    PPL Electric will appoint an independent compliance administrator to
     review, on a semi-annual basis, its compliance with the new corporate
     governance and operating requirements contained in its amended Articles of
     Incorporation and Bylaws; and

 .    PPL Electric will adopt a plan of division pursuant to the Pennsylvania
     Business Corporation Law. The plan of division will result in two separate
     corporations. PPL Electric will be the surviving corporation and a new
     Pennsylvania corporation will be created. Under the plan of division, $5
     million of cash and certain of PPL Electric's potential liabilities will be
     allocated to the new corporation. PPL will guarantee the obligations of the
     new corporation with respect to such liabilities.

The enhancements to PPL Electric's legal separation from its affiliates are
intended to minimize the risk that a court would order PPL Electric's assets and
liabilities to be substantively consolidated with those of PPL or another
affiliate of PPL in the event that PPL or another PPL affiliate were to become a
debtor in a bankruptcy case. Taken collectively with the other steps in the
strategic initiative to reduce its business risk profile, PPL Electric
anticipates that it can increase the leverage in its capital structure,
replacing higher-cost equity with lower-cost debt, and thus lower its total cost
of capital.

At a special meeting of PPL Electric shareowners held on July 17, 2001, the plan
of division and the amendments to PPL Electric's Articles of Incorporation and
Bylaws referred to above were approved. The plan of division and the amendments
to the Articles of Incorporation and Bylaws will become effective upon filing of
articles of division and the plan of division with the Secretary of State of the
Commonwealth of Pennsylvania. This filing will be made in conjunction with the
issuance of the PPL Electric debt.

Under the Pennsylvania Customer Choice Act, PPL Electric is required to act as a
PLR to provide electricity to its delivery customers who do not select an
alternate supplier. As part of a restructuring settlement with the PUC, PPL
Electric agreed to provide such electricity to such customers at pre-set rates
through 2009. While these generation supply rates vary by customer class, the
settlement provided for average rates ranging from 4.16 cents per kWh in 2001,
increasing to 5.02 cents per kWh in 2009. PPL Electric currently has a full
requirements supply agreement with PPL EnergyPlus designed to enable PPL
Electric to meet this obligation until the end of 2001. Under its existing
contract with PPL Electric, PPL EnergyPlus provides all of PPL Electric's supply
needs at the price cap level through 2001, regardless of the prevailing market
price. As part of the strategic initiative, PPL Electric solicited bids to
contract with energy suppliers to meet its obligation to deliver energy to its
customers from 2002 through 2009.

In June 2001, PPL Electric announced that PPL EnergyPlus was the low bidder,
among six bids examined, and was selected as the company to provide for the
energy supply requirements of PPL Electric from 2002 through 2009. Under this
contract, PPL EnergyPlus will provide electricity at pre-established capped
prices that PPL Electric is authorized to charge its PLR customers, and receive
a $90 million payment by January 1, 2002, to offset differences between the
revenues expected under the capped prices and projected market prices through
the life of the supply agreement (as projected by PPL EnergyPlus at the time of
its bid). The contract results in PPL EnergyPlus having an eight-year contract
at current market prices.

In July 2001, the energy supply contract was approved by the PUC and accepted
for filing by the FERC.

Also in July 2001, PPL Electric filed a shelf registration statement with the
SEC to issue up to $900 million in debt. PPL Electric will use a portion of the
proceeds of any debt issuances under the registration statement to make the $90
million up-front payment to PPL EnergyPlus under the terms of the long-term
energy supply contract, and to repurchase a portion of its common stock from
PPL. The remainder of the proceeds will be used for general corporate purposes.

The common stock repurchase by PPL Electric will make additional capital
available to PPL for PPL's growing, higher-return, unregulated generation
business.

                                      20
<PAGE>

Turbine Leases

In September 2000, a subsidiary of PPL Global entered into a $470 million
operating lease for turbine generators, which in November 2000 was increased to
$550 million to also include related equipment (SCRs, transformers and spare
engines). The turbines are under an operating lease structure that eliminates
PPL's need for cash outlays during the turbine manufacturing process and
diversifies PPL's portfolio. The payment obligations of the PPL Global
subsidiary under this operating lease have been guaranteed by PPL.

In May 2001, another PPL Global subsidiary entered into an operating lease
arrangement, initially for $900 million and increased in July 2001 to $1.06
billion upon syndication, for the development, construction and operation of
several commercial power generation facilities. Certain obligations of the PPL
Global subsidiary under this operating lease have been guaranteed by PPL and PPL
Energy Supply. PPL's guarantee will fall away upon the satisfaction of a number
of conditions, including PPL Energy Supply obtaining specified credit ratings
with respect to its debt.

Energy Supply to Montana Power

PPL Montana has two transition agreements to supply wholesale electricity to
Montana Power. One agreement provides for the sale of 200 megawatts from the
leasehold interest in Colstrip Unit 3 until December 2001. The second agreement
covers Montana Power until its remaining load is zero, but in no event later
than June 2002. In April 2001, PPL announced that PPL EnergyPlus has offered to
provide Montana Power with 500 megawatts of energy to be supplied by PPL
Montana. The delivery term of this new contract would be for five years
beginning July 1, 2002, which is the day after the termination date of the
second transition agreement, pursuant to which PPL Montana supplies energy to
Montana Power to serve its retail load not served by other providers or provided
by Montana Power's remaining generation.

Under the proposed new contract, PPL Montana would be obligated to sell this
energy to Montana Power only to the extent that the energy is produced by
certain designated units of PPL Montana. The price under the contract would be
fixed at 4 cents per kWh. However, if PPL Montana is subjected to significantly
increased costs or regulatory burdens by the MPSC or the Montana Legislature or
any other governmental authority during the contract period, PPL Montana could
pass the resulting costs through to Montana Power as an addition to the contract
price. Also, in that event PPL Montana could terminate the contract. Montana
Power has not accepted the new contract. If PPL EnergyPlus and Montana Power
agree to a contract, it would be submitted to the MPSC and the FERC for review
and approval.

In June 2001, the MPSC issued an order (MPSC Order) in which it found that
Montana Power must continue to provide electric service to its customers at
tariffed rates until its transition plan under the Montana Electricity Utility
Industry Restructuring and Customer Choice Act is finally approved, and that
purchasers of generating assets from Montana Power must provide electricity to
meet Montana Power's full load requirements at prices to Montana Power that
reflect costs calculated as if the generation assets had not been sold. PPL
Montana purchased Montana Power's interest in two coal-fired plants and 11
hydroelectric units in 1999.

In July 2001, PPL Montana filed a complaint against the MPSC with the U.S.
District Court in Helena, Montana, challenging the MPSC Order. In its complaint,
PPL Montana asserted, among other things, that the Federal Power Act preempts
states from exercising regulatory authority over sale of electricity in
wholesale markets, and requested the court to declare the MPSC action preempted,
unconstitutional and void. In addition, the complaint requested that the MPSC be
enjoined from seeking to exercise any authority, control or regulation of
wholesale sales from PPL Montana's generating assets.

At this time, PPL cannot predict the outcome of the proceedings related to the
MPSC Order, whether PPL Montana and Montana Power will reach a new supply
agreement, whether any such agreement will be approved by the MPSC or the FERC
on acceptable terms, what actions the MPSC, the Montana Legislature or any other
governmental authority may take on these or related matters, or the ultimate
impact on PPL and PPL Montana of any of these matters.

                                      21
<PAGE>

                                PPL CORPORATION

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

This discussion should be read in conjunction with the section entitled "Review
of the Financial Condition and Results of Operations" in PPL's Annual Report to
the SEC on Form 10-K for the year ended December 31, 2000. Terms and
abbreviations appearing in Management's Discussion and Analysis of Financial
Condition and Results of Operations are explained in the glossary.

                             Results of Operations
                             ---------------------

The following discussion explains significant changes in principal items on the
Consolidated Statement of Income, comparing the three and six months ended June
30, 2001, to the comparable periods in 2000.

The Consolidated Statement of Income reflects the results of past operations and
is not intended as any indication of future operating results. Future operating
results will necessarily be affected by various and diverse factors and
developments. Furthermore, because results for interim periods can be
disproportionately influenced by various factors and developments and by
seasonal variations, the results of operations for interim periods are not
necessarily indicative of results or trends for the year. Finally, PPL Global
acquired CEMAR in June 2000, and fully consolidated its accounts in September
2000. Accordingly, the results for the first half of 2001 include CEMAR, whereas
the results for the first half of 2000 do not.

Earnings

Earnings per share were $.80 during the three months ended June 30, 2001,
compared with $.64 per share during the same period in 2000. The second quarter
of 2000 benefited from a nonrecurring item of $.04 per share related to an
insurance settlement for environmental liability coverage. Excluding this
nonrecurring item, earnings per share in the second quarter of 2001 were $.20
per share, or 33%, higher than the adjusted earnings of $.60 per share in the
second quarter of 2000.

This earnings improvement was primarily due to higher earnings of PPL Montana,
resulting from increased margins on wholesale energy sales. This reflects higher
wholesale energy prices in the western U.S. The second quarter earnings
improvement also reflects favorable tax credits from synfuel operations. These
earnings improvements were partially offset by a $.17 per share gain on the sale
of emission allowances recorded in the second quarter of 2000.

Earnings per share were $2.33 (or $2.31 diluted) during the six months ended
June 30, 2001, compared with $1.63 per share during the same period in 2000.
After eliminating the aforementioned $.04 per share nonrecurring item, earnings
per share in the first half of 2001 were $.74 per share, or 47%, higher than the
adjusted earnings in the first half of 2000.

This earnings improvement was primarily attributable to the reasons noted above,
as well as higher earnings of PPL Global. This reflects higher equity earnings
in international projects, as well as the equity in earnings of WPDL, which
acquired Hyder in October 2000.

Operating Revenues

Retail Electric and Gas
-----------------------

The increase (decrease) in retail revenues from electric and gas operations was
attributable to the following (millions of dollars):

                                      June 30, 2001 vs. June 30, 2000
                                      -------------------------------
                                         Three Months  Six Months
                                            Ended         Ended
                                           -------       -------
Retail Electric Revenue
    PPL Electric
       electric delivery............       $     1       $     3
       PLR electric generation
       supply.......................            87           136
    PPL EnergyPlus
       electric generation supply...           (40)          (61)
    PPL Global international
       electric delivery............            25            71
    Other...........................            (2)           (4)
                                           -------       -------
                                                71           145
                                           =======       =======

Retail Gas Revenue
    PPL Gas Utilities...............             4            28
    PPL EnergyPlus..................             6            19
                                           -------       -------
                                                10            47
                                           -------       -------

                                           $    81       $   192
                                           =======       =======

Operating revenues from retail electric operations increased by $81 million and
$192 million for the three and six months ended June 30, 2001, respectively,
when compared to the same periods in 2000. PPL Electric revenues as a PLR
increased by $87 million and $136 million for the three and six months ended
June 30, 2001, respectively, due to fewer retail customers shopping for
electricity under Pennsylvania's Customer Choice Act. Revenues from PPL Global
were also higher in both periods, primarily due to revenues of CEMAR. Partially
offsetting these increases were lower PPL EnergyPlus retail revenues. This was
primarily due to expirations of contracts with existing customers and an
increased emphasis on competing in wholesale markets.

                                      22
<PAGE>

Pursuant to the Customer Choice Act and a restructuring settlement with the PUC,
PPL Electric is required, through 2009, to provide electricity at pre-set prices
to its delivery customers who do not select an alternate supplier. While these
supply rates vary by customer class, the settlement provides for average rates
ranging from 4.16 cents per kWh in 2001, increasing to 5.02 per kWh in 2009. As
part of such settlement agreement, PPL Electric also agreed to a cap on its
average transmission and distribution rates of 1.74 cents per kWh through 2004.

Both PPL Gas Utilities and PPL EnergyPlus experienced higher retail gas revenues
during the three and six months ended June 30, 2001, when compared to the same
periods in 2000. PPL Gas Utilities' increase was primarily due to a base rate
increase effective January 1, 2001, and higher off-system sales volumes. PPL
EnergyPlus' increase was primarily due to higher gas prices.

Wholesale Energy Marketing and Trading
--------------------------------------

The increase (decrease) in revenues from wholesale energy marketing and trading
activities was attributable to the following (millions of dollars):

                                June 30, 2001 vs. June 30, 2000
                                -------------------------------
                                Three Months          Six Months
                                    Ended               Ended
                                ------------          ---------
Eastern markets
    Bilateral/Spot market.....  $        (13)         $     (76)
    Cost-based................           (11)               (16)
    Gas & oil.................           (42)               (54)
    Other.....................             3                 (1)
                                ------------          ---------
                                         (63)              (147)

Western markets...............            36                157

Intercompany eliminations.....           (27)               (57)
                                ------------          ---------
                                $        (54)         $     (47)
                                ============          =========

Wholesale energy marketing and trading revenues decreased by $54 million and $47
million for the three and six months ended June 30, 2001, when compared to the
same periods in 2000. Decreases in eastern markets were partially offset by
increases in western markets for both periods.

The decrease in eastern markets was primarily due to lower gas and oil trading
activity, and the expiration of capacity and energy agreements with JCP&L and
BG&E. The decrease in revenues also reflects lower bilateral/spot market sales,
due to unplanned outages, creating fewer opportunities to sell forward and less
trading activity. The increase in western markets was due to higher wholesale
energy prices related to the energy supply shortage in the western U.S.

In June 2001, the FERC instituted a series of price controls designed to
mitigate (or cap) prices in the entire western U.S. as a result of the
California energy crisis. These price controls have had the effect of
significantly lowering spot and forward energy prices in the western U.S.

Energy Related Businesses

Energy related businesses contributed $18 million and $12 million to the
operating income of PPL for the three months ending June 30, 2001 and 2000,
respectively. For the six months ending June 30, 2001 and 2000, these businesses
contributed a total of $45 million and $33 million, respectively, to operating
income. The improvement in 2001 primarily reflects PPL Global's higher equity
earnings from WPDH, and other international investments, and equity in the
earnings of WPDL, which acquired Hyder in September 2000. PPL Global's equity
earnings, net of its development, administrative and general expenses,
contributed an additional $24 million in operating income for the six months
ended June 30, 2001, compared to the same period in 2000. These gains and others
from PPL mechanical contracting and engineering subsidiaries were partially
offset by pre-tax operating losses from synfuel projects. However, after
recording tax credits associated with synfuel operations, the synfuel projects
contributed approximately $11 million to net income for the six months ended
June 30, 2001. (See "Income Taxes" for further information).

Fuel

Fuel costs increased by $18 million and $60 million for the three and six months
ended June 30, 2001, compared with the same periods in 2000.

Electric fuel costs increased by $12 million for the three months ended June 30,
2001, compared with the same period in 2000. The increase was attributed to
higher usage of PPL Generation's oil/gas fired units as well as higher per-unit
costs for this generation. The units were needed to compensate for an unplanned
outage at a coal-fired station. The increase in fossil fuel expense was
partially offset by recognized mark-to-market gains on gas transactions.

Electric fuel increased by $29 million for the six months ended June 30, 2001,
compared with the same period in 2000. The increase was attributed to the
reasons noted above, as well as higher coal prices, partially offset by lower
nuclear fuel costs.

The cost of natural gas and propane increased by $6 million and $31 million for
the three and six months ended June 30, 2001, compared with the same periods in
2000. The second quarter increase reflects higher per-unit prices for gas
purchases. The year-to-date increase reflects higher prices as well as higher
off-system volume due to higher demand.

                                      23
<PAGE>

Energy Purchases

The increase (decrease) in energy purchases was attributed to the following
(millions of dollars):

                                          June 30, 2001 vs. June 30, 2000
                                          -------------------------------
                                          Three Months         Six Months
                                              Ended               Ended
                                          ------------         ----------
Domestic
    Eastern markets.........              $        (65)        $     (157)
    Western markets.........                        (4)                 6

International...............                        12                 27
                                          ------------         ----------
                                          $        (57)        $     (124)
                                          ============         ==========

Energy purchases decreased by $57 million and $124 million during the three and
six months ended June 30, 2001, respectively, compared with the same periods in
2000. These decreases were primarily due to lower eastern market purchases,
partially offset by higher international purchases. The decrease in eastern
markets was attributable to lower quantities of wholesale purchases needed to
supply wholesale load obligations, lower quantities of gas purchases for
wholesale activity, as well as lower purchases for PPL EnergyPlus retail sales.
These decreases were partially offset by recognized losses on certain long-term
forward transactions, an increase in prices for wholesale purchases, and higher
volumes of interchange activity to compensate for an unplanned outage.
International increases were primarily due to energy purchases by CEMAR.

Other Operation Expenses

Other operation expenses increased by $52 million and $67 million for the three
and six months ended June 30, 2001, respectively, when compared with the same
periods in 2000. These increases include a $40 million gain on the sale of
emission allowances recognized by PPL Electric in the second quarter of 2000,
$11 million of CEMAR expenses, and PPL Montana's lease of the Colstrip
generating facilities in the first half of 2001, as opposed to depreciating
these facilities in the first half of 2000. These increases were partially
offset by lower pension costs recorded in 2001. These lower pension costs
resulted from pension investment performance.

Amortization of Recoverable Transition Costs

Amortization of recoverable transition costs increased by $9 million and $17
million, respectively, during the three and six months ended June 30, 2001, when
compared with the same periods in 2000. These increases were primarily due to
the collection of CTC revenues related to prior year CTC deferrals of amounts in
excess of the rate cap.

Maintenance Expenses

Maintenance expenses increased by $13 million and $18 million for the three and
six month periods ended June 30, 2001, respectively, when compared to the same
periods in 2000. These increases were primarily due to higher general
maintenance costs at PPL's fossil plants and refueling outage costs at PPL
Susquehanna. The increase at the fossil plants reflects a wider scope of outage
activities, and the acceleration of other outage work generally completed in the
fall. The increase in refueling outage costs reflects additional overtime and
contractor costs to improve plant equipment reliability, as well as the timing
of refueling outage costs.

Depreciation

Depreciation decreased by $6 million and $11 million for the three and six
months ended June 30, 2001, respectively, when compared to the same periods in
2000. These decreases were primarily due to a change in the estimated economic
remaining useful lives of certain PPL generating plants based on studies done in
conjunction with corporate realignment activities undertaken in early 2000. Also
contributing to the decreases were PPL Montana's sale and leaseback of its
investment in the Colstrip plant in July 2000, and a change in life
characteristics for transmission and distribution property. These reductions in
depreciation expense were partially offset by depreciation of CEMAR's
transmission, distribution and other assets.

Taxes, Other Than Income

Taxes other than income decreased by $4 million and $14 million for the three
and six months ended June 30, 2001, respectively, compared with the same periods
in 2000. These changes were primarily the result of lower gross receipts tax
accruals due to a reduction in the Pennsylvania gross receipts tax rate, and
lower PPL EnergyPlus retail electric revenues in 2001 as compared to 2000.
Property taxes were also lower in 2001 as compared to the same periods in 2000.

Financing Costs

Interest expense decreased by $4 million for the three months ended June 30,
2001, when compared with the same period in 2000. This was primarily the result
of reductions in interest due to the retirement of first mortgage bonds and
transition bonds, and lower levels of short-term debt. These decreases were
partially offset by higher levels of medium-term note balances as compared to
the second quarter of 2000.

Interest expense increased by $12 million for the six months ended June 30,
2001, when compared to the same period in 2000. This increase was primarily the
result of higher levels of medium-term debt and

                                      24
<PAGE>

commercial paper balances, interest expense of CEMAR, and the buy-back of a call
option to re-market securities. These increases were partially offset by
retirements of first mortgage bonds and transition bonds, and lower levels of
short-term debt.

Dividends on preferred securities increased by $6 million for the three and six
months ended June 30, 2001, as compared to the same periods in 2000. This was
primarily due to the issuance of PEPS Units in May 2001.

Income Taxes

Income taxes decreased by $23 million and increased by $21 million for the three
and six months ended June 30, 2001, respectively, when compared to the same
periods in 2000. PPL's pre-tax book income was higher in both periods in 2001.
The increased income tax expense was offset by an adjustment for federal synfuel
tax credits recognized in the second quarter of 2001, following an evaluation of
the IRS' revenue procedures as they apply to the synfuel projects.

                              Financial Condition
                              -------------------

Energy Marketing and Trading Activities

PPL, through PPL EnergyPlus, purchases and sells energy at the wholesale level
under FERC market-based tariffs throughout the U.S. PPL enters into agreements
to market energy and capacity from its generating assets with the expectation of
profiting from market price fluctuations.

If PPL were unable to deliver firm capacity and energy under these agreements,
under certain circumstances it would be required to pay damages. These damages
would be based on the difference between the market price to acquire replacement
capacity or energy and the contract price of the undelivered capacity or energy.
Depending on price volatility in the wholesale energy markets, such damages
could be significant. Extreme weather conditions, unplanned power plant outages,
transmission disruptions, non-performance by counterparties (or their
counterparties) with which it has power contracts, and other factors could
affect PPL's ability to meet its firm capacity or energy obligations, or cause
significant increases in the market price of replacement capacity and 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
non-performance in the future. PPL attempts to mitigate risks associated with
open contract positions by reserving generation capacity to deliver electricity
to satisfy its net firm sales contracts and, when necessary, by purchasing firm
transmission service.

Credit risk relates to the risk of loss that PPL would incur as a result of
non-performance by counterparties pursuant to the terms of their contractual
obligations. PPL maintains credit policies and procedures with respect to
counterparties (including requirements that counterparties meet certain credit
ratings criteria) 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 in the electric and
natural gas industries, including electric utilities, natural gas distribution
companies and other energy marketing and trading companies. These concentrations
of counterparties may impact PPL's overall exposure to credit risk, either
positively or negatively, in that the counterparties may be similarly affected
by changes in economic, regulatory or other conditions. To date, PPL has not
experienced any significant losses due to non-performance by counterparties.
However, given the current electric energy situation in California, PPL has
established a reserve with respect to certain sales to the California ISO for
which PPL has not yet been paid. See Note 13 to the Financial Statements for a
discussion related to the California situation.

Market Risk Sensitive Instruments

Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------

PPL actively manages the market risk inherent in its commodity, debt, and
foreign currency and equity positions as detailed in Note 11 to the Financial
Statements. Nonetheless, adverse changes in commodity prices, interest rates,
foreign currency exchange rates and equity prices may result in losses in
earnings, cash flows and/or fair values. The forward-looking information
presented below provides only estimates of what may occur in the future,
assuming certain adverse market conditions, due to reliance on model
assumptions. As a result, actual future results may differ materially from those
presented. These disclosures are not precise indicators of expected future
losses, but only indicators of reasonably possible losses.

Commodity Price Risk
--------------------

PPL uses various methodologies to simulate forward price curves in the energy
markets to estimate the size and probability of changes in market value
resulting from commodity price movements. The methodologies require several key
assumptions, including selection of confidence levels, the holding period of the
commodity positions, and the depth and applicability to future periods of
historical commodity price information.

As of June 30, 2001, PPL estimated that a 10% adverse movement in market prices
across all geographic areas and time periods could have decreased the value of
its

                                      25
<PAGE>

non-hedge portfolio by approximately $1 million. For PPL's hedge portfolio, a
10% adverse movement in market prices across all geographic areas and time
periods could have decreased the value of its hedge portfolio by approximately
$33 million. However, this would have been offset by an increase in the value of
the underlying commodity, the electricity generated. In addition to commodity
price risk, PPL's commodity positions are also subject to operational and event
risks including, among others, increases in load demand and forced outages at
power plants.

PPL's risk management program is designed to manage the risks associated with
market fluctuations in the price of electricity, natural gas, oil and emission
allowances. PPL's risk management policy and programs include risk
identification and risk limits management, with measurement and controls for
real-time monitoring. PPL has entered into fixed-price forward and option
contracts that required physical delivery of the commodity, exchange-for-
physical transactions and over-the-counter contracts (such as swap agreements
where settlement is generally based on the difference between a fixed and index-
based price for the underlying commodity). PPL expects the use of these
contracts to be ongoing.

PPL also executes these 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.

Commodity Price Risk - PPL Electric
-----------------------------------

Currently, PPL Electric and PPL EnergyPlus have a power sales agreement under
which PPL EnergyPlus sells to PPL Electric, under a predetermined pricing
arrangement, energy, capacity, and ancillary services to fulfill PPL Electric's
PLR obligation through 2001. PPL EnergyPlus has contracted to supply PPL
Electric with long-term power for the period 2002 through 2009. See Note 14 to
the Financial Statements for additional information. As a result, PPL Electric
has shifted any electric price risk relating to its PLR obligation to PPL
EnergyPlus for 2001 through 2009.

Interest Rate Risk
------------------

PPL and its subsidiaries, including PPL Electric, have issued debt to finance
their operations. PPL has also issued debt to provide funds for unregulated
energy investments, which also increases interest rate risk. PPL manages
interest rate risk by using financial derivative products to adjust the mix of
fixed and floating-rate interest rates in its debt portfolios, adjusting the
duration of its debt portfolios and locking in U.S. treasury rates (and interest
rate spreads over treasuries) in anticipation of future financing, when
appropriate. Risk limits under the risk management program are designed to
balance risk exposure to volatility in interest expense and losses in the fair
value of PPL's and PPL Electric's debt portfolio due to changes in the absolute
level of interest rates.

At June 30, 2001, PPL's potential annual exposure to increased interest expense,
based on a 10% increase in interest rates, was estimated at $3 million.

PPL is also exposed to changes in the fair value of its debt portfolio. At June
30, 2001, PPL estimated that its potential exposure to a change in the fair
value of its debt portfolio, through a 10% adverse movement in interest rates,
was $51 million.

PPL utilizes various risk management instruments to reduce its exposure to
adverse interest rate movements for future anticipated financings. While PPL is
exposed to changes in the fair value of these instruments, they are designed
such that any economic loss in value should be offset by interest rate savings
at the time the future anticipated financing is completed. At June 30, 2001, PPL
estimated its potential exposure to a change in the fair value of these
instruments, through a 10% adverse movement in interest rates, was approximately
$23 million.

See Notes 5 and 11 to the Financial Statements for a discussion of financial
derivative instruments outstanding at June 30, 2001.

Foreign Currency Risk
---------------------

PPL Global has investments in international energy-related distribution
facilities. PPL Global is exposed to foreign currency risk primarily through
investments in affiliates in Latin America and Europe. In addition, PPL may make
purchases of equipment in currencies other than U.S. dollars.

PPL has adopted a foreign currency risk management program designed to hedge
foreign currency exposures, including firm commitments, recognized assets or
liabilities, and net investments. At June 30, 2001, PPL had a purchase
obligation for equipment payable in euros. In addition, PPL Global expects the
payment of certain payables in British pounds sterling. Therefore, as of June
30, 2001, PPL had entered into forward contracts for the purchase of 52 million
euros and the sale of 78 million British pounds sterling. See Notes 5 and 11 to
the Financial Statements for additional information.

Nuclear Decommissioning Fund - Securities Price Risk
----------------------------------------------------

PPL Susquehanna maintains trust funds, as required by the NRC, to fund certain
costs of decommissioning the Susquehanna station. As of June 30, 2001, these
funds were invested primarily in domestic equity securities and fixed-rate,
fixed income securities and are reflected at

                                      26
<PAGE>

fair value on PPL's Consolidated Balance Sheet. The mix of securities is
designed to provide returns to be used to fund Susquehanna's decommissioning and
to compensate for inflationary increases in decommissioning costs. However, the
equity securities included in the trusts are exposed to price fluctuation in
equity markets, and the values of fixed rate, fixed income securities are
exposed to changes in interest rates. PPL Susquehanna actively monitors the
investment performance and periodically reviews asset allocation in accordance
with its nuclear decommissioning trust policy statement. A hypothetical 10%
increase in interest rates and a 10% decrease in equity prices would have
resulted in an estimated $18 million reduction in the fair value of the assets
at June 30, 2001.

PPL Electric's restructuring settlement agreement in 1998 provides for the
collection of authorized nuclear decommissioning costs through the CTC.
Additionally, PPL Electric is permitted to seek recovery from customers of up to
96% of any increases in these costs. Under the purchase agreement between PPL
Electric and PPL EnergyPlus, these revenues are passed on to PPL EnergyPlus.
Similarly, these revenues are passed on to PPL Susquehanna under a power
purchase agreement between PPL EnergyPlus and PPL Susquehanna. Therefore, PPL's
securities price risk is expected to remain insignificant.

Acquisitions and Development

At June 30, 2001, PPL Global had investments in foreign facilities, including
consolidated investments in Emel, EC, CEMAR and others. See Note 3 to the
Financial Statements for information on PPL Global's unconsolidated investments
accounted for under the equity method.

See Note 8 to the Financial Statements for information regarding acquisitions
and development activities.

Development activities continue on the Griffith and Wallingford projects,
located near Kingman, Arizona and Wallingford, Connecticut, respectively. These
facilities are expected to be operational during the third quarter of 2001, and
will add in excess of 500 megawatts of capacity.

Also, PPL Global is pursuing the development of a 600-megawatt combined cycle
facility in Lower Mount Bethel, Pennsylvania. The facility, at an estimated cost
of $400-$450 million, is expected to be in service in late 2003 or early 2004,
pending necessary governmental approvals.

Financing Activities

See Notes 7 and 14 to the Financial Statements for a discussion of financing
activities.

Financing and Liquidity

Cash and cash equivalents decreased by $394 million more during the six months
ended June 30, 2001, compared with the same period in 2000. The reasons for this
change were:

 .    A $51 million decrease in cash provided by operating activities, primarily
     due to lower balances of accounts payable, accrued taxes, and accrued
     interest.

 .    A $415 million decrease in cash used in investing activities, primarily due
     to less investment in electric energy projects. Investing activities for
     the six months ended June 30, 2000, included the acquisition of CEMAR.

 .    A $758 million decrease in cash provided by financing activities,
     reflecting a decrease in the net issuance of securities, and a decrease in
     short-term debt.

Financial Indicators

Earnings for 2001 and 2000 were impacted by nonrecurring items. (See "Earnings"
in PPL's Form 10-K for the year ended December 31, 2000 for additional
information.) The following financial indicators reflect the elimination of
these impacts from earnings, and provide an additional measure of the underlying
earnings performance of PPL and its subsidiaries:

<TABLE>
<CAPTION>
                                                        Twelve Months Ended
                                                              June 30,
                                                      -----------------------
                                                         2001   vs.   2000
<S>                                                   <C>           <C>
Earnings per share, diluted,
  as adjusted.........................                $  4.00       $ 2.76
Return on average common equity.......                  30.25%       24.87%
Times interest earned before income
  taxes...............................                   3.24         2.90
Dividends declared per share..........                $  1.06       $ 1.03
</TABLE>


Environmental Matters

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

Increasing Competition

The electric utility industry has experienced, and will continue to experience,
a significant increase in the level of competition in the energy supply market
at both the state and federal level. PPL believes that as deregulation of the
energy industry continues on both the federal and state levels and retail
markets are opened to new participants and new services, competition will
continue to be intense. Additionally, competitive pressures have resulted from
technological advances in power generation and electronic communications, and
the energy markets have become more efficient. Refer

                                       27
<PAGE>

to PPL's Form 10-K for the year ended December 31, 2000 for a discussion of
state and federal activities in this regard.

PPL EnergyPlus serves industrial and commercial customers in Pennsylvania, New
Jersey, Delaware and Montana. PPL EnergyPlus is also licensed to sell energy in
Maine, Maryland and Massachusetts.

In June 2001, the FERC issued orders calling for the formation of one RTO
throughout the Mid-Atlantic region (PJM), New York and New England. In response,
PPL is taking the position that a single northeastern RTO is a significant step
forward in establishing a reliable and properly functioning wholesale
electricity market in the region. PPL strongly supports the most comprehensive
amalgamation of the existing and proposed northeast pools, including the
establishment of a single RTO as well as the elimination of marketplace
distinctions and control area boundaries. FERC's northeastern RTO proceeding is
continuing.

      Item 3. Quantitative and Qualitative Disclosures About Market Risk
      ------------------------------------------------------------------

Reference is made to "Market Risk Sensitive Instruments" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations.

                                       28
<PAGE>

              PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES

                                       29
<PAGE>

PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES
---------------------------------------------------
Part 1. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
----------------------------

In the opinion of PPL Electric, the unaudited financial statements included
herein reflect all adjustments necessary to present fairly the Consolidated
Balance Sheet as of June 30, 2001 and December 31, 2000, and the Consolidated
Statement of Income, Consolidated Statement of Cash Flows, and Consolidated
Statement of Shareowner's Common Equity and Comprehensive Income for the periods
ended June 30, 2001 and 2000. All nonutility operating transactions are included
in "Other Income - net" in PPL Electric's Consolidated Statement of Income.
These financial statements have been impacted by the corporate realignment on
July 1, 2000. See Note 7 to the Financial Statements for additional information.

CONSOLIDATED STATEMENT OF INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                      Three Months Ended       Six Months Ended
                                                                                           June 30,                June 30,
                                                                                   ------------------------ -----------------------
                                                                                      2001         2000        2001        2000
                                                                                   -----------  ----------- ----------- -----------
<S>                                                                                <C>          <C>         <C>         <C>
Operating Revenues
   Retail electric............................................................        $ 564        $  598    $ 1,203      $1,320
   Wholesale energy marketing and trading.....................................           50           404        105         803
   Energy related businesses..................................................           11             4         17          10
                                                                                   -----------  ----------- ----------- -----------
   Total......................................................................          625         1,006      1,325       2,133
                                                                                   -----------  ----------- ----------- -----------

Operating Expenses
   Operation
      Fuel....................................................................                         88                    200
      Energy purchases........................................................          344           388        723         779
      Other...................................................................           62            96        121         237
      Amortization of recoverable transition costs............................           55            46        126         109
   Maintenance................................................................           13            67         26         109
   Depreciation...............................................................           22            58         45         116
   Taxes, other than income...................................................           27            39         55          85
   Energy related businesses..................................................           10             7         16          13
                                                                                   -----------  ----------- ----------- -----------
   Total......................................................................          533           789      1,112       1,648
                                                                                   -----------  ----------- ----------- -----------

Operating Income..............................................................           92           217        213         485

Other Income -  net...........................................................            1            12          5          23
                                                                                   -----------  ----------- ----------- -----------

Income Before Interest and Income Taxes.......................................           93           229        218         508

Interest Expense..............................................................           52            64        114         125
                                                                                   -----------  ----------- ----------- -----------

Income Before Income Taxes....................................................           41           165        104         383

Income Taxes..................................................................           13            63         36         144
                                                                                   -----------  ----------- ----------- -----------

Net Income Before Dividends on Preferred Securities...........................           28           102         68         239

Dividends - Preferred Securities..............................................            7             7         13          13
                                                                                   -----------  ----------- ----------- -----------

Net Income Available for Common Stock.........................................        $  21        $   95    $    55      $  226
                                                                                   ===========  =========== =========== ===========
</TABLE>

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

                                       30
<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                                          Six Months Ended
                                                                                                              June 30,
                                                                                                   ------------------------------
                                                                                                       2001             2000
                                                                                                   -------------   --------------

<S>                                                                                                <C>             <C>
Net Cash Provided by Operating Activities...................................................         $  155          $   258

Cash Flows From Investing Activities
  Expenditures for property, plant and equipment............................................            (65)            (155)
  Sale of nuclear fuel to trust.............................................................                              27
  Net decrease in notes receivable from parent and affiliates...............................             70                6
  Other investing activities - net..........................................................            (10)
                                                                                                 -------------   --------------
     Net cash used in investing activities..................................................             (5)            (122)
                                                                                                 -------------   --------------

Cash Flows From Financing Activities
  Retirement of long-term debt..............................................................           (329)            (275)
  Deposit of funds for the retirement of long-term debt.....................................             (5)
  Termination of nuclear fuel lease.........................................................                            (154)
  Payments on capital lease obligation......................................................                             (11)
  Payment of common and preferred dividends.................................................            (37)             (51)
  Net increase (decrease) in short-term debt................................................            (40)             466
  Redemption of preferred stock.............................................................             (1)
                                                                                                 -------------   --------------
     Net cash used in financing activities..................................................           (412)             (25)
                                                                                                 -------------   --------------

Net  Increase (Decrease) in Cash and Cash Equivalents.......................................           (262)             111
Cash and Cash Equivalents at Beginning of Period............................................            267               52
                                                                                                 -------------   --------------
Cash and Cash Equivalents at End of Period..................................................         $    5          $   163
                                                                                                 =============   ==============
</TABLE>


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

                                       31
<PAGE>

CONSOLIDATED BALANCE SHEET
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                                       June 30,      December 31,
                                                                                                         2001            2000
                                                                                                     -------------   --------------
<S>                                                                                                 <C>              <C>
Assets

Current Assets
    Cash and cash equivalents...................................................................... $          5       $      267
    Accounts receivable (less reserve:  2001, $18; 2000, $16)......................................          208              173
    Accounts receivable from parent and affiliates.................................................           30               99
    Notes receivable from parent and affiliates....................................................                            70
    Income tax receivable..........................................................................           36               51
    Unbilled revenues..............................................................................          107              137
    Fuel, materials and supplies - at average cost.................................................           31               30
    Prepayments....................................................................................           42                4
    Deferred income taxes..........................................................................           39               35
    Other..........................................................................................            9                9
                                                                                                    -------------     ------------
                                                                                                             507              875
                                                                                                    -------------     ------------

Investments........................................................................................           28               18
                                                                                                    -------------     ------------

Property, Plant and Equipment - net
    Electric utility plant in service
       Transmission and distribution...............................................................        2,205            2,183
       General.....................................................................................          180              180
                                                                                                   -------------      -----------
                                                                                                           2,385            2,363
    Construction work in progress..................................................................           33               33
                                                                                                   -------------      -----------
       Electric utility plant......................................................................        2,418            2,396
    Other property.................................................................................            5                5
                                                                                                   -------------      -----------
                                                                                                           2,423            2,401
                                                                                                   -------------      -----------

Regulatory and Other Noncurrent Assets
    Recoverable transition costs...................................................................        2,299            2,425
    Other..........................................................................................          305              304
                                                                                                   -------------      -----------
                                                                                                           2,604            2,729
                                                                                                   -------------      -----------

                                                                                                    $      5,562       $    6,023
                                                                                                   =============      ===========

</TABLE>

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

                                       32
<PAGE>

CONSOLIDATED BALANCE SHEET
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                                     June 30,       December 31,
                                                                                                       2001             2000
                                                                                                   -------------   --------------
<S>                                                                                                <C>             <C>
Liabilities and Equity

Current Liabilities
  Short-term debt.........................................................................           $     19         $     59
  Long-term debt..........................................................................                277              240
  Accounts payable........................................................................                 37               62
  Accounts payable to parent and affiliates...............................................                131              207
  Taxes...................................................................................                 46               51
  Dividends...............................................................................                 30               23
  Interest and other......................................................................                 63               82
                                                                                                   -------------   --------------
                                                                                                          603              724
                                                                                                   -------------   --------------

Long-term Debt............................................................................              2,521            2,886
                                                                                                   -------------   --------------

Deferred Credits and Other Noncurrent Liabilities
  Deferred income taxes and investment tax credits........................................                736              724
  Other...................................................................................                173              182
                                                                                                   -------------   --------------
                                                                                                          909              906
                                                                                                   -------------   --------------


Commitments and Contingent Liabilities....................................................
                                                                                                   -------------   --------------

Company-obligated Mandatorily Redeemable Preferred Securities of
  Subsidiary Trust Holding Solely Company Debentures......................................                250              250
                                                                                                   -------------   --------------

Preferred Stock
  With sinking fund requirements..........................................................                 46               47
  Without sinking fund requirements.......................................................                 50               50
                                                                                                   -------------   --------------
                                                                                                           96               97
                                                                                                   -------------   --------------
Shareowner's Common Equity
  Common stock............................................................................              1,476            1,476
  Additional paid-in capital..............................................................                 55               55
  Treasury stock..........................................................................               (632)            (632)
  Earnings reinvested.....................................................................                301              277
  Accumulated other comprehensive income..................................................                 (1)
  Capital stock expense and other.........................................................                (16)             (16)
                                                                                                   -------------   --------------
                                                                                                        1,183            1,160
                                                                                                   -------------   --------------

                                                                                                     $  5,562         $  6,023
                                                                                                   =============   ==============
</TABLE>


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

                                       33
<PAGE>

CONSOLIDATED STATEMENT OF SHAREOWNER'S COMMON EQUITY AND
COMPREHENSIVE INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                      Three Months Ended       Six Months Ended
                                                                                           June 30,                June 30,
                                                                                    ---------------------- ----------------------
                                                                                       2001        2000      2001        2000
                                                                                    ---------- ----------- ---------  -----------

<S>                                                                                  <C>       <C>         <C>        <C>
Common stock at beginning of period...............................................  $  $1,476  $   1,476   $   1,476  $   1,476
                                                                                    ---------- ----------  ---------- ----------
Common stock at end of period.....................................................      1,476      1,476       1,476      1,476
                                                                                    ---------- ----------  ---------- ----------

Additional paid-in capital at beginning of period.................................         55         55          55         55
                                                                                    ---------- ----------  ---------- ----------
Additional paid-in capital at end of period.......................................         55         55          55         55
                                                                                    ---------- ----------  ---------- ----------

Treasury stock at beginning of period.............................................       (632)      (632)       (632)      (632)
                                                                                    ---------- ----------  ---------- ----------
Treasury stock at end of period...................................................       (632)      (632)       (632)      (632)
                                                                                    ---------- ----------  ---------- ----------

Earnings reinvested at beginning of period........................................        304        512         277        419
     Net income available for common stock (b)....................................         21         95          55        226
     Cash dividends declared on common stock......................................        (24)       (38)        (31)       (76)
                                                                                    ---------- ----------  ---------- ----------
Earnings reinvested at end of period..............................................        301        569         301        569
                                                                                    ---------- ----------  ---------- ----------

Accumulated other comprehensive income (loss) at beginning of period..............                    (6)                    (6)
     Unrealized (loss) on qualifying derivatives (b)..............................         (1)                    (1)
                                                                                    ---------- ----------  ---------- ----------
Accumulated other comprehensive income (loss) at end of period....................         (1)        (6)         (1)        (6)
                                                                                    ---------- ----------  ---------- ----------

Capital stock expense and other at beginning of period............................        (16)       (16)        (16)       (16)
                                                                                    ---------- ----------  ---------- ----------
Capital stock expense and other at end of period..................................        (16)       (16)        (16)       (16)
                                                                                    ---------- ----------  ---------- ----------

Total Shareowner's Common Equity..................................................  $   1,183  $   1,446   $   1,183  $   1,446
                                                                                    ========== ==========  ========== ==========

Common stock shares at beginning of period (a)....................................    102,230    102,230     102,230    102,230
                                                                                    ---------- ----------  ---------- ----------
Common stock shares at end of period..............................................    102,230    102,230     102,230    102,230
                                                                                    ========== ==========  ========== ==========

(a)    In thousands.  No par value.  170 million shares authorized.
       All common shares of PPL Electric stock are owned by PPL.
(b)    Statement of Comprehensive Income, net of tax:
       Net income available for common stock......................................  $      21  $      95   $      55  $     226
       Other comprehensive income, net of tax:
            Unrealized (loss) on qualifying derivatives, net of tax (benefit) of
            $0, ($1)..............................................................         (1)                    (1)
                                                                                    ---------- ----------  ---------- ----------
       Total other comprehensive income...........................................         (1)                    (1)
                                                                                    ---------- ----------  ---------- ----------
       Comprehensive Income.......................................................  $      20  $      95   $      54  $     226
                                                                                    ========== ==========  ========== ==========
</TABLE>


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

                                       34
<PAGE>

                      PPL ELECTRIC UTILITIES CORPORATION

                  Notes to Consolidated Financial Statements
                  ------------------------------------------

Terms and abbreviations appearing in Notes to Consolidated Financial Statements
are explained in the glossary.

1.       Interim Financial Statements

Certain information in footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the U.S., has been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the SEC. These financial statements should be read in
conjunction with the financial statements and notes included in PPL Electric's
Annual Report to the SEC on Form 10-K for the year ended December 31, 2000.

Certain amounts in the June 30, 2000 and December 31, 2000 financial statements
have been reclassified to conform to the presentation in the June 30, 2001
financial statements.

2.       Credit Arrangements and Financing Activities

PPL Electric issues commercial paper and borrows from banks to provide
short-term funds for general corporate purposes. Bank borrowings generally bear
interest at rates negotiated at the time of the borrowing. At June 30, 2001, PPL
Electric had $15 million of commercial paper outstanding at an interest rate of
4.29%.

In order to enhance liquidity, and as a credit back-stop to the commercial paper
programs, PPL Electric, PPL Capital Funding and PPL (as guarantor for PPL
Capital Funding) shared a 364-day $750 million credit facility and a five-year
$300 million credit facility, each with a group of banks. At June 30, 2001,
these credit facilities were retired, and PPL Electric obtained a new $400
million 364-day facility. No borrowings were outstanding under this facility at
June 30, 2001.

In March 2001, PPL Electric deposited with its Mortgage Trustee $5 million for
the purpose of retiring, on July 1, 2001, all of its outstanding First Mortgage
Bonds, 9-3/8% Series due 2021, at par value through the maintenance and
replacement fund provisions of its Mortgage. These bonds have been retired.

During the first six months of 2001, PPL Transition Bond Company made principal
payments on bonds totaling $129 million.

In March 2001, PPL Electric made a payment of $9.6 million to buy back an option
related to its 6 1/8% Reset Put Securities due 2006. The option would have
permitted a third party to remarket these securities at higher interest rates in
May 2001. PPL Electric recorded this charge, net of the $1.8 million balance
remaining on the third party option. The net charge of $7.8 million is included
in "Interest Expense" on the Consolidated Statement of Income for the six months
ended June 30, 2001. PPL Electric retired the $200 million, 6-1/8% Reset Put
Securities in May 2001.

3.       Commitments and Contingent Liabilities

Environmental Matters

Superfund and Other Remediation
-------------------------------

In 1995, PPL Electric entered into a consent order with the DEP to address a
number of sites where PPL Electric may be liable for remediation. This may
include potential PCB contamination at certain PPL Electric substations and pole
sites, potential contamination at a number of coal gas manufacturing facilities
formerly owned and operated by PPL Electric, and oil or other contamination
which may exist at some of PPL Electric's former generating facilities. As of
June 30, 2001, work had been completed on over 80% of the sites included in the
consent order.

At June 30, 2001, PPL Electric had accrued approximately $5 million,
representing the amount it estimates it will have to spend for site remediation,
including those sites covered by its consent order mentioned above.

Guarantees of Affiliated Companies

At June 30, 2001, PPL Electric provided a guarantee in the amount of $7 million
in support of Safe Harbor Water Power Corporation, in which PPL Electric had an
ownership interest prior to the corporate realignment, and in which PPL Holtwood
now has an ownership interest.

4.       Related Party Transactions

As part of the corporate realignment, PPL Electric entered into power sales
agreements with PPL EnergyPlus for the purchase of electricity to meet its
obligations as a PLR for customers who have not selected an alternative supplier
under the Customer Choice Act. Under the terms of these agreements, this
electricity is purchased by PPL Electric at the applicable shopping credits
authorized by the PUC, plus nuclear decommissioning costs, less state taxes.
These purchases totaled $294 million and $622 million for the three and six
months ended June 30, 2001, respectively, and are included in "Energy purchases"
on the

                                       35
<PAGE>

Consolidated Statement of Income. These agreements end on December 31, 2001. See
Note 8 for a discussion of the new agreement with PPL EnergyPlus, whereby PPL
EnergyPlus will provide electricity for PPL Electric's PLR load obligation
through 2009.

Also as part of the corporate realignment, PPL Electric executed a reciprocal
contract with PPL EnergyPlus to sell electricity purchased under contracts with
NUGs. PPL Electric purchases electricity from the NUGs at contractual rates, and
then sells the electricity at the same price to PPL EnergyPlus. These revenues
totaled $43 million and $88 million for the three and six months ended June 30,
2001, respectively, and are included in Operating Revenues as "Wholesale energy
marketing and trading" on the Consolidated Statement of Income.

Corporate functions such as financial, legal, human resources and information
services were transferred to PPL Services in the corporate realignment. PPL
Services bills the respective PPL subsidiaries for the cost of such services
when they can be specifically identified. The cost of these services that are
not directly charged to PPL subsidiaries are allocated to certain of the
subsidiaries based on the relative capital invested by PPL in these
subsidiaries. During the three and six months ended June 30, 2001, PPL Services
charged PPL Electric approximately $16 million and $33 million for direct
expenses, and allocated PPL Electric overhead costs of approximately $6 million
and $11 million, respectively.

5.       Adoption of SFAS 133

PPL Electric adopted SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," on January 1, 2001. SFAS 133 requires that every derivative
instrument be recorded on the balance sheet as an asset or liability measured at
its fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria area met. SFAS
133 requires that as of the date of adoption, the difference between the fair
market value of derivative instruments recorded on the balance sheet and the
previous carrying amount of those derivatives be reported in net income or other
comprehensive income, as appropriate. At June 30, 2001 and December 31, 2000,
PPL Electric had no derivative instruments.

6.       New Accounting Standards

SFAS 141

On June 30, 2001, the FASB issued SFAS 141, "Business Combinations," which
eliminates the pooling-of-interest method of accounting for business
combinations and requires the use of the purchase method. In addition, it
requires the reassessment of intangible assets to determine if they are
appropriately classified either separately or within goodwill. SFAS 141 is
effective for business combinations initiated after June 30, 2001. PPL Electric
adopted SFAS 141 on July 1, 2001, with no material impact on net income.

SFAS 142

On June 30, 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," which eliminates the amortization of goodwill and other acquired
intangible assets with indefinite economic useful lives. SFAS 142 requires an
annual impairment test of goodwill and other intangible assets that are not
subject to amortization. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The impact of adopting SFAS 142 is not yet determinable, but
will be immaterial.

SFAS 143

On June 30, 2001, the FASB approved SFAS 143, "Accounting for Asset Retirement
Obligations", on the accounting for obligations associated with the retirement
of long-lived assets. SFAS 143 requires a liability to be recognized in the
financial statements for retirement obligations meeting specific criteria.
Measurement of the initial obligation is to approximate fair value with an
equivalent amount recorded as an increase in the value of the capitalized asset.
The asset will be depreciated in accordance with normal depreciation policy and
the liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The potential impact of adopting SFAS 143 is not yet
determinable, but may be material.

7.       Corporate Realignment

On July 1, 2000, PPL and PPL Electric completed a corporate realignment in order
to effectively separate PPL Electric's regulated transmission and distribution
operations from its recently deregulated generation operations and to better
position the companies and their affiliates in the new competitive marketplace.
The realignment included PPL Electric's transfer of certain generation and
related assets, and associated liabilities, to PPL and its unregulated
subsidiaries at book value. The net book value of this transfer was $271
million, and was recorded effective July 1, 2000.

As a result of the corporate realignment, PPL Electric's principal businesses
are the transmission and distribution of electricity to serve retail customers
in its franchised territory in eastern and central Pennsylvania, and the supply
of electricity to retail customers in that territory as a PLR. Other
subsidiaries of PPL and PPL Electric are generally aligned in the new corporate
structure according to their principal business functions.

                                       36
<PAGE>

The corporate realignment followed receipt of various regulatory approvals,
including approvals from the PUC, the FERC, the NRC and the IRS.

8.       Subsequent Events

In April 2001, PPL announced a plan to confirm the structural separation of PPL
Electric from PPL and PPL's other affiliated companies, in a transaction that
enables PPL Electric to reduce business risk by securing a supply contract
adequate for it to meet its PLR obligations while allowing PPL to retain
valuable advantages related to operating both energy supply and energy delivery
businesses.

The strategic initiative is designed to substantially reduce PPL Electric's
exposure to volatility in energy prices through 2009 and to reduce its business
and financial risk profile by, among other things, limiting its business
activities to the transmission and distribution of electricity and businesses
related to or arising out of the electric transmission and distribution
businesses.

Under this initiative, PPL Electric is taking the following steps:

 .    PPL Electric has obtained a long-term electric supply contract, at prices
     generally equal to the pre-determined "capped" rates under the 1998 PUC
     settlement order it is authorized to charge its PLR customers, to satisfy
     its PLR obligations to retail customers from 2002 through 2009;

 .    PPL Electric will limit its businesses to electric transmission and
     distribution and activities relating to or arising out of those businesses;

 .    PPL Electric will adopt amendments to its Articles of Incorporation and
     Bylaws containing corporate governance and operating provisions designed to
     reinforce its corporate separateness from affiliated companies;

 .    PPL Electric will appoint an independent director to its Board of Directors
     and require the unanimous consent of the Board of Directors, including the
     consent of the independent director, to amendments to these corporate
     governance and operating provisions or to the commencement of any
     insolvency proceeding, including any filing of a voluntary petition in
     bankruptcy or other similar actions;

 .    PPL Electric will appoint an independent compliance administrator to
     review, on a semi-annual basis, its compliance with the new corporate
     governance and operating requirements contained in its amended Articles of
     Incorporation and Bylaws; and

 .    PPL Electric will adopt a plan of division pursuant to the Pennsylvania
     Business Corporation Law. The plan of division will result in two separate
     corporations. PPL Electric will be the surviving corporation and a new
     Pennsylvania corporation will be created. Under the plan of division, $5
     million of cash and certain of PPL Electric's potential liabilities will be
     allocated to the new corporation. PPL will guarantee the obligations of the
     new corporation with respect to such liabilities.

The enhancements to PPL Electric's legal separation from its affiliates are
intended to minimize the risk that a court would order PPL Electric's assets and
liabilities to be substantively consolidated with those of PPL or another
affiliate of PPL in the event that PPL or another PPL affiliate were to become a
debtor in a bankruptcy case. Taken collectively with the other steps in the
strategic initiative to reduce its business risk profile, PPL Electric
anticipates that it can increase the leverage in its capital structure,
replacing higher-cost equity with lower-cost debt and thus lower its total cost
of capital.

At a special meeting of PPL Electric shareowners held on July 17, 2001, the plan
of division and the amendments to PPL Electric's Articles of Incorporation and
Bylaws referred to above were approved. The plan of division and the amendments
to the Articles of Incorporation and Bylaws will become effective upon filing of
articles of division and the plan of division with the Secretary of State of the
Commonwealth of Pennsylvania. This filing will be made in conjunction with the
issuance of the PPL Electric debt.

Under the Pennsylvania Customer Choice Act, PPL Electric is required to act as a
PLR to provide electricity to its delivery customers who do not select an
alternate supplier. As part of a restructuring settlement with the PUC, PPL
Electric agreed to provide such electricity to such customers at pre-set rates
through 2009. While these generation supply rates vary by customer class, the
settlement provided for average rates ranging from 4.16 cents per kWh in 2001,
increasing to 5.02 cents per kWh in 2009. PPL Electric currently has a full
requirements supply agreement with PPL EnergyPlus designed to enable PPL
Electric to meet this obligation until the end of 2001. Under its existing
contract with PPL Electric, PPL EnergyPlus provides all of PPL Electric's supply
needs at the price cap level through 2001, regardless of the prevailing market
price. As part of the strategic initiative, PPL Electric solicited bids to
contract with energy suppliers to meet its obligation to deliver energy to its
customers from 2002 through 2009.

In June 2001, PPL Electric announced that PPL EnergyPlus was the low bidder,
among six bids examined, and was selected as the company to provide for the
energy supply requirements of PPL Electric from 2002 through 2009. Under this
contract, PPL

                                       37
<PAGE>

EnergyPlus will provide electricity at pre-established capped prices and receive
a $90 million payment by January 1, 2002, to offset differences between the
revenues expected under the capped prices that PPL Electric is authorized to
charge its PLR customers, and projected market prices through the life of the
supply agreement (as projected by PPL EnergyPlus at the time of its bid). The
contract results in PPL EnergyPlus having an eight-year contract at current
market prices.

In July 2001, the energy supply contract was approved by the PUC and accepted
for filing by the FERC.

Also in July 2001, PPL Electric filed a shelf registration statement with the
SEC to issue up to $900 million in debt. PPL Electric will use a portion of the
proceeds of any debt issuances under the registration statement to make the $90
million up-front payment to PPL EnergyPlus under the terms of the long-term
energy supply contract, and to repurchase a portion of its common stock from
PPL. The remainder of the proceeds will be used for general corporate purposes.

                                       38
<PAGE>

                       PPL ELECTRIC UTILITIES CORPORATION

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

This discussion should be read in conjunction with the section entitled "Review
of the Financial Condition and Results of Operations" in PPL Electric's Annual
Report to the SEC on Form 10-K for the year ended December 31, 2000. Terms and
abbreviations appearing in Management's Discussion and Analysis of Financial
Condition and Results of Operations are explained in the glossary.

                             Results of Operations
                             ---------------------

The following discussion explains significant changes in principal items on the
Consolidated Statement of Income comparing the three and six months ended June
30, 2001, to the comparable periods in 2000.

Certain items on the Consolidated Statement of Income have been impacted by the
corporate realignment undertaken by PPL and PPL Electric effective July 1, 2000.
See Note 7 to the Financial Statements for information regarding the corporate
realignment. The Consolidated Statement of Income of PPL Electric for the first
six months of 2001 includes the results of its remaining activities (the
transmission and distribution of electricity in its service territory and the
supply of electricity as a PLR in this territory under Pennsylvania's Customer
Choice Act). The results for the first six months of 2000 also include PPL
Electric's former electric generation and unregulated wholesale and retail
marketing functions. When discussing the results of operations for 2001 compared
with 2000, the estimated results of operations of the electric generation and
unregulated marketing assets during the first six months of 2000 are eliminated
for purposes of comparability.

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

Earnings

PPL Electric's net income available for common stock decreased by $74 million
and $171 million for the three and six months ended June 30, 2001, respectively,
when compared with the same periods in 2000. After eliminating the estimated
results of assets transferred in the corporate realignment from the results in
2000, earnings increased by $5 million and decreased by $2 million,
respectively, for the three and six month periods. The increase in adjusted
earnings during the three months ended June 30, 2001 compared with the same
period in 2000 was primarily due to higher deliveries of electricity to retail
customers and lower interest expense. These earnings gains were partially offset
by an insurance settlement for environmental liability coverage recorded in
April 2000.

Operating Revenues

Retail Electric
---------------

The increase (decrease) in revenues from retail electric operations was
attributable to the following (millions of dollars):

                                          June 30, 2001 vs. June 30, 2000
                                          -------------------------------
                                          Three Months        Six Months
                                              Ended              Ended
                                          ------------       ------------
PPL Electric
    electric delivery...................        $    1            $     3
    PLR electric generation supply......            87                136
PPL EnergyPlus
    electric generation supply..........          (125)              (259)
Other...................................             3                  3
                                          ------------       ------------
                                                $  (34)           $  (117)
                                          ============       ============

Operating revenues from retail electric operations decreased by $34 million for
the three months ended June 30, 2001, when compared to the same period in 2000.
After eliminating the revenues of assets transferred in the corporate
realignment from the results for the second quarter of 2000, retail electric
revenues increased by $91 million. This increase was primarily due to higher PPL
Electric revenues as a PLR, attributable to a 21% increase in sales volume. This
reflects a decrease in retail electric customers shopping for electricity under
the Customer Choice Act. Deliveries of electricity also increased by 3% between
the periods.

Operating revenues from retail electric operations decreased by $117 million for
the six months ended June 30, 2001, when compared to the same period in 2000.
After eliminating the revenues of assets transferred in the corporate
realignment from the results for the first half of 2000, retail electric
revenues increased by $142 million. This was primarily due to higher PPL
Electric revenues as a PLR, attributable to a 20% increase in electricity
supply, compared with the first half of 2000. Deliveries of electricity also
increased by 4% between the periods.

Pursuant to the Customer Choice Act and a restructuring settlement with the PUC,
PPL Electric is required, through 2009, to provide electricity at pre-set prices
to its delivery customers who do not select an alternate

                                       39
<PAGE>

supplier. While these supply rates vary by customer class, the settlement
provides for average rates ranging from 4.16 cents per kWh in 2001, increasing
to 5.02 per kWh in 2009. As part of such settlement agreement, PPL Electric also
agreed to a cap on its average transmission and distribution rates of 1.74 cents
per kWh through 2004.

Wholesale Energy Marketing and Trading
--------------------------------------

The increase (decrease) in revenues from wholesale energy marketing and trading
activities was attributable to the following (millions of dollars):

                                             June 30, 2001 vs. June 30, 2000
                                             -------------------------------
                                              Three Months       Six Months
                                                  Ended             Ended
                                             --------------    -------------
PPL Electric
     Bilateral Sales......................       $    (260)        $    (508)
     PJM..................................             (47)              (69)
     Cost based contracts.................             (31)              (65)
     Gas and oil sales....................             (63)             (148)
     NUG purchases sold to affiliate......              43                88
     Other................................               4                 4
                                             --------------    -------------
                                                 $    (354)        $    (698)
                                             ==============    =============

Wholesale energy marketing and trading revenues decreased by $354 million and
$698 million for the three and six months ended June 30, 2001, when compared to
the same periods in 2000. After eliminating the revenues of assets transferred
in the corporate realignment from the results for 2000, wholesale revenues were
essentially unchanged between the periods. The remaining wholesale revenues
consist of sales to municipalities and the sale of power (purchased from NUGs)
to PPL EnergyPlus.

Energy Related Business

Energy related businesses contributed $1 million to the operating income of PPL
Electric for both the three and six months ended June 30, 2001.

For the three and six months ended June 30, 2000, these activities negatively
impacted operating income by $3 million in each period. After deducting the
results of the mechanical contracting and engineering companies and synfuel
operations, all of which were transferred in the corporate realignment, PPL
Electric's remaining energy related business broke even on a pre-tax basis for
the three and six months ended June 30, 2000.

Fuel

Effective with the July 1, 2000 corporate realignment, the generation of
electricity, and the acquisition of fuel for that generation, was transferred to
PPL Generation.

Energy Purchases

Energy purchases decreased by $44 million and $56 million for the three and six
months ended June 30, 2001, compared with the same periods in 2000. After
eliminating the expenses of assets transferred in the corporate realignment from
the results for the first half of 2000, energy purchases increased by $83
million and $141 million for the three and six months ended June 30, 2001,
respectively. The increases represent the additional purchases required to
support PPL Electric's higher PLR load.

Other Operation Expenses

Other operation expenses decreased by $34 million and $116 million for the three
and six months ended June 30, 2001, when compared with the same periods in 2000.
After eliminating the expenses associated with assets transferred in the
corporate realignment from the results for 2000, other operation expenses
increased by $11 million and $10 million for the three and six months ended June
30, 2001. These increases were due primarily to an insurance settlement for
environmental liability coverage recorded in the second quarter of 2000, which
reduced other operation expenses in that period.

Amortization of Recoverable Transition Costs

Amortization of recoverable transition costs increased by $9 million and $17
million during the three and six months ended June 30, 2001, when compared with
the same periods in 2000. These increases were primarily due to the collection
of CTC revenues related to prior year CTC deferrals of amounts in excess of the
rate cap.

Maintenance Expenses

Maintenance expenses decreased by $54 million during the three months ended June
30, 2001, when compared with the same period in 2000. After eliminating the
expenses of assets transferred in the corporate realignment from the results for
the second quarter of 2000, maintenance expenses were virtually unchanged from
the prior year.

Maintenance expenses decreased by $83 million during the six months ended June
30, 2001, when compared with the same period in 2000. After eliminating the
expenses of assets transferred in the corporate realignment from the results for
the first half of 2000, maintenance expenses decreased by $2 million.

Depreciation

Depreciation decreased by $36 million and $71 million for the three and six
months ended June 30, 2001, respectively, when compared with the same periods in
2000. After eliminating the expenses of assets

                                       40
<PAGE>

transferred in the corporate realignment from the 2000 results, depreciation
decreased by $2 million and $3 million for the three and six months ended June
30, 2001. These decreases reflect a change in life characteristics for
transmission and distribution property.

Taxes, Other Than Income

Taxes other than income decreased by $12 million and $30 million during the
three and six months ended June 30, 2001, respectively, when compared to the
same periods in 2000. After eliminating the taxes associated with the assets
transferred in the corporate realignment from the results for the first half of
2000, taxes other than income were approximately the same in both periods.

Other Income - net

Other income, net of deductions, decreased by $11 million during the three
months ended June 30, 2001, when compared with the same period in 2000. After
eliminating the income and deductions of assets transferred in the corporate
realignment from the results for the second quarter of 2000, other income was
relatively unchanged during the second quarter of 2001.

Other income, net of deductions, decreased by $18 million during the six months
ended June 30, 2001, when compared with the same period in 2000. After
eliminating the income and deductions of assets transferred in the corporate
realignment from the results for the first half of 2000, other income decreased
by $3 million between the periods. This decrease was primarily due to income
recorded in June 2000 due to the demutualization of a medical insurance
provider.

Financing Costs

Interest expense decreased by $12 million and $11 million during the three and
six months ended June 30, 2001, respectively, when compared with the same
periods in 2000. After eliminating the interest expense associated with assets
transferred in the corporate realignment from the results for 2000, interest
expense decreased by $17 million and $21 million during the three and six months
ended June 30, 2001, respectively, when compared with the same periods in 2000.
The lower interest expense was primarily due to retirements of first mortgage
bonds and transition bonds, and lower levels of intercompany debt.

Income Taxes

Income tax expenses decreased by $50 million during the three months ended June
30, 2001, when compared with the same period in 2000. After eliminating the
taxes associated with the assets transferred in the corporate realignment from
the results for the second quarter of 2000, income taxes increased by $2 million
during the second quarter of 2001. This change was primarily due to an increase
in adjusted pre-tax book income.

Income taxes decreased by $108 million during the six months ended June 30,
2001, when compared with the same period in 2000. After eliminating the expenses
of assets transferred in the corporate realignment from the results for the
first half of 2000, income taxes were relatively unchanged.

                              Financial Condition
                              -------------------

Energy Marketing and Trading Activities

In connection with the corporate realignment, effective July 1, 2000, PPL
Electric's unregulated energy marketing and trading activities were transferred
to PPL EnergyPlus.

Market Risk Sensitive Instruments

Commodity Price Risk - PPL Electric
-----------------------------------

Currently, PPL Electric and PPL EnergyPlus have a long-term power sales
agreement under which PPL EnergyPlus will sell to PPL Electric, at a
predetermined pricing arrangement, energy, capacity, and ancillary services to
fulfill PPL Electric's PLR obligation through 2001. PPL EnergyPlus has
contracted to supply PPL Electric with long-term power for the period 2002
through 2009. As a result, PPL Electric has shifted any electric price risk to
PPL EnergyPlus for 2001 through 2009.

Interest Rate Risk
------------------

PPL Electric has issued debt to finance its operations, which increases interest
rate risk. At June 30, 2001, PPL Electric's potential annual exposure to
increased interest expense, based on a 10% increase in interest rates, was
approximately $700,000.

PPL Electric is also exposed to changes in the fair value of its debt portfolio.
At June 30, 2001, PPL Electric estimated that its potential exposure to a change
in the fair value of its debt portfolio, through a 10% adverse movement in
interest rates, was approximately $18 million.

Market events that are inconsistent with historical trends could cause actual
results to differ from estimated levels.

Financing Activities

See Notes 2 and 8 to the Financial Statements for a discussion of financing
activities.

                                       41
<PAGE>

Financing and Liquidity

Cash and cash equivalents decreased by $373 million more during the six months
ended June 30, 2001, compared with the same period in 2000. The reasons for this
change were:

 .    A $103 million decrease in cash provided by operating activities, primarily
     due to the operating income of assets transferred in the corporate
     realignment.


 .    A $117 million decrease in cash used in investing activities, primarily due
     to lower property, plant and equipment expenditures in 2001, due to the
     transfer of generation assets as part of the corporate realignment. Also,
     repayment of notes receivable from parent and affiliates were greater
     during the six months ended June 30, 2001.

 .    A $387 million increase in cash used in financing activities, primarily due
     to greater retirements of long-term debt, and decreases in short-term debt.

Financial Indicators

Earnings for the twelve months ended June 30, 2001 and 2000 were impacted by
nonrecurring items and restructuring impacts. See "Earnings" in PPL Electric's
Form 10-K for the year ended December 31, 2000 for additional information. The
following financial indicators for PPL Electric reflect the elimination of these
impacts from earnings, and provide an additional measure of the underlying
earnings performance of PPL Electric and its subsidiaries. For purposes of
comparability with 2001, the estimated results of assets transferred in the
corporate realignment were also eliminated for the twelve months ended June 30,
2000.

                                                    12 Months Ended
                                                        June 30,
                                          ----------------------------------
                                               2001               2000
                                               ----               ----
                                                      Adjusted      Not Adjusted
                                                         for             for
                                                     Realignment     Realignment
                                                     -----------     -----------
 Earnings available to PPL
    (adjusted, in millions)............       $  72       $  91        $ 394
 Times interest earned before
    income taxes.......................        1.59        1.66         3.44

Environmental Matters

See Note 3 to the Financial Statements for a discussion of environmental
matters.

Increasing Competition

The electric utility industry has experienced, and will continue to experience,
a significant increase in the level of competition in the energy supply market
at both the state and federal level. PPL Electric's PLR supply business will be
affected by customers who select alternate suppliers. Refer to PPL Electric's
Form 10-K for the year ended December 31, 2000 for a discussion of state and
federal activities in this regard.

In June 2001, the FERC issued orders calling for the formation of one RTO
throughout the Mid-Atlantic region (PJM), New York and New England. In response,
PPL Electric is taking the position that a single northeastern RTO is a
significant step forward in establishing a reliable and properly functioning
wholesale electricity market in the region. PPL Electric strongly supports the
most comprehensive amalgamation of the existing and proposed northeast pools,
including the establishment of a single RTO as well as the elimination of
marketplace distinctions and control area boundaries. FERC's northeastern RTO
proceeding is continuing.



      Item 3. Quantitative and Qualitative Disclosures About Market Risk
      ------------------------------------------------------------------

Reference is made to "Market Risk Sensitive Instruments" in the Management's
Discussion and Analysis of Financial Condition and Results of Operations.

                                       42
<PAGE>

                       PPL MONTANA, LLC AND SUBSIDIARIES

                                       43
<PAGE>

PPL MONTANA, LLC AND SUBSIDIARIES
---------------------------------
Part 1. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
----------------------------

In the opinion of PPL Montana, the unaudited financial statements included
herein reflect all adjustments necessary to present fairly the Consolidated
Balance Sheet as of June 30, 2001 and December 31, 2000, and the Consolidated
Statement of Income, Consolidated Statement of Cash Flows and Consolidated
Statement of Member's Equity and Comprehensive Income for the periods ended June
30, 2001 and 2000.

CONSOLIDATED STATEMENT OF INCOME
PPL Montana, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                           Three Months Ended       Six Months Ended
                                                                                June 30,                June 30,
                                                                           ------------------     -------------------
                                                                             2001       2000        2001        2000
                                                                           -------    -------     -------     -------
<S>                                                                        <C>        <C>         <C>         <C>
Operating Revenues
     Wholesale energy marketing and trading............................    $    99    $    63     $   281     $   124
     Other revenues....................................................                                 1           1
                                                                           -------    -------     --------    -------
     Total.............................................................         99         63         282         125
                                                                           -------    -------     --------    -------

Operating Expenses
     Operation
         Fuel..........................................................          5          7          14          16
         Energy purchases..............................................         17         21          34          28
         Other operation and maintenance...............................         29         17          49          29
         Transmission..................................................          2          3           5           7
     Depreciation......................................................          2          4           5           8
     Taxes, other than income..........................................          5          3           8           7
                                                                           -------    -------     -------     -------
     Total.............................................................         60         55         115          95
                                                                           -------    -------     -------     -------

Operating Income.......................................................         39          8         167          30

Other Income - net.....................................................          1          1           2           1

Interest Expense.......................................................          2         10           4          19
                                                                           -------    -------     -------     -------

Income (Loss) Before Income Taxes......................................         38         (1)        165          12

Income Taxes...........................................................         15                     65           5
                                                                           -------    -------     -------     -------

Net Income (Loss)......................................................    $    23    $    (1)    $   100     $     7
                                                                           =======    =======     =======     =======
</TABLE>

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

                                       44
<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS
PPL Montana, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                                    Six Months Ended
                                                                                                        June 30,
                                                                                                -----------------------
                                                                                                  2001            2000
                                                                                                -------         -------
<S>                                                                                             <C>             <C>
Net Cash Provided by Operating Activities...................................................    $   123         $    22

Cash Flows From Investing Activities
    Proceeds from sale of property, plant and equipment.....................................          1
    Expenditures for property, plant and equipment..........................................        (12)            (10)
                                                                                                -------         -------
        Net cash used in investing activities...............................................        (11)            (10)
                                                                                                -------         -------

Cash Flows From Financing Activities
    Borrowings on revolving line of credit..................................................                          5
    Repayments on revolving line of credit..................................................                        (15)
    Distribution to Member..................................................................       (167)
                                                                                                -------         -------
        Net cash used in financing activities...............................................       (167)            (10)
                                                                                                -------         -------

Net Increase (Decrease) in Cash and Cash Equivalents.......................................         (55)              2
Cash and Cash Equivalents at Beginning of Period...........................................          79               3
                                                                                                -------         -------
Cash and Cash Equivalents at End of Period.................................................     $    24         $     5
                                                                                                =======         =======
</TABLE>

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

                                       45
<PAGE>

CONSOLIDATED BALANCE SHEET
PPL Montana, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                            June 30,       December 31,
                                                                                              2001            2000
                                                                                         -------------   --------------
<S>                                                                                      <C>             <C>
     Assets

     Current Assets
       Cash and cash equivalents...................................................          $   24          $    79
       Accounts receivable (less reserve:  2001, $ 19 ; 2000, $18).................              15               87
       Accounts receivable from joint owners.......................................               5                7
       Accounts receivable from affiliates.........................................               3
       Fuel, materials and supplies - at average cost..............................               5                5
       Unrealized derivative gains.................................................              49                2
       Deferred income taxes.......................................................              19               20
       Prepayments and other.......................................................               4                3
                                                                                             ------          -------
                                                                                                124              203
                                                                                             ------          -------

     Noncurrent Assets
       Property, plant and equipment - net.........................................             434              428
       Deferred income taxes.......................................................              23               31
       Other.......................................................................              48               34
                                                                                             ------          -------
                                                                                                505              493
                                                                                             ------          -------
                                                                                             $  629          $   696
                                                                                             ======          =======

     Liabilities and Equity

     Current Liabilities
       Accounts payable............................................................          $   39          $    50
       Accounts payable to affiliates..............................................                               18
       Accounts payable to Member..................................................              35               38
       Accrued expenses............................................................              14               17
       Unrealized derivative losses................................................              39
       Wholesale energy commitments................................................              24               23
                                                                                             ------          -------
                                                                                                151              146
                                                                                             ------          -------

     Noncurrent Liabilities
       Employee benefit obligations................................................               9                8
       Wholesale energy commitments................................................              65               75
       Other.......................................................................              17               14
                                                                                             ------          -------
                                                                                                 91               97
                                                                                             ------          -------

     Commitments and Contingent Liabilities
                                                                                             ------          -------

     Member's Equity...............................................................             387              453
                                                                                             ------          -------
                                                                                            $   629          $   696
                                                                                            =======          =======
</TABLE>

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

                                       46
<PAGE>

CONSOLIDATED STATEMENT OF MEMBER'S EQUITY AND
COMPREHENSIVE INCOME
PPL Montana, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)

<TABLE>
<CAPTION>
                                                                                     Three Months Ended      Six Months Ended
                                                                                          June 30,               June 30,
                                                                                    ---------------------  ---------------------
                                                                                      2001       2000        2001       2000
                                                                                    ---------- ----------  ---------- ----------
<S>                                                                                 <C>       <C>          <C>       <C>
Member's equity at beginning of period............................................   $  430    $   425      $  453    $   417
   Net income (a).................................................................       23         (1)        100          7
   Distribution to Member.........................................................      (67)                  (167)
                                                                                     ------    -------      ------    -------
Member's equity at end of period..................................................      386        424         386        424
                                                                                     ------    -------      ------    -------

Accumulated other comprehensive income (loss) at beginning of period..............     (182)
   Unrealized gain on qualifying derivatives (a)..................................      183                      1
                                                                                     ------    -------      ------    -------
Accumulated other comprehensive income at end of period...........................        1                      1
                                                                                     ------    -------      ------    -------


Total Member's Equity.............................................................   $  387    $   424      $  387    $   424
                                                                                     ======    =======      ======    =======


(a)   Statement of Comprehensive Income (Loss):

      Net income (loss)...........................................................   $   23    $    (1)     $  100    $     7
      Other comprehensive income, net of taxes:
           Unrealized gain on qualifying derivatives, net of tax of $117, $0......      183                      1
                                                                                     ------    -------      ------    -------
           Total other comprehensive income.......................................      183                      1
                                                                                     ------    -------      ------    -------
       Comprehensive Income (Loss)................................................   $  206    $    (1)     $  101    $     7
                                                                                     ======    =======      ======    =======
</TABLE>


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

                                       47
<PAGE>

                       PPL MONTANA, LLC AND SUBSIDIARIES

                  Notes to Consolidated Financial Statements
                  ------------------------------------------

Terms and abbreviations appearing in Notes to Consolidated Financial Statements
are explained in the glossary.

1.  Interim Financial Statements

Certain information in footnote disclosures, normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the U.S., has been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the SEC. These financial statements should be read in
conjunction with the financial statements and notes included in PPL Montana's
Form S-4 Registration Statement filed with the SEC on March 2, 2001 for the year
ended December 31, 2000.

Certain amounts in the December 31, 2000 financial statements have been
reclassified to conform to the presentation in the June 30, 2001 financial
statements.

2.  Credit Arrangements and Financing Activities

PPL Montana has a $100 million Tranche B Revolver which matures in November
2002. The maturity date may be extended with the consent of the lenders. The
Tranche B Revolver provides that up to $75 million of the commitment may be used
to issue letters of credit. At June 30, 2001, there were no amounts outstanding
under the Tranche B Revolver and $21 million of letters of credit were issued
thereunder.

In April 2001, PPL Montana entered into a new credit facility to allow for
incremental letter of credit capacity of $150 million. At June 30, 2001, there
were no amounts outstanding under this facility.

3.  Commitments and Contingent Liabilities

Wholesale Energy Commitments

As part of the purchase of generation assets from Montana Power, PPL Montana
agreed to supply electricity under two wholesale transition service agreements.
In addition, PPL Montana assumed a power purchase agreement and a power sales
agreement. In accordance with purchase accounting guidelines, PPL Montana
recorded a liability of $118 million, the estimated fair value of the agreements
at the acquisition date. The supply and purchase agreements are prospectively
amortized over the agreement terms as adjustments to "Wholesale energy marketing
and trading" revenues and "Energy purchases," respectively, on the Consolidated
Statement of Income. The unamortized balance at June 30, 2001 was $89 million.

Environmental Matters
Air
---

The Clean Air Act deals, in part, with acid rain, attainment of federal ambient
ozone standards and toxic air emissions. PPL Montana is substantially compliant
with the Clean Air Act.

The EPA has developed a revised ambient ozone standard and a new standard for
ambient fine particulates. These standards were challenged and remanded to the
EPA by the D.C. Circuit Court of Appeals in 1999. The United States Supreme
Court is reviewing the Circuit Court decision. The new particulates standard, if
finalized, may require further reductions in SO2 emissions for PPL Montana.

Under the Clean Air Act, the EPA has been studying the health effects of
hazardous air emissions from power plants and other sources, in order to
determine what should be regulated, and has determined that mercury emissions
must be regulated. In this regard, the EPA is expected to develop regulations by
2004.

In 1999, the EPA initiated enforcement actions against several utilities,
asserting that older, coal-fired power plants operated by those utilities have,
over the years, been modified in ways that subject them to more stringent "New
Source" requirements under the Clean Air Act. The EPA has since issued notices
of violation and commenced enforcement activities against other utilities, and
has threatened to continue expanding its enforcement actions. At this time, PPL
Montana is unable to predict whether such EPA enforcement actions will be
brought with respect to any of its affiliates' plants. However, the EPA's
regional offices that regulate PPL Montana's generation plants have indicated an
intention to issue information requests to all utilities in its jurisdiction and
have issued such a request to PPL Montana related to its Corette plant. PPL
Montana has responded to the information request. PPL Montana cannot predict
what, if any, enforcement action the EPA might take. The EPA has reportedly
suspended further enforcement activity pending an interagency review of the "New
Source" program. Should the EPA initiate one or more enforcement actions against
PPL Montana, compliance with any such EPA enforcement action could result in
additional capital and operating expenses in amounts which are not now
determinable, but which could be significant.

                                       48
<PAGE>

Water/Waste
-----------

In 2000, the EPA significantly tightened the water quality standard for arsenic.
However, the EPA has now withdrawn the standard in order to further study the
matter. A tightened standard may require PPL Montana to further treat wastewater
and/or take abatement action at several of its power plants, the cost of which
is not now determinable, but which could be significant.

EPA's proposed requirements for new or modified water intake structures will
affect where generating facilities are built, will establish intake design
standards, and could lead to requirements for cooling towers at new power
plants. These proposed regulations are expected to be finalized by November
2001. The rule could require new or modified cooling towers at one or more PPL
Montana stations. Another new rule, expected to be finalized in 2003, will
address existing structures. Each of these rules could impose significant costs
on PPL Montana, which are not now determinable.

Remediation
-----------

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

PPL Montana has been indemnified by Montana Power for any preacquisition
environmental liabilities. However, this indemnification is conditioned on
certain circumstances that can result in PPL Montana and Montana Power sharing
in certain costs within limits set forth in the Asset Purchase Agreement.

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 Montana that cannot be estimated at this time.

General
-------

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

Source of Labor Supply

Approximately 68% and 2% of the PPL Montana employees are represented by
International Brotherhood of Electrical Workers (IBEW) and Teamsters,
respectively. In 2001, PPL Montana reached a new three-year contract with the
employees represented by the IBEW local 1638 and reached a new four-year
contract with IBEW Local 44. PPL Montana is also currently negotiating with the
Teamsters for a new employment agreement.

4.  Sales to California Independent System Operator and to Other Pacific
    Northwest Purchasers

PPL Montana has made approximately $18 million of sales to the California
Independent System Operator ("Cal ISO"), for which PPL Montana has not yet been
paid in full. Given the myriad of electricity supply problems presently faced by
the California electric utilities and the Cal ISO, PPL Montana cannot predict
when it will receive payment. As of June 30, 2001, PPL Montana has fully
reserved for possible underrecoveries of payments for these sales.

Litigation arising out of the California electricity supply situation has been
filed at the FERC and in California courts against sellers of energy to the Cal
ISO. The plaintiffs and intervenors in these proceedings allege abuses of market
power, manipulation of market prices, unfair trade practices and violations of
state antitrust laws, among other things, and seek price caps on wholesale sales
in California and other western power markets, refunds of excess profits
allegedly earned on these sales, and other relief, including treble damages and
attorney's fees. PPL Montana has intervened in the FERC proceedings in order to
protect its interests, but have not been named as a defendant in any of the
court actions. In addition, attorneys general in several western states,
including California, have begun investigations related to the electricity
supply situation in California and other western states. FERC currently is
considering whether to order refunds for sales made into California markets,
including sales made by PPL Montana. FERC also is considering whether to order
refunds for sales made in the Pacific Northwest, including sales made by PPL
Montana. PPL Montana cannot predict whether it will eventually be the target of
any governmental investigation or named in these lawsuits, refund proceedings,
or other lawsuits, the outcome of any such proceeding or whether the ultimate
impact on PPL Montana of the electricity supply situation in California and
other western states will be material.

5.  Pending Transactions

PPL Global, an indirect wholly-owned subsidiary of PPL and an affiliate of PPL
Montana, was party to separate asset purchase agreements with Portland General

                                       49
<PAGE>

Electric Company and Puget Sound Energy, Inc. to purchase their respective
interests in the Colstrip Units and certain related transmission assets and
rights. The interested parties mutually agreed to terminate these asset purchase
agreements in 2000.

The Montana Power Asset Purchase Agreement, previously assigned to PPL Montana
by PPL Global, provided that if neither the Puget Sound Energy, Inc. or Portland
General Electric Company acquisitions were consummated, PPL Montana would be
required to purchase a portion of Montana Power's interest in the 500 kilovolt
Colstrip Transmission System for $97 million. PPL Montana is currently in
discussions with Montana Power to pursue alternatives to acquiring this entire
interest in the Colstrip Transmission System as contemplated by the Asset
Purchase Agreement. These discussions are ongoing; therefore, PPL Montana cannot
predict whether it will buy all, or less than all of Montana Power's entire
interest in the Colstrip Transmission System, or what the purchase price will be
if a purchase occurs.

6.   Adoption of SFAS 133

PPL Montana adopted SFAS 133, "Accounting for Derivative Instrument and Hedging
Activities," on January 1, 2001. SFAS 133 requires that every derivative
instrument be recorded on the balance sheet as an asset or liability measured at
its fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
133 requires that as of the date of initial adoption, the difference between the
fair market value of derivative instruments recorded on the balance sheet and
the previous carrying amount of those derivatives be reported in net income or
other comprehensive income, as appropriate.

In accordance with the transition provisions of SFAS 133, PPL Montana had no
recorded cumulative-effect adjustment in earnings to recognize the difference
between the carrying values and fair values of derivatives not designated as
hedging instruments as per SFAS 133. PPL Montana recorded a cumulative-effect
adjustment charge of $156 million in accumulated other comprehensive income in
Member's Equity on the Consolidated Balance Sheet, to recognize the difference
between the carrying values and fair values of derivatives designated as cash
flow hedging instruments as per SFAS 133. PPL Montana expects to reclassify $120
million into earnings from the transition adjustment that was recorded in other
comprehensive income during the twelve months ended December 31, 2001.

Accounting for Derivatives and Hedging Activities

All derivatives are recognized on the balance sheet at their fair value.
According to SFAS 133, fair value is defined as the amount at which an asset
(liability) could be bought (incurred) or sold (settled) in a current
transaction between willing parties, that is, other than in a forced or
liquidation sale. On the date the derivative contract is entered into, PPL
Montana designates the derivative as:

 .    A hedge of the fair value of a recognized asset or liability or of an
     unrecognized firm commitment ("fair value" hedge),

 .    A hedge of a forecasted transaction or of the variability of cash flows to
     be received or paid related to a recognized asset or liability ("cash flow"
     hedge),

 .    A foreign-currency fair-value or cash flow hedge ("foreign currency"
     hedge),

 .    A hedge of a net investment in a foreign operation, or

 .    A non-hedge derivative.

Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a fair value hedge, along with the loss or gain
on the hedged asset or liability that is attributable to the hedged risk, are
recorded in current period earnings. Changes in the fair value of a derivative
that is highly effective as, and that is designated as and qualifies as, a cash
flow hedge are recorded in other comprehensive income, until earnings are
affected by the variability of cash flows being hedged. Changes in the fair
value of derivatives that are designated as and qualifies as foreign currency
hedges are recorded in either current period earnings or other comprehensive
income, depending on whether the hedge transaction is a fair value hedge or a
cash flow hedge. If however, a derivative is used as a hedge of a net investment
in a foreign operation, its changes in fair value, to the extent effective as a
hedge, are recorded in the cumulative translation adjustments account within
equity. Changes in the fair value of derivatives that are not designated as
hedging instruments are reported in current-period earnings.

PPL Montana formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair value, cash flow or foreign currency
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. PPL Montana formally assesses, both
at the hedge's

                                       50
<PAGE>

inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values
or cash flows of hedged items.

PPL Montana discontinues hedge accounting prospectively when it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of a hedged item; when the derivative expires or is sold,
terminated or exercised; or when the derivative is dedesignated as a hedge
instrument because it is unlikely that a forecasted transaction will occur or
management determines that designation of the derivative as a hedge instrument
is no longer appropriate.

When hedge accounting is discontinued because it is determined that the
derivative no longer qualifies as an effective fair value hedge, the derivative
will continue to be carried on the balance sheet at its fair value, and the
hedged asset or liability will no longer be adjusted for changes in its fair
value. When hedge accounting is voluntarily discontinued so that the forecasted
transaction can be re-hedged with a new hedging instrument, the derivative will
continue to be carried on the balance sheet at its fair value, and gains and
losses that were accumulated in other comprehensive income will remain until the
hedged forecasted transaction impacts earnings. In all other situations in which
hedge accounting is discontinued, the derivative will be carried at its fair
value on the balance sheet, with changes in its fair value recognized in current
period earnings.

Derivative Instruments and Hedging Activities

PPL Montana's primary market risk exposures are associated with commodity
prices. PPL Montana actively manages the market risk inherent in its commodity
positions. The Board of Directors of PPL Montana has adopted a risk management
policy to manage the risk exposures related to energy prices. This policy
monitors and assists in controlling market risk and use of derivative
instruments to manage some associated commodity activities. For the three and
six months ended June 30, 2001, PPL Montana held derivative instruments
designated as cash flow hedging instruments.

PPL Montana's derivative activities are subject to the management, direction and
control of RMC. The RMC is composed of the chief financial officer and other
officers of PPL. The RMC reports to the Board of Directors of PPL on the scope
of its derivative activities. The RMC sets forth risk-management philosophy and
objectives through a corporate policy, provides guidelines for
derivative-instrument usage, and establishes procedures for control and
valuation, counterparty credit approval, and the monitoring and reporting of
derivative activity. Market risk is the adverse effect on the value of a
financial transaction that results from a change in commodity prices, interest
rates or currency exchange rates. The market risk associated with commodity
price, interest rate and foreign exchange contracts is managed by the
establishment and monitoring of parameters that limit the types and degree of
market risk that may be undertaken.

PPL Montana utilizes financial and physical contracts as part of its risk
management strategy to minimize unanticipated fluctuations in earnings caused by
commodity price volatility.

PPL Montana maintains a commodity price risk management strategy that uses
derivative instruments to minimize significant, unanticipated earnings
fluctuations caused by commodity price volatility. Fluctuations in electricity
commodities cause firm commitments for purchase or sale of these commodities to
develop unrealized gains or losses when compared to current commodity prices.
PPL Montana uses swaps to hedge these risks.

By using derivative instruments to hedge exposures to changes in commodity
rates, interest rates and exchange rates, PPL Montana exposes itself to credit
risk and market risk. Credit risk is the failure of the counterparty to perform
under the terms of the derivative contract. When the fair value of a derivative
contract is positive, the counterparty owes PPL Montana, which creates repayment
risk for PPL Montana. When the fair value of the derivative contract is
negative, PPL Montana owes the counterparty and, therefore it does not possess
repayment risk. PPL Montana attempts to mitigate the credit (or repayment) risk
in derivative instruments by entering into transactions with counterparties who
meet credit rating criteria, limiting the amount of exposure to each
counterparty, and monitoring the financial condition of its counterparties.
Additionally, in certain circumstances, PPL Montana obtains credit enhancements
and/or enters into bilateral collateral arrangements.

Fair Value Hedges

PPL Montana had no derivative instruments designated as fair value hedges for
the six months ended June 30, 2001.

Cash Flow Hedges

PPL Montana enters into financial swap contracts to hedge the price risk
associated with electric commodities. These contracts range in maturity through
2006. For the three and six months ended June 30, 2001 PPL Montana recorded
net-of-tax gains of $183 million and $400,000, respectively (reported in
accumulated other comprehensive income in Member's

                                       51
<PAGE>

Equity on the Consolidated Balance Sheet). PPL Montana has reserved and stands
ready to deliver energy from the planned output of its generating units. In
these cases, PPL Montana realized a margin that represents the difference
between the sales price and the average cost of generation.

As a result of changes in economic conditions, certain previously hedged
transactions are no longer probable of occurring. Consequently, PPL Montana
discontinued hedge accounting for such cash flow hedges which resulted in a net
of tax gain of $7 million reported in current earnings for the three and six
months ended June 30, 2001.

As of June 30, 2001, the deferred net losses on derivative instruments in
accumulated other comprehensive income expected to be reclassified into earnings
during the next twelve months are $4 million. The sale of associated
electricity, that is expected to occur over the next twelve months, will
necessitate reclassifying to earnings these derivative losses. PPL Montana
expects the majority of these losses to be largely offset by the inverse changes
in the market value of the underlying commodities, the electricity generated.
PPL Montana expects these offsetting gains to exceed the mark-to-market losses
on the associated derivative instruments when the transactions are recorded in
future earnings over the next twelve months.

Unrealized Gains/Losses on Derivatives Qualified as Hedges
(Millions of Dollars)
(After tax)

                                               June 30, 2001
                                        Three Months     Six Months
                                           Ended           Ended
                                      -------------  --------------

Unrealized losses on derivatives
qualified as hedges, beginning of
period:.............................     $  (182)       $      0

Unrealized gains (losses) arising
during period:
    Cumulative effect of change in
    accounting principle at
    January 1, 2001.................                        (156)

    Other unrealized gains .........         190             164

    Less:  reclassification for gains
    included in net  income.........           7               7
                                         -------        --------
Other comprehensive income.........          183               1
                                         -------        --------

Unrealized gains on derivatives
qualified as hedges, end of period..     $     1        $      1
                                         =======        ========



7.   New Accounting Standards

SFAS 141

On June 30, 2001, the FASB issued SFAS 141, "Business Combinations," which
eliminates the pooling-of-interest method of accounting for business
combinations and requires the use of the purchase method. In addition, it
requires the reassessment of intangible assets to determine if they are
appropriately classified either separately or within goodwill. SFAS 141 is
effective for business combinations initiated after June 30, 2001. PPL Montana
adopted SFAS 141 on July 1, 2001, with no material impact on the financial
statements.

SFAS 142

On June 30, 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," which eliminates the amortization of goodwill and other acquired
intangible assets with indefinite economic useful lives. SFAS 142 requires an
annual impairment test of goodwill and other intangible assets that are not
subject to amortization. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The impact of adopting SFAS 142 is not yet determinable, but
will be immaterial.

SFAS 143

On June 30, 2001, the FASB approved SFAS 143, "Accounting for Asset Retirement
Obligation," on the accounting for obligations associated with the retirement of
long-lived assets. SFAS 143 requires a liability to be recognized in the
financial statements for retirement obligations meeting specific criteria.
Measurement of the initial obligation is to approximate fair value with an
equivalent amount recorded as an increase in the value of the capitalized asset.
The asset will be depreciated in accordance with normal depreciation policy and
the liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The potential impact of adopting SFAS 143 is not yet
determinable, but may be material.

8.   Subsequent Events

Energy Supply to Montana Power

PPL Montana has two transition agreements to supply wholesale electricity to
Montana Power. One agreement provides for the sale of 200 megawatts from the
leasehold interest in Colstrip Unit 3 until December 2001. The second agreement
covers Montana Power until its remaining load is zero, but in no event later
than June 2002. In April 2001, PPL announced that PPL EnergyPlus has offered to
provide Montana Power with 500 megawatts of energy to be supplied by PPL

                                       52
<PAGE>

Montana. The delivery term of this new contract would be for five years
beginning July 1, 2002, which is the day after the termination date of the
second contract, pursuant to which PPL Montana supplies energy to Montana Power
to serve its retail load not served by other providers or provided by Montana
Power's remaining generation.

Under the proposed new contract, PPL Montana would be obligated to sell this
energy to Montana Power only to the extent that the energy is produced by
certain designated units of PPL Montana. The price under the contract would be
fixed at 4 cents per kWh. However, if PPL Montana is subjected to significantly
increased costs or regulatory burdens by the MPSC or the Montana Legislature or
any other governmental authority during the contract period, PPL Montana could
pass the resulting costs through to Montana Power as an addition to the contract
price. Also, in that event PPL Montana could terminate the contract. Montana
Power has not accepted the new contract. If PPL EnergyPlus and Montana Power
agree to a contract, it would be submitted to the MPSC and the FERC for review
and approval.

In June 2001, the MPSC issued an order (MPSC Order) in which it found that
Montana Power must continue to provide electric service to its customers at
tariffed rates until its transition plan under the Montana Electricity Utility
Industry Restructuring and Customer Choice Act is finally approved, and that
purchasers of generating assets from Montana Power must provide electricity to
meet Montana Power's full load requirements at prices to Montana Power that
reflect costs calculated as if the generation assets had not been sold. PPL
Montana purchased Montana Power's interest in two coal-fired plants and 11
hydroelectric units in 1999.

In July 2001, PPL Montana filed a complaint against the MPSC with the U.S.
District Court in Helena, Montana, challenging the MPSC Order. In its complaint,
PPL Montana asserted, among other things, that the Federal Power Act preempts
states from exercising regulatory authority over sale of electricity in
wholesale markets, and requested the court to declare the MPSC action preempted,
unconstitutional and void. In addition, the complaint requested that the MPSC be
enjoined from seeking to exercise any authority, control or regulation of
wholesale sales from PPL Montana's generating assets.

At this time, PPL Montana cannot predict the outcome of the proceedings related
to the MPSC Order, whether PPL Montana and Montana Power will reach a new supply
agreement, whether any such agreement will be approved by the MPSC or the FERC
on acceptable terms, what actions the MPSC, the Montana Legislature or any other
governmental authority may take on these or related matters, or the ultimate
impact on PPL Energy Supply and PPL Montana of any of these matters.

Energy Supply to Energy West Resources, Inc.

In July 2001, PPL Montana filed an action in state court and a responsive
pleading in federal court, both related to a breach of contract by Energy West
Resources, Inc. (Energy West), a Great Falls, Montana-based energy aggregator.
Energy West had obtained a temporary restraining order stopping PPL Montana from
filing with FERC for authority to terminate the contract with Energy West. In
the federal action, PPL Montana had requested that the court refrain from
issuing a preliminary injunction and lift a temporary restraining order that had
been issued in July 2001, prohibiting PPL Montana from seeking to terminate the
contract under which it supplies energy to Energy West. In the state action, PPL
Montana is seeking a judgment that Energy West violated the terms of the supply
contract and should pay damages of at least $7.5 million. Subsequently, in July
2001, the federal court judge dissolved the temporary restraining order and
stayed all proceedings in the case pending resolution by the FERC of a request
by PPL Montana to terminate the contract between PPL Montana and Energy West.
PPL Montana cannot predict the ultimate outcome of these proceedings.

Energy Supply to Montana Energy Pool

PPL Montana has executed an agreement to supply 20 megawatts to the Montana
energy pool at 3.5 cents per kWh through June 2002.

                                       53
<PAGE>

                      PPL MONTANA, LLC AND SUBSIDIARIES

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


This discussion should be read in conjunction with the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in PPL Montana's Form S-4 Registration Statement filed with the SEC
on March 2, 2001 for the year ended December 31, 2000. Terms and abbreviations
appearing in Management's Discussion and Analysis of Financial Condition and
Results of Operations are explained in the glossary.

PPL Montana was formed to acquire, own, lease and operate the Montana portfolio.
The aggregate purchase price for the Montana portfolio, which PPL Montana
acquired on December 17, 1999, was $767 million, which included a $760 million
payment to Montana Power and $7 million for transaction expenses. PPL Montana
funded the acquisition with a $402 million indirect equity contribution from PPL
and a $365 million draw under its credit facility. After the acquisition closed,
PPL made additional indirect equity contributions of approximately $15 million.
PPL is also required to provide an additional indirect equity contribution of a
maximum of $97 million in the event that PPL Montana purchases a portion of
Montana Power's interest in the Colstrip Transmission System.

In July 2000, PPL Montana completed a sale and leaseback of its interests in the
Colstrip Generating Station. The owner lessors paid an aggregate amount of
approximately $410 million for the leased assets. This amount was funded by
equity contributions from the owner investor to the owner lessors in the amount
of $72 million, and $338 million of the proceeds from the sale of pass-through
trust certificates secured by lessor notes.

                              Results of Operations
                              ---------------------

The following discussion explains significant changes in principal items on the
Consolidated Statement of Income, comparing the three and six months ended June
30, 2001, to the comparable periods in 2000.

PPL Montana has a limited operating history. Separate financial statements for
PPL Montana are available only for the period since acquisition. Prior to that,
the portfolio's operations were fully integrated with Montana Power's
operations. Therefore, the Montana portfolio's results of operations were
consolidated into the financial statements of Montana Power. In addition, the
energy generated by the Montana portfolio was sold based on rates set by
regulatory authorities.


Operating Revenues

Wholesale energy marketing and trading revenues were $99 million and $63 million
for the three months ended June 30, 2001 and 2000, respectively. The increase in
revenues was primarily due to higher wholesale energy prices related to an
energy supply shortage in the western U.S.

Wholesale energy marketing and trading revenues were $281 million and $124
million for the six months ended June 30, 2001 and 2000, respectively. The
increase in revenues was due to the foregoing reasons.

In June 2001, the FERC instituted a series of price controls designed to
mitigate (or cap) prices in the entire western U.S. as a result of the
California energy crisis. These price controls have had the effect of
significantly lowering spot and forward energy prices in the western U.S., where
PPL Montana sells power.

PPL Montana has two transition agreements to supply wholesale electricity to
Montana Power. One agreement provides for the sale of 200 megawatts from the
leasehold interest in Colstrip Unit 3 until December 2001. The other agreement
covers Montana Power until the remaining load is zero, but in no event later
than June 2002. In April 2001, PPL announced that PPL EnergyPlus has offered to
provide Montana Power with 500 megawatts of energy to be supplied by PPL
Montana. The delivery term of this new contract would be for five years
beginning July 1, 2002, which is the day after the termination date of the
second contract, pursuant to which PPL Montana supplies energy to Montana Power
to serve its retail load not served by other providers or provided by Montana
Power's remaining generation.

Under the proposed new contract, PPL Montana would be obligated to sell this
energy to Montana Power only to the extent that the energy is produced by
certain designated units of PPL Montana. The price under the contract would be
fixed at 4 cents per kWh. However, if PPL Montana is subjected to significantly
increased costs or regulatory burdens by the MPSC or the Montana Legislature or
any other governmental authority during the contract period, PPL Montana could
pass the resulting costs through to Montana Power as an addition to the contract
price. Also, in that event PPL Montana could terminate the contract. Montana
Power has not accepted the new contract. If PPL EnergyPlus and Montana Power
agree to a contract, it would be submitted to the MPSC and the FERC for review
and approval.

                                       54
<PAGE>

In June 2001, the MPSC issued an order (MPSC Order) in which it found that
Montana Power must continue to provide electric service to its customers at
tariffed rates until its transition plan under the Montana Electricity Utility
Industry Restructuring and Customer Choice Act is finally approved, and that
purchasers of generating assets from Montana Power must provide electricity to
meet Montana Power's full load requirements at prices to Montana Power that
reflect costs calculated as if the generation assets had not been sold. PPL
Montana purchased Montana Power's interest in two coal-fired plants and 11
hydroelectric units in 1999.

In July 2001, PPL Montana filed a complaint against the MPSC with the U.S.
District Court in Helena, Montana, challenging the MPSC Order. In its complaint,
PPL Montana asserted, among other things, that the Federal Power Act preempts
states from exercising regulatory authority over sale of electricity in
wholesale markets, and requested the court to declare the MPSC action preempted,
unconstitutional and void. In addition, the complaint requested that the MPSC be
enjoined from seeking to exercise any authority, control or regulation of
wholesale sales from PPL Montana's generating assets.

As part of the purchase of generation assets from Montana Power, PPL Montana
agreed to supply electricity to the United States Government on behalf of
Flathead Irrigation Project. Under the agreement, which expires in December
2010, PPL Montana is required to supply approximately 7.5 megawatts of capacity
year round, with an additional 3.7 megawatts during the months of April through
October.

Operation Expense

Operation expenses increased by $5 million and $20 million for the three month
and six months ended June 30, 2001, respectively, compared to the same periods
in 2000. Operation expenses consist mainly of expenses for fuel, energy
purchases, transmission tariffs, plant operations and maintenance, lease rental
payments and general and administrative expenses.

Generation decreased by 252 and 576 million kWh for the three and six months
ended June 30, 2001, respectively, compared to the same periods in 2000. These
decreases were primarily the result of lower hydroelectric generation caused by
the lower than normal water flow in the northwestern U.S.

Fuel

Fuel decreased by $2 million for the three and six months ended June 30, 2001,
compared to the same periods in 2000. These changes were primarily due to
decreased coal costs and the use of less coal due to alternative fuel sources.

Energy Purchases

Energy purchases decreased by $4 million and increased by $6 million for the
three and six months ended June 30, 2001, respectively, compared to the same
periods in 2000. The decrease for the three months ended was related to lower
supply obligations under long-term supply commitments for the three months,
resulting in less purchased power. The increase for the six months ended was the
result of increased power costs in the western U. S.

As part of the purchase of generation assets from Montana Power, PPL Montana
assumed a power purchase agreement, which expires in April 2010, with Basin
Electric Power Cooperative. The agreement requires PPL Montana to purchase up to
98 megawatts of firm capacity from November through April of each year.

Other Operation and Maintenance Expenses

Other operation and maintenance expense increased by $12 million and $20 million
for the three and six months ended June 30, 2001, respectively, compared to the
same periods in 2000. These increases were primarily due to lease expense
associated with the Colstrip plant sale and leaseback.

Transmission Expenses

Transmission expenses decreased by $1 million and $2 million for the three and
six months ended June 30, 2001, respectively, compared to the same periods in
2000. These decreases were due to lower generation in the first six months of
2001 and more in-state sales in 2001, requiring less transmission usage.

Depreciation Expense

Depreciation expense decreased by $2 million and $3 million for the three and
six months ended June 30, 2001, respectively, compared to the same periods in
2000. These decreases were mainly due to the reduction of property, plant and
equipment related to the sale and leaseback of PPL Montana's interest in the
Colstrip plant completed in July 2000.

Other Income

Other income remained relatively stable for the three months ended June 30, 2001
compared to the same period in 2000. Other income increased by $1 million for
the six months ended June 30, 2001 compared to the same period in 2000. The
change for the six-month period was due mainly to higher interest income from
increased cash and cash equivalents on hand during the first quarter of 2001.

                                       55
<PAGE>

Interest Expense

Interest expense decreased by $8 million and $15 million for the three and six
months ended June 30, 2001, respectively, compared to the same periods in 2000.
Interest expense relates to interest on the credit facility, amortization of
related financing costs and interest on accretion of wholesale energy
commitments. These decreases were mainly due to the retirement of debt
obligations in 2000.

Income Taxes

Income taxes increased by $15 million and $60 million for the three and six
months ended June 30, 2001, respectively, compared to the same periods in 2000.
These changes were due to the increase in taxable income in 2001.

                              Financial Conditions
                              --------------------

PPL Montana is required to make semi-annual rent payments under the Colstrip
leases on each January 2 and July 2 during the terms of the leases. PPL
Montana's minimum rent obligations under the leases are approximately $21
million for 2001, $49 million for 2002, $47 million for 2003, $44 million for
2004, $38 million for 2005 and a total of $509 million for the remaining term of
the leases. As a result of these obligations, a substantial portion of PPL
Montana's cash flow from operations will be dedicated to payments of rent under
the leases.

PPL Montana expects to make continued capital expenditures for the Montana
portfolio. The average capital expenditures PPL Montana expects to make are
approximately $20 million per year for the next three years. Compliance with
environmental standards will continue to be reflected in PPL Montana's capital
expenditures and operating costs. PPL Montana believes that cash flow from its
operations will be sufficient to cover aggregate rent payments under the leases
and, together with borrowings under its working capital facility, to cover
expected capital expenditure requirements. If the cash flow from PPL Montana's
operations is not sufficient, any unanticipated capital expenditures could
adversely affect its cash flow from operations and operating income in the
period incurred.

Sales to California Independent System Operator and to Other Pacific Northwest
Purchasers

See Note 4 to the Financial Statements for information regarding sales to the
California ISO.


Market Risk Sensitive Instruments

Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------

PPL Montana actively manages the market risks inherent in its business. The
Board of Directors of PPL has adopted a risk management policy to manage risk
exposure. The policy establishes a risk management committee, comprised of
certain executive officers, which oversees the risk management function.
Nonetheless, adverse changes in commodity prices and interest rates may result
in losses in earnings, cash flows and/or fair values. The forward-looking
information presented below only provides estimates of what may occur in the
future, assuming certain adverse market conditions, due to reliance on model
assumptions. As a result, actual future results may differ materially from those
presented. These disclosures are not precise indicators of expected future
losses, but only indicators of reasonably possible losses.

Commodity Price Risk
--------------------

PPL Montana uses various methodologies to simulate forward price curves in the
energy markets to estimate the size and probability of changes in market value
resulting from commodity price movements. The methodologies require several key
assumptions, including selection of confidence levels, the holding period of the
commodity positions and the depth and applicability to future periods of
historical commodity price information.

At June 30, 2001, PPL Montana estimated that a 10% adverse movement in market
prices across the markets PPL Montana operates in, and across all time periods,
could have decreased the value of the non-trading and trading portfolio by
approximately $15 million and $200,000 at June 30, 2001, respectively. However,
this effect would have been offset by the change in the value of the underlying
commodity, the electricity generated. In addition to commodity price risk, PPL
Montana's commodity positions are also subject to operational and event risks
including, among others, increases in load demand and forced outages at
generating plants.

PPL Montana's risk management program is designed to manage the risks associated
with market fluctuations in the price of electricity. PPL Montana's risk
management policy and programs include risk identification and risk limits
management, with measurement and controls for real time risk monitoring. PPL
Montana has entered into fixed price forward contracts that require physical
delivery of the commodity and derivative financial instruments consisting mainly
of financial swaps where settlement is generally based on the difference between
a fixed price and an index-based price for the underlying commodity.

                                       56
<PAGE>

Interest Rate Risk
------------------

PPL Montana may use borrowings to provide funds for its operations. PPL Montana
utilizes various risk management instruments to reduce its exposure to adverse
interest rate movements through the use of financial derivative products to
adjust the mix of fixed and floating-rate interest rates in its debt portfolio.
PPL Montana has risk limits designed to balance risk exposure to volatility in
interest expense and losses in the fair value of the debt portfolio due to
changes in the absolute level of interest rates. PPL Montana had no borrowings
outstanding as of June 30, 2001.

Financing and Liquidity

Cash and cash equivalents decreased by $57 million more for the six months ended
June 30, 2001, compared with the same period in 2000. The reasons for the change
were:

 .    A $101 million increase in cash provided by operating activities, primarily
     due to an increase in operating income.

 .    A $1 million increase in cash used in investing activities due to more
     expenditures for property, plant and equipment.

 .    A $157 million increase in cash used in financing activities due to
     distributions to the member.

Environment Matters

See Note 3 to the Financial Statements for a discussion of environmental
matters.

                                       57
<PAGE>

      Item 3. Quantitative and Qualitative Disclosures About Market Risk
      ------------------------------------------------------------------

Reference is made to "Quantitative and Qualitative Disclosures About Market
Risk," in Management's Discussion and Analysis of Financial Condition and
Results of Operations.

                                       58
<PAGE>

                                PPL CORPORATION,
                                ---------------
                       PPL ELECTRIC UTILITIES CORPORATION,
                       ----------------------------------
                        PPL MONTANA, LLC AND SUBSIDIARIES
                        ---------------------------------

                           PART II. OTHER INFORMATION
                           --------------------------


Item 1.  Legal Proceedings
--------------------------

         Reference is made to "Legal Proceedings" in PPL's and PPL Electric's
         Annual Report to the SEC on Form 10-K for the year ended December 31,
         2000, "Legal Matter" in PPL Montana's Form S-4 and to the PPL, PPL
         Electric and PPL Montana "Notes to Consolidated Financial Statements"
         for additional information regarding various pending administrative and
         judicial proceedings involving regulatory, environmental and other
         matters.

Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

         At PPL's Annual Meeting of Shareowners held on April 27, 2001, the
         shareowners:

         (1)   Elected all three nominees for the office of director. The vote
               for all nominees was 115,682,632. The votes for individual
               nominees were as follows:

                                                  Number of Votes
                                                  ---------------
                                            For        Withhold Authority
                                            ---        ------------------
         William F. Hecht               115,880,329         1,868,250
         Stuart Heydt                   115,682,632         2,065,947
         W. Keith Smith                 115,919,862         1,828,717

         The vote to withhold authority for all nominees was 1,289,254.

         (2)  Ratified the appointment of PricewaterhouseCoopers LLP as
              independent auditors for the year ended December 31, 2001. The
              vote was 115,950,243 in favor and 807,612 against, with 990,724
              abstaining.

         At PPL Electric Utilities' Annual Meeting of Shareowners held on April
         24, 2001, the shareowners:

         (1)  Elected all eight nominees for the office of director. The vote
              for all nominees was 103,204,705. The votes for individual
              nominees were as follows:

                                                          Number of Votes for
                                                          -------------------

                           John R. Biggar                     103,204,705
                           Michael E. Bray                    103,204,705
                           Paul T. Champagne                  103,204,705
                           Lawrence E. De Simone              103,204,705
                           Robert J. Grey                     103,204,705
                           William F. Hecht                   103,204,705
                           Frank A. Long                      103,204,705
                           James H. Miller                    103,204,705

         The vote to withhold authority for all nominees was 0.

Item 6. Exhibits and Reports on Form 8-K
----------------------------------------

          (a)  Exhibits

                    10(a) - PPL Energy Supply $600 million 364-Day Credit
                    Agreement

                    10(b) - PPL Energy Supply $500 Million 3-Year Credit
                    Agreement

                    10(c) - PPL Electric $400 million 364-Day Credit Agreement

                    10(d) - PPL Montana $150 million 364-Day Credit Agreement

                    12(a), 12(b) and 12(c) - Computation of Ratio of Earnings to
                    Fixed Charges

         (b)   Reports on Form 8-K

                                       59
<PAGE>

         Report dated April 20, 2001
         ---------------------------

         Item 5. Other Events

                 Press release dated April 20, 2001 regarding PPL EnergyPlus'
                 offer to provide Montana Power with 500 MW of energy for five
                 years beginning July 1, 2002.

                 Press release dated April 23, 2001 regarding PPL's announcement
                 to develop a 540 MW power plant near Chicago, Illinois and to
                 increase the capacity at its Susquehanna nuclear plant in
                 Pennsylvania by 100 MW.

                 Press release dated April 24, 2001 regarding PPL's first
                 quarter 2001 earnings and revised earnings forecast for 2001
                 and 2002, PPL's structural separation of PPL Electric and PPL's
                 announcement to maintain its current dividend level.

         Report dated May 9, 2001
         ------------------------

         Item 5. Other Events

                 Information regarding PPL's offering of $575 million of the
                 Corporation's Premium Equity Participating Security Units
                 ("PEPS").

         Item 7. Exhibits

                 Exhibits filed with reference to Registration Statement on Form
                 S-3 of PPL, Registration Statement on Form S-3 of PPL Capital
                 Funding and Registration Statement Form S-3 of PPL Capital
                 Funding Trust I.

         Report dated June 20, 2001
         --------------------------

         Item 5. Other Events

                 Press release dated June 20, 2001 regarding PPL Electric's
                 announcement of its supply contract with PPL EnergyPlus.

                                       60
<PAGE>

                                  SIGNATURES
                                  ----------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its 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 Electric Utilities Corporation
                                              ----------------------------------
                                                        (Registrant)





Date: August 10, 2001                        /s/ John R. Biggar
                                             ----------------------------------
                                                          John R. Biggar
                                                   Executive Vice President and
                                                      Chief Financial Officer
                                                         (PPL Corporation)
                                                   (principal financial officer)




                                              /s/ Joseph J. McCabe
                                              ----------------------------------
                                                       Joseph J. McCabe
                                                Vice President and Controller
                                            (PPL Electric Utilities Corporation)
                                               (principal accounting officer)

                                       61
<PAGE>

                                   SIGNATURE
                                   ---------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                          PPL Montana, LLC
                                          ----------------
                                                     (Registrant)


Date: August 10, 2001                     /s/ Paul A. Farr
                                          --------------------------------------
                                                        Paul A. Farr
                                              Vice President, Chief Financial
                                              Officer and Assistant Secretary
                                                 (principal financial and
                                                    accounting officer)

                                       62