10-K 1 form10k.htm FORM 10-K form10k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2009
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________

Commission File
Number
Registrant; State of Incorporation;
Address and Telephone Number
IRS Employer
Identification No.
     
1-11459
PPL Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA  18101-1179
(610) 774-5151
23-2758192
     
1-32944
PPL Energy Supply, LLC
(Exact name of Registrant as specified in its charter)
(Delaware)
Two North Ninth Street
Allentown, PA  18101-1179
(610) 774-5151
23-3074920
     
1-905
PPL Electric Utilities Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA  18101-1179
(610) 774-5151
23-0959590
     
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
 
Common Stock of PPL Corporation
New York Stock Exchange
 
Senior Notes of PPL Energy Supply, LLC
  
 
7.0% due 2046
New York Stock Exchange
 
Preferred Stock of PPL Electric Utilities Corporation
  
 
4-1/2%
4.40% Series
New York Stock Exchange
New York Stock Exchange
     
Junior Subordinated Notes of PPL Capital Funding, Inc.
 
2007 Series A due 2067
New York Stock Exchange
 
Senior Notes of PPL Capital Funding, Inc.
 
6.85% due 2047
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the Registrants are well-known seasoned issuers, as defined in Rule 405 of the Securities Act.

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

Indicate by check mark if the Registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

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

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

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

Indicate by check mark whether the Registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

 
PPL Corporation
[ X ]
    
 
PPL Energy Supply, LLC
[ X ]
    
 
PPL Electric Utilities Corporation
[ X ]
    

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

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

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

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

As of June 30, 2009, PPL Corporation had 376,144,172 shares of its $.01 par value Common Stock outstanding.  The aggregate market value of these common shares (based upon the closing price of these shares on the New York Stock Exchange on that date) held by non-affiliates was $12,397,711,909.  As of January 29, 2010, PPL Corporation had 377,900,179 shares of its $.01 par value Common Stock outstanding.

As of January 29, 2010, PPL Corporation held all 66,368,056 outstanding common shares, no par value, of PPL Electric Utilities Corporation.

PPL Corporation indirectly holds all of the membership interests in PPL Energy Supply, LLC.

PPL Energy Supply, LLC meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.

Documents incorporated by reference:

PPL Corporation and PPL Electric Utilities Corporation have incorporated herein by reference certain sections of PPL Corporation's 2010 Notice of Annual Meeting and Proxy Statement, and PPL Electric Utilities Corporation's 2010 Notice of Annual Meeting and Information Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.  Such Statements will provide the information required by Part III of this Report.
PPL CORPORATION
PPL ENERGY SUPPLY, LLC
PPL ELECTRIC UTILITIES CORPORATION

FORM 10-K ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2009

TABLE OF CONTENTS

This combined Form 10-K is separately filed by PPL Corporation, PPL Energy Supply, LLC and PPL Electric Utilities Corporation.  Information contained herein relating to PPL Energy Supply, LLC and PPL Electric Utilities Corporation is filed by PPL Corporation and separately by PPL Energy Supply, LLC and PPL Electric Utilities Corporation on their own behalf.  No registrant makes any representation as to information relating to any other registrant, except that information relating to the two PPL Corporation subsidiaries is also attributed to PPL Corporation.

Item
    
Page
PART I
  
   
i
  
   
v
  
1.
  
1
  
1A.
  
9
  
1B.
  
16
  
2.
  
17
  
3.
  
18
  
4.
  
18
  
   
19
  
         
PART II
  
5.
  
21
  
6.
  
21
  
7.
  
Management's Discussion and Analysis of Financial Condition and Results of Operations
    
   
24
  
   
51
  
   
75
  
7A.
  
87
  
   
89
  
8.
  
93
  
9.
  
195
  
9A.
  
195
  
9A(T).
  
195
  
9B.
  
196
  
         
PART III
  
10.
  
196
  
11.
  
197
  
12.
  
197
  
13.
  
198
  
14.
  
198
  
         
PART IV
  
15.
  
199
  
   
200
  
   
202
  
   
205
  
   
215
  
   
218
  
   
224
  
   
230
  
GLOSSARY OF TERMS AND ABBREVIATIONS

PPL Corporation and its current and former subsidiaries

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

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

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

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

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

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

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

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

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

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

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

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

PPL Investment Corp. - PPL Investment Corporation, a subsidiary of PPL Energy Supply.

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

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

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

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

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

PPL Transition Bond Company - PPL Transition Bond Company, LLC, a subsidiary of PPL Electric that was formed to issue transition bonds under the Customer Choice Act.  This subsidiary was dissolved in June 2009.

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

WPD - refers collectively to WPDH Limited and WPDL.

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

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

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

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

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

Other terms and abbreviations

401(h) account - A sub-account established within a qualified pension trust to provide for the payment of retiree medical costs.

£ - British pounds sterling.

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

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

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

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

AMT - alternative minimum tax.

AOCI - accumulated other comprehensive income or loss.

ARO - asset retirement obligation.

Baseload generation - includes the output provided by PPL's nuclear, coal, hydroelectric and qualifying facilities.

Basis - when used in the context of derivatives and commodity trading, the commodity price differential between two locations, products or time periods.

Bcf - billion cubic feet.

Black Lung Trust - a trust account maintained under federal and state Black Lung legislation for the payment of claims related to disability or death due to pneumoconiosis.

CAIR - the EPA's Clean Air Interstate Rule.

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

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

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

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

DDCP - Directors Deferred Compensation Plan.

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

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

DRIP - Dividend Reinvestment Plan.

Economic Stimulus Package - The American Recovery and Reinvestment Act of 2009, generally referred to as the federal economic stimulus package, which was signed into law in February 2009.

EMF - electric and magnetic fields.

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

EPS - earnings per share.

ESOP - Employee Stock Ownership Plan.

EWG - exempt wholesale generator.

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

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

Fitch - Fitch, Inc.

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

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

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

HMRC - HM Revenue & Customs.  The tax authority in the U.K., formerly known as Inland Revenue.

IBEW - International Brotherhood of Electrical Workers.

ICP - Incentive Compensation Plan.

ICPKE - Incentive Compensation Plan for Key Employees.

Intermediate and peaking generation - includes the output provided by PPL Energy Supply's oil- and natural gas-fired units.

Ironwood - a natural gas-fired power plant in Lebanon, Pennsylvania with a winter rating of 759 MW.

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

IRC Sec. 481 - the Internal Revenue Code Section that prescribes the tax year in which adjustments to taxable income resulting from a change in a tax accounting method must be recognized.

ISO - Independent System Operator.

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

kVA - kilovolt-ampere.

kWh - kilowatt-hour, basic unit of electrical energy.

LCIDA - Lehigh County Industrial Development Authority.

LIBOR - London Interbank Offered Rate.

Long Island generation business - includes a 79.9 MW gas-fired plant in the Edgewood section of Brentwood, New York and a 79.9 MW oil-fired plant in Shoreham, New York.

MACT - maximum achievable control technology.

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

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

MW - megawatt, one thousand kilowatts.

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

NDT - nuclear plant decommissioning trust.

NERC - North American Electric Reliability Corporation.

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

NPDES - National Pollutant Discharge Elimination System.

NPNS - the normal purchases and normal sales exception as permitted by derivative accounting rules.

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

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

NYMEX - New York Mercantile Exchange.

OCI - other comprehensive income or loss.

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

PEDFA - Pennsylvania Economic Development Financing Authority.

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

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

PP&E - property, plant and equipment.

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

PUC Final Order - final order issued by the PUC on August 27, 1998, approving the settlement of PPL Electric's restructuring proceeding.
 
PUHCA - Public Utility Holding Company Act of 1935, legislation passed by the U.S. Congress.  Repealed effective February 2006 by the Energy Policy Act of 2005.
 
PURPA - Public Utility Regulatory Policies Act of 1978, legislation passed by the U.S. Congress to encourage energy conservation, efficient use of resources and equitable rates.

PURTA - The Pennsylvania Public Utility Realty Tax Act.

RAB - regulatory asset base.  This term is also commonly known as RAV.

RECs - renewable energy credits.

Regulation S-K - SEC regulation governing the content of reports and other documents required to be filed pursuant to the federal securities laws.

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

RMC - Risk Management Committee.

RMR - reliability must run.  Describes a generation facility that is operated at the request of an ISO to ensure system reliability, generally in a transmission constrained area of the electricity system.

RTO - Regional Transmission Organization.

Sarbanes-Oxley - Sarbanes-Oxley Act of 2002, which sets requirements for management's assessment of internal controls for financial reporting.  It also requires an independent auditor to make its own assessment.

SCR - selective catalytic reduction, a pollution control process.
 
Scrubber - an air pollution control device that can remove particulates and/or gases (such as sulfur dioxide) from exhaust gases.

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

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

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

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

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

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

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

Total shareowner return - increase in market value of a share of the Company's common stock plus the value of all dividends paid on a share of the common stock during the applicable performance period, divided by the price of the common stock as of the beginning of the performance period.

VaR - value-at-risk, a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.

VEBA - Voluntary Employee Benefit Association Trust, trust accounts for health and welfare plans for future benefit payments for employees, retirees or their beneficiaries.
FORWARD-LOOKING INFORMATION

Statements contained in this Form 10-K concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical fact are "forward-looking statements" within the meaning of the federal securities laws.  Although PPL, PPL Energy Supply and PPL Electric believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct.  Forward-looking statements are subject to many risks and uncertainties, and actual results may differ materially from the results discussed in forward-looking statements.  In addition to the specific factors discussed in "Item 1A. Risk Factors" and in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K report, the following are among the important factors that could cause actual results to differ materially from the forward-looking statements.

·
fuel supply cost and availability;
·
weather conditions affecting generation, customer energy use and operating costs;
·
operation, availability and operating costs of existing generation facilities;
·
transmission and distribution system conditions and operating costs;
·
potential expansion of alternative sources of electricity generation;
·
potential laws or regulations to reduce emissions of "greenhouse" gases;
·
collective labor bargaining negotiations;
·
the outcome of litigation against PPL and its subsidiaries;
·
potential effects of threatened or actual terrorism, war or other hostilities, or natural disasters;
·
the commitments and liabilities of PPL and its subsidiaries;
·
market demand and prices for energy, capacity, emission allowances and delivered fuel;
·
competition in retail and wholesale power markets;
·
liquidity of wholesale power markets;
·
defaults by counterparties under energy, fuel or other power product contracts;
·
market prices of commodity inputs for ongoing capital expenditures;
·
capital market conditions, including the availability of capital or credit, changes in interest rates, and decisions regarding capital structure;
·
stock price performance of PPL;
·
the fair value of debt and equity securities and the impact on defined benefit costs and resultant cash funding requirements for defined benefit plans;
·
interest rates and their effect on pension, retiree medical and nuclear decommissioning liabilities;
·
the impact of the current financial and economic downturn;
·
the effect of electricity price deregulation beginning in 2010 in PPL Electric's service territory;
·
the profitability and liquidity, including access to capital markets and credit facilities, of PPL and its subsidiaries;
·
new accounting requirements or new interpretations or applications of existing requirements;
·
changes in securities and credit ratings;
·
foreign currency exchange rates;
·
current and future environmental conditions, regulations and other requirements and the related costs of compliance, including environmental capital expenditures, emission allowance costs and other expenses;
·
political, regulatory or economic conditions in states, regions or countries where PPL or its subsidiaries conduct business;
·
receipt of necessary governmental permits, approvals and rate relief;
·
new state, federal or foreign legislation, including new tax legislation;
·
state, federal and foreign regulatory developments;
·
the outcome of any rate cases by PPL Electric at the PUC;
·
the impact of any state, federal or foreign investigations applicable to PPL and its subsidiaries and the energy industry;
·
the effect of any business or industry restructuring;
·
development of new projects, markets and technologies;
·
performance of new ventures; and
·
business or asset acquisitions and dispositions.

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

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

ITEM 1. BUSINESS

BACKGROUND

PPL Corporation, headquartered in Allentown, PA, is an energy and utility holding company that was incorporated in 1994.  Through its subsidiaries, PPL generates electricity from power plants in the northeastern and western U.S., markets wholesale or retail energy primarily in the northeastern and western portions of the U.S. and delivers electricity to approximately 4 million customers in Pennsylvania and the U.K.  PPL's significant subsidiaries are shown below:
 

In addition to PPL Corporation, the other SEC registrants included in this filing are:

PPL Energy Supply, LLC, an indirect wholly owned subsidiary of PPL formed in 2000, is an energy company engaged through its subsidiaries in the generation and marketing of power, primarily in the northeastern and western power markets of the U.S. and in the delivery of electricity in the U.K.  PPL Energy Supply's major operating subsidiaries are PPL Generation, PPL EnergyPlus and PPL Global.  At December 31, 2009, PPL Energy Supply owned or controlled 11,719 MW of electric power generation capacity and has plans to implement capital projects at certain of its existing generation facilities in Pennsylvania and Montana to provide 239 MW of additional generating capacity by 2014.

PPL Electric Utilities Corporation, incorporated in 1920, is a direct subsidiary of PPL and a regulated public utility.  PPL Electric provides electricity delivery service in its service territory in Pennsylvania and provides electricity supply to retail customers in that territory as a PLR under the Customer Choice Act.
 
Segment Information

PPL is organized into three segments:  Supply, Pennsylvania Delivery and International Delivery.  PPL Energy Supply's segments consist of Supply and International Delivery.  PPL Electric operates in a single business segment.  See Note 2 to the Financial Statements for financial information about the segments and geographic financial data.

·
Supply Segment -
   
 
Owns and operates domestic power plants to generate electricity; markets and trades this electricity and other purchased power to deregulated wholesale and retail markets; and acquires and develops domestic generation projects.  Consists primarily of the activities of PPL Generation and PPL EnergyPlus.

PPL Energy Supply has generation assets that are located in the eastern and western U.S. markets.  The eastern generation assets are located in the Northeast/Mid-Atlantic energy markets - including PJM, the New York ISO and ISO New England.  PPL Energy Supply's western generating capacity is located in markets within the Western Electricity Coordinating Council.

 
PPL Energy Supply Owned or Controlled Generation Capacity

PPL Energy Supply owned or controlled generating capacity of 11,719 MW at December 31, 2009.  Through subsidiaries, PPL Generation owns and operates power plants primarily in Pennsylvania, Montana, Illinois, Connecticut, New York and Maine.  The total owned or controlled generating capacity includes power obtained through PPL EnergyPlus' tolling or power purchase agreements (including Ironwood and other facilities that consist of NUGs, wind farms and landfill gas facilities).  See "Item 2. Properties - Supply Segment" for a complete listing of PPL Energy Supply's generating capacity.

PPL Energy Supply's U.S. generation subsidiaries are EWGs, which sell electricity into the wholesale market.  PPL Energy Supply's EWGs are subject to regulation by the FERC, which has authorized these EWGs to sell generation from their facilities at market-based prices.  The electricity from these plants is sold to PPL EnergyPlus under FERC-jurisdictional power purchase agreements.

PPL Generation operates its Pennsylvania and Illinois power plants in conjunction with PJM.  PPL Generation's Pennsylvania and Illinois power plants and PPL EnergyPlus are members of the RFC.  Refer to "Pennsylvania Delivery Segment" for information regarding PJM's operations and functions and the RFC.

Pennsylvania generation had a total capacity of 9,583 MW at December 31, 2009.  These plants are fueled by uranium, coal, natural gas, oil, water and other fuels.

PPL Susquehanna, a subsidiary of PPL Generation, owns a 90% undivided interest in each of the two nuclear-fueled generating units at its Susquehanna station in Pennsylvania.  Allegheny Electric Cooperative, Inc. owns the remaining 10% undivided interest.  PPL's 90% share of Susquehanna's generating capacity was 2,206 MW at December 31, 2009.  The Illinois natural gas-fired station has a total capacity of 585 MW.

The Montana coal-fired and hydroelectric-powered stations have a capacity of 1,286 MW.  PPL Montana's power plants are operated in conjunction with the Western Electricity Coordinating Council.

The Connecticut natural gas-fired station has a total capacity of 244 MW, is operated in conjunction with ISO New England and the Northeast Power Coordinating Council.

The New York oil/gas-fired stations have a capacity of 159 MW.  These generating assets are operated in conjunction with the New York ISO and the Northeast Power Coordinating Council.  Tolling agreements are in place for 100% of the capacity and output of this business.  See Note 9 to the Financial Statements for additional information on the anticipated sale of the Long Island generation business.

The Maine hydroelectric-powered stations have a total capacity of 12 MW.  The Maine generating assets are operated in conjunction with ISO New England and the Northeast Power Coordinating Council.  See Note 9 to the Financial Statements for information on the November 2009 sale of the majority of the Maine hydroelectric business, the sale of PPL's interest in an oil-fired unit in Maine and the conditional agreement of sale for the remaining three hydroelectric facilities.

PPL Generation has current plans for capital projects at certain of its generation facilities in Pennsylvania and Montana to provide 239 MW of additional generation capacity for its use by 2014.  See "Item 2. Properties - Supply Segment" for additional information regarding these capital projects.

Refer to the "Power Supply" section for additional information regarding electricity generated by the power plants operated by PPL Generation and to the "Fuel Supply" section for a discussion of fuel requirements and contractual arrangements for fuel.

A subsidiary of PPL Energy Supply develops renewable energy plants on various sites using technologies such as turbines, reciprocating engines and photovoltaic solar panels.  Included in PPL Energy Supply's owned or controlled generating capacity reported in "Item 2. Properties - Supply Segment" is approximately 28 MW of installed capacity from these projects that serve commercial and industrial customers.

Certain PPL Energy Supply subsidiaries are subject to the jurisdiction of certain federal, regional, state and local regulatory agencies with respect to air and water quality, land use and other environmental matters.  PPL Susquehanna is subject to the jurisdiction of the NRC in connection with the operation of the Susquehanna units.  Certain of PPL Energy Supply's other subsidiaries are subject to the jurisdiction of the NRC in connection with the operation of their fossil plants with respect to certain level and density monitoring devices.

Certain operations of PPL Generation's subsidiaries are subject to the Occupational Safety and Health Act of 1970 and comparable state statutes.

 
Energy Marketing

PPL EnergyPlus sells the electricity produced by PPL Generation subsidiaries, along with purchased power, FTRs, natural gas, oil, uranium, emission allowances and RECs in competitive wholesale and deregulated retail markets in order to take advantage of opportunities in the competitive energy marketplace.

PPL EnergyPlus purchases and sells electric capacity and energy at the wholesale level at competitive prices under FERC market-based prices.  PPL EnergyPlus enters into these agreements to market available energy and capacity from PPL Generation's assets and to profit from market price fluctuations.  Within the constraints of its hedging policy, PPL EnergyPlus actively manages its portfolios to optimize the value of PPL's generating assets and to limit exposure to price fluctuations.  PPL EnergyPlus also enters into over-the-counter and futures contracts to purchase and sell energy and other commodity-based financial instruments in accordance with PPL's risk management policies, objectives and strategies.

PPL EnergyPlus had contracted to provide electricity to PPL Electric sufficient for it to meet its PLR obligation through 2009 at the predetermined capped rates PPL Electric was entitled to charge its customers.  These contracts accounted for 29% of PPL Energy Supply's operating revenues in 2009 and expired December 31, 2009.  See Note 15 to the Financial Statements for more information concerning these contracts.

PPL EnergyPlus is licensed to provide retail electric supply to customers in Delaware, Maine, Massachusetts, Maryland, Montana, New Jersey and Pennsylvania and provides electricity to industrial and commercial customers in Montana and Pennsylvania.  PPL EnergyPlus provides natural gas to customers in Pennsylvania, New Jersey, Delaware and Maryland.

 
Competition

The unregulated businesses and markets in which PPL and its subsidiaries participate are highly competitive.  Since the early 1990s, there has been increased competition in U.S. energy markets because of federal and state deregulation initiatives.  For example, in 1992 the Energy Act amended the Federal Power Act to provide open access to electric transmission systems for wholesale transactions.  In 1996, the Customer Choice Act was enacted in Pennsylvania to restructure the state's electric utility industry to create a competitive market for electricity generation.  Certain other states in which PPL's subsidiaries operate have also adopted "customer choice" plans to allow customers to choose their electricity supplier.  PPL and its subsidiaries believe that competition in deregulated energy markets will continue to be intense.

The Supply segment faces competition in wholesale markets for available energy, capacity and ancillary services.  Competition is impacted by electricity and fuel prices, new market entrants, construction by others of generating assets, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors.  The Supply segment primarily competes with other electricity suppliers based on its ability to aggregate generation supply at competitive prices from different sources and to efficiently utilize transportation from third-party pipelines and transmission from electric utilities and ISOs.  Competitors in wholesale power markets include regulated utilities, industrial companies, non-utility generators, unregulated subsidiaries of regulated utilities and other energy marketers.  See "Item 1A. Risk Factors - Risks Related to Supply Segment" and PPL's and PPL Energy Supply's "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" for more information concerning the risks faced with respect to competition in deregulated energy markets.

 
Power Supply

PPL Energy Supply's owned or controlled system capacity (winter rating) at December 31, 2009 was 11,719 MW.  The capacity of generating units is based upon a number of factors, including the operating experience and physical condition of the units, and may be revised periodically to reflect changes in circumstances.  See "Item 2. Properties - Supply Segment" for a description of PPL Energy Supply's plants at December 31, 2009.

During 2009, PPL Energy Supply's plants, excluding renewable facilities that are discussed separately below, generated the following amounts of electricity.

State
Millions of kWh
   
Pennsylvania
46,019
Montana
8,120
Maine
261
Connecticut
108
New York (a)
  
Illinois
64
Total
54,572

(a)
  
72 million kWhs were excluded as tolling agreements were in place for 100% of the output.

Of this generation, 49% of the energy was from coal-fired stations, 32% from nuclear operations at the Susquehanna station, 11% from oil/gas-fired stations and 8% from hydroelectric stations.

PPL Energy Supply estimates that, on average, approximately 94% of its total expected annual generation output for 2010 will be used to meet EnergyPlus' committed contractual sales.  PPL Energy Supply has also entered into commitments of varying quantities and terms for the years 2011 and beyond.  These commitments are consistent with, and integral to, PPL Energy Supply's business strategy to capture profits while managing exposure to adverse movements in energy and fuel prices.  See "Commodity Volumetric Activity" in Note 18 to the Financial Statements for the strategies PPL Energy Supply employs to optimize the value of its wholesale and retail energy portfolio.

Subsidiaries of PPL Energy Supply controlled existing renewable energy projects located in Pennsylvania, New Jersey, Vermont and New Hampshire with capacity of 28 MW.  PPL EnergyPlus sells the energy and RECs produced by these plants to commercial, industrial and institutional customers.  During 2009, these projects generated 145 million kWhs.  In addition, a PPL Energy Supply subsidiary owns renewable energy facilities with capacity of 6 MW that have power purchase agreements in place.  During 2009, these projects generated 23 million kWhs.

PPL EnergyPlus also purchases the full output from two wind farms in Pennsylvania with a combined capacity of 50 MW.

 
Fuel Supply

Coal

Pennsylvania

PPL Generation, by and through its agent PPL EnergyPlus, actively manages PPL's coal requirements by purchasing coal principally from mines located in central and northern Appalachia.

During 2009, PPL Generation, by and through its agent PPL EnergyPlus, purchased 100% of the coal delivered to PPL Generation's wholly owned Pennsylvania stations under short-term and long-term contracts.  These contracts provided PPL Generation 7.3 million tons of coal.  Contracts currently in place are expected to provide 7.8 million tons in 2010.  The amount of coal in inventory varies from time to time depending on market conditions and plant operations.

PPL Generation, by and through its agent PPL EnergyPlus, entered into a long-term coal purchase agreement with CONSOL Energy Inc.  The contract will provide more than one-third of PPL Generation's projected annual coal needs for the Pennsylvania power plants from 2010 through 2018.  PPL Generation has other contracts that, in total, will provide additional coal supply for PPL's projected annual needs from 2010 through 2013.

A PPL Generation subsidiary owns a 12.34% interest in the Keystone station and a 16.25% interest in the Conemaugh station.  The Keystone station contracts with Keystone Fuels, LLC for its coal requirements.  In 2009, Keystone Fuels, LLC provided 4.8 million tons of coal to the Keystone station.  The Conemaugh station requirements are purchased under contract from Conemaugh Fuels, LLC.  In 2009, Conemaugh Fuels, LLC provided 4.8 million tons of coal to the Conemaugh station.  A PPL Generation subsidiary also owns a 12.34% equity interest in Keystone Fuels, LLC and a 16.25% equity interest in Conemaugh Fuels, LLC.

Scrubbers were placed in service at Montour in 2008 and at Brunner Island in 2009.  At December 31, 2009, scrubbers were in place at all of PPL Generation's Pennsylvania coal stations.  Contracts are in place for all the limestone requirements for all the scrubbers at PPL Generation's wholly owned Pennsylvania coal stations through 2010.  It is projected that annual limestone requirements will be approximately 600,000 tons.  During 2009, approximately 325,000 tons of limestone were delivered to PPL Generation's wholly owned Pennsylvania stations under long-term contracts.

Montana

PPL Montana has a 50% leasehold interest in Colstrip Units 1 and 2, and a 30% leasehold interest in Colstrip Unit 3.  NorthWestern owns a 30% leasehold interest in Colstrip Unit 4.  PPL Montana and NorthWestern have a sharing agreement to govern each party's responsibilities regarding the operation of Colstrip Units 3 and 4, and each party is responsible for 15% of the respective operating and construction costs, regardless of whether a particular cost is specified to Colstrip Unit 3 or 4.  However, each party is responsible for its own fuel-related costs.  PPL Montana, along with the other owners, is party to contracts to purchase 100% of its coal requirements with defined coal quality characteristics and specifications.  In 2007, PPL Montana entered into a long-term purchase and supply agreement with the current supplier for Units 1 and 2 beginning January 1, 2010.  The contract is to provide these units 100% of their coal requirements through December 2014, and at least 85% of such requirements from January 2015 through December 2019.  The coal supply contract for Unit 3's requirements is in effect through December 2019.  Scrubbers are in place at all of these units.

Coal supply contracts are in place to purchase low-sulfur coal with defined quality characteristics and specifications for PPL Montana's Corette station.  The contracts covered 100% of the station's coal requirements in 2009, and similar contracts are currently in place to supply 100% of the expected coal requirements through 2012.

Oil and Natural Gas

Pennsylvania

PPL Generation's Martins Creek Units 3 and 4 burn both oil and natural gas.  PPL EnergyPlus is responsible for procuring the oil and natural gas supply for all PPL Generation operations.  During 2009, 100% of the physical gas and oil requirements for the Martins Creek units were purchased on the spot market.  At December 31, 2009, PPL EnergyPlus had no long-term agreements for oil or gas.

PPL EnergyPlus has a short-term and long-term gas transportation contract in place for approximately 30% of the maximum daily requirements of the Lower Mt. Bethel facility.

In 2008, PPL EnergyPlus acquired the rights to an existing long-term tolling agreement associated with the capacity and energy of the Ironwood facility.  PPL EnergyPlus has long-term transportation contracts to serve approximately 25% of Ironwood's maximum daily requirements, which begins in the fourth quarter of 2010.  For the first three quarters of 2010, Ironwood will be served through a combination of transportation capacity release transactions and delivered supply to the plant.  PPL EnergyPlus currently has no long-term physical supply agreements to purchase natural gas for Ironwood.

Illinois

At December 31, 2009, there were no long-term delivery or supply agreements to purchase natural gas for the University Park facility.

Connecticut

PPL EnergyPlus has a long-term contract for approximately 40% of the expected pipeline transportation requirements of the Wallingford facility, but has no long-term physical supply agreement to purchase natural gas.

Nuclear

The nuclear fuel cycle consists of several material and service components:  the mining and milling of uranium ore to produce uranium concentrates; the conversion of these concentrates into uranium hexafluoride, a gas component; the enrichment of the hexafluoride gas; the fabrication of fuel assemblies for insertion and use in the reactor core; and the temporary storage and final disposal of spent nuclear fuel.

PPL Susquehanna has a portfolio of supply contracts, with varying expiration dates, for nuclear fuel materials and services.  These contracts are expected to provide sufficient fuel to permit Unit 1 to operate into the first quarter of 2016 and Unit 2 to operate into the first quarter of 2015.  PPL Susquehanna anticipates entering into additional contracts to ensure continued operation of the nuclear units.

Federal law requires the federal government to provide for the permanent disposal of commercial spent nuclear fuel.  Under the Federal Nuclear Waste Policy Act, the DOE carried out an analysis of a site in Nevada for a permanent nuclear waste repository.  There is no definitive date by which a repository will be operational.  As a result, it was necessary to expand Susquehanna's on-site spent fuel storage capacity.  To support this expansion, PPL Susquehanna contracted for the design and construction of a spent fuel storage facility employing dry cask fuel storage technology.  The facility is modular, so that additional storage capacity can be added as needed.  The facility began receiving spent nuclear fuel in 1999.  PPL Susquehanna estimates that there is sufficient storage capacity in the spent nuclear fuel pools and the on-site spent fuel storage facility at Susquehanna to accommodate spent fuel discharged through approximately 2017 under current operating conditions.  If necessary, the on-site spent fuel storage facility can be expanded, assuming appropriate regulatory approvals are obtained.  If additional on-site storage capacity is required, supplementary storage capacity will be pursued.

 
Franchise and Licenses

See "Background - Segment Information - Supply Segment - Energy Marketing" for a discussion of PPL EnergyPlus' licenses in various states.  PPL EnergyPlus also has an export license from the DOE to sell capacity and/or energy to electric utilities in Canada.

PPL Susquehanna operates Units 1 and 2 pursuant to NRC operating licenses.  In November 2009, the NRC approved PPL Susquehanna's application for 20-year license renewals for each of the Susquehanna units, extending the license expiration dates to 2042 for Unit 1 and to 2044 for Unit 2.  See Note 8 to the Financial Statements for additional information.

In 2008, PPL Susquehanna received NRC approval for its request to increase the generation capacity of the Susquehanna nuclear plant.  The total expected capacity increase is 159 MW, of which PPL Susquehanna's 90% ownership share would be 143 MW.  The first uprate for Unit 1 totaling 50 MW was completed in 2008 and the second uprate is scheduled to be completed in 2010.  The first uprate for Unit 2 totaling 50 MW was completed in 2009, and the second uprate is scheduled to be completed in 2011.  The remaining total capacity increase is 59 MW, of which PPL Susquehanna's share is 53 MW.  PPL Susquehanna's share of the expected capital cost for the total uprate of 143 MW is $345 million.

In October 2008, a PPL subsidiary submitted a COLA to the NRC for a new nuclear generating unit (Bell Bend) to be built adjacent to the Susquehanna plant.  The COLA was accepted for review by the NRC in December 2008.  In May 2009, the NRC published its official review schedule that culminates with the issuance of Bell Bend's final safety evaluation report in 2012.  See Note 8 to Financial Statements for additional information.

PPL Holtwood operates the Holtwood hydroelectric generating station pursuant to a license that was recently extended by the FERC to expire in 2030.  PPL Holtwood operates the Wallenpaupack hydroelectric generating station pursuant to a license renewed by the FERC in 2005 and expiring in 2044.  PPL Holtwood also owns one-third of the capital stock of Safe Harbor Water Power Corporation (Safe Harbor), which holds a project license that extends the operation of its hydroelectric generating station until 2030.  The total capacity of the Safe Harbor generating station is 421 MW, and PPL Holtwood is entitled by contract to one-third of the total capacity.

In 2007, PPL requested FERC approval to expand its Holtwood plant by 125 MW.  In 2008, PPL withdrew the application in light of prevailing economic conditions, including the high cost of capital and projections of future energy prices.  PPL reconsidered its Holtwood expansion project in view of the tax incentives and potential loan guarantees for renewable energy projects contained in the Economic Stimulus Package.  In April 2009, PPL resubmitted the expansion application to FERC and in October 2009, the FERC approved the request to expand the plant and extended the operating license through August 2030.  See Note 8 to the Financial Statements for additional information.

The 11 hydroelectric facilities and one storage reservoir in Montana are licensed by the FERC.  These licenses expire periodically and the generating facilities must be relicensed at such times.  The FERC license for the Mystic facility expired in 2009 but has been extended, effective January 1, 2010, for an additional 40-year term.  The Thompson Falls and Kerr licenses expire in 2025 and 2035, respectively; and the licenses for the nine Missouri-Madison facilities expire in 2040.

In connection with the relicensing of these generation facilities, the FERC may, under applicable law, relicense the original licensee or license a new licensee, or the U.S. government may take over the facility.  If the original licensee is not relicensed, it is compensated for its net investment in the facility, not to exceed the fair value of the property taken, plus reasonable damages to other property affected by the lack of relicensing.

·
Pennsylvania Delivery Segment -
   
 
Includes the regulated electric delivery operations of PPL Electric.

 
PPL Electric

PPL Electric delivers electricity to approximately 1.4 million customers in a 10,000-square mile territory in 29 counties of eastern and central Pennsylvania.  The largest cities in this territory are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport.

PPL Electric is the sole electricity distribution provider in its service territory, and also provides electricity supply in that territory as a PLR.  As part of the PUC Final Order, PPL Electric agreed to supply this electricity at predetermined capped rates through 2009.  PPL Electric entered into two contracts to purchase electricity from PPL EnergyPlus sufficient for PPL Electric to meet its PLR obligation through 2009 at the capped rates.  As discussed below, PPL Electric's PLR obligation after 2009 is governed by the PUC pursuant to the Public Utility Code as amended by Act 129, PLR regulations and a policy statement regarding interpretation and implementation of those regulations.  Both the regulations and the policy statement became effective in September 2007.  The PUC has approved PPL Electric's procurement plans for 2010 and for the period from January 2011 through May 2013.  Refer to Notes 14 and 15 to the Financial Statements for additional information.

During 2009, about 98% of PPL Electric's operating revenues were derived from regulated electricity delivery and supply as a PLR.  The remaining 2009 operating revenues were from wholesale revenues, primarily the sale to PPL EnergyPlus of power purchased from NUGs.  During 2009, about 46% of electricity delivery and PLR revenues were from residential customers, 37% from commercial customers, 16% from industrial customers and 1% from other customer classes.

PPL Electric's transmission facilities are operated as part of PJM, which operates the electric transmission network and electric energy market in the mid-Atlantic and Midwest regions of the U.S.  Bulk electricity is transmitted to wholesale users throughout a geographic area including all or part of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.  As of January 1, 2006, PPL Electric became a member of the RFC.  The purpose of the RFC is to preserve and enhance electric service reliability and security for the interconnected electric systems within its territory and to be a regional entity under the framework of the NERC.  The RFC's key functions are the development of regional standards for reliable planning and operation of the bulk electric system and non-discriminatory compliance monitoring and enforcement of both NERC and regional standards.

PJM serves as a FERC-approved RTO in order to promote greater participation and competition in the region.  An RTO, like an ISO, is a designation provided by the FERC to a FERC-approved independent entity that operates the transmission system and typically administers a competitive power market.  PJM also administers regional markets for energy, capacity and ancillary services.  A primary purpose of the RTO/ISO is to separate the operation of, and access to, the transmission grid from market participants that buy or sell electricity in the same markets.  Electric utilities continue to own the transmission assets, but the RTO/ISO directs the control and operation of the transmission facilities.  PPL Electric is entitled to fully recover from retail customers the charges that it pays to PJM for transmission-related services.  PJM imposes these charges pursuant to its FERC-approved Open Access Transmission Tariff.

PPL Electric is subject to regulation as a public utility by the PUC, and certain of its activities are subject to the jurisdiction of the FERC under the Federal Power Act.

PPL Electric also is subject to the jurisdiction of certain federal, regional, state and local regulatory agencies with respect to land use and other environmental matters.  Certain operations of PPL Electric are subject to the Occupational Safety and Health Act of 1970 and comparable state statutes.

In November 2004, Pennsylvania enacted the Alternative Energy Portfolio Standard (the AEPS), which requires electric distribution companies, such as PPL Electric, and retail electric suppliers serving retail load to ultimately provide 18% of the electricity sold to retail customers in Pennsylvania from alternative energy sources by 2020.  Under this state law, alternative energy sources include hydro, wind, solar, waste coal, landfill methane and fuel cells.  An electric distribution company will pay an alternative compliance payment of $45 (or, in the case of solar, 200% of the average market value of solar credits) for each MWh that it is short of its required alternative energy supply percentage.  PPL Electric became subject to the requirements of this legislation beginning in 2010.  In 2010, PPL Electric is required to supply about 9% of the total amount of electricity it delivers to its PLR customers from alternative energy sources.  PPL Electric has purchased all of the supply required to meet its 2010 default service obligations pursuant to a PUC-approved Competitive Bridge Plan (the Plan).  Under the Plan, PPL Electric obtained full requirements service which includes the generation or credits that PPL Electric will need to comply with the AEPS in 2010.

Act 129 became effective in October 2008.  The law creates an energy efficiency and conservation program and smart metering technology requirements, adopts new PLR electricity supply procurement rules, provides remedies for market misconduct, and makes changes to the existing AEPS.

See "Regulatory Issues - Pennsylvania Activities" in Note 14 to the Financial Statements for additional information regarding Act 129, other legislative and regulatory impacts and PPL Electric's actions to provide default electricity supply for periods after 2009.

 
Competition

Pursuant to authorizations from the Commonwealth of Pennsylvania and the PUC, PPL Electric operates a regulated distribution monopoly in its service area.  Accordingly, PPL Electric does not face competition in its electricity distribution business.

Effective January 1, 2010, PPL Electric's rates for generation supply as a PLR are no longer capped and the cost of electric generation is based on a competitive solicitation process.  Prior to the expiration of the generation rate caps, PPL Electric's customers' interest in purchasing generation supply from other providers was limited because, in recent years, the long-term supply agreement between PPL Electric and PPL EnergyPlus provided a below-market cost of generation supply for these customers.  As a result, a limited amount of "shopping" occurred.  In 2010, several alternative suppliers have offered to provide generation supply in PPL Electric's service territory.  When its customers purchase supply from these alternative suppliers or from PPL Electric as PLR, the purchase of such supply has no significant impact on the operating results of PPL Electric.  The cost to purchase PLR supply is passed directly by PPL Electric to its customers without markup. PPL Electric remains the distribution provider for all the customers in its service territory and charges a regulated rate for the service of delivering that electricity.

 
Provider of Last Resort Supply

The Customer Choice Act requires electric distribution companies, like PPL Electric, to act as a PLR of electricity supply and provides that electricity supply costs will be recovered by such companies pursuant to regulations established by the PUC.  In May 2007, the PUC approved PPL Electric's plan to procure default electricity supply for 2010 - after its current supply agreements with PPL EnergyPlus expire - for retail customers who do not choose an alternative competitive supplier.  Pursuant to this plan, PPL Electric completed six competitive supply solicitations and has contracted for all of the 2010 electricity supply it expects to need for residential, small commercial and small industrial customers.  In October 2009, PPL Electric purchased supply for fixed-price default service to large commercial and large industrial customers who elect to take that service in 2010.  In November 2009, PPL Electric purchased supply to provide hourly default service to large commercial and industrial customers in 2010.  See "Energy Purchase Commitments" in Note 14 to the Financial Statements for additional information regarding PPL Electric's solicitations for 2010 and its actions to provide default electricity supply for periods after 2010.

 
Franchise and Licenses

PPL Electric is authorized to provide electric public utility service throughout its service area as a result of grants by the Commonwealth of Pennsylvania in corporate charters to PPL Electric and companies to which it has succeeded and as a result of certification by the PUC.  PPL Electric is granted the right to enter the streets and highways by the Commonwealth subject to certain conditions.  In general, such conditions have been met by ordinance, resolution, permit, acquiescence or other action by an appropriate local political subdivision or agency of the Commonwealth.

·
International Delivery Segment -
   
 
Includes WPD, a regulated electricity distribution company in the U.K.

WPD, through indirect wholly owned subsidiaries, operates two of the 15 distribution networks providing electricity service in the U.K.  The WPD subsidiaries together serve approximately 2.6 million end-users in the U.K.  WPD (South West) serves 1.5 million customers in a 5,560 square mile area of southwest England.  WPD (South Wales) serves an area of Wales opposite the Bristol Channel from WPD (South West)'s territory.  Its 1.1 million customers occupy 4,550 square miles within Wales.  WPD is headquartered in Bristol, England.  See "Franchise and Licenses" for additional information about WPD's regulator, Ofgem, which sets price controls and grants distribution licenses.

 
Competition

Although WPD operates in non-exclusive concession areas in the U.K., it currently faces little competition with respect to residential customers.  See "Franchises and Licenses" for more information.

 
Franchise and Licenses

WPD is authorized by the U.K. government to provide electric distribution services within its concession areas and service territories, subject to certain conditions and obligations.  For instance, WPD is subject to governmental regulation of the prices it can charge and the quality of service it must provide, and WPD can be fined or have its licenses revoked if it does not meet the mandated standard of service.

WPD operates under distribution licenses granted, and price controls set, by Ofgem.  The price control formula that governs WPD's allowed revenue is normally determined every five years. Ofgem completed a rate review in December 2009 for the five-year period from April 1, 2010 through March 31, 2015.  See PPL's and PPL Energy Supply's "Results of Operations - Segment Results - International Delivery Segment" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information.

SEASONALITY

Demand for and market prices of electricity are affected by weather.  As a result, PPL's overall operating results in the future may fluctuate substantially on a seasonal basis, especially when more severe weather conditions such as heat waves or winter storms make such fluctuations more pronounced.  The pattern of this fluctuation may change depending on the type and location of the facilities PPL owns and the terms of its contracts to purchase or sell electricity.

FINANCIAL CONDITION

See PPL's, PPL Energy Supply's and PPL Electric's "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for this information.

CAPITAL EXPENDITURE REQUIREMENTS

See "Financial Condition - Liquidity and Capital Resources - Forecasted Uses of Cash - Capital Expenditures" in PPL's, PPL Energy Supply's and PPL Electric's "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information concerning projected capital expenditure requirements for the years 2010-2012.  See Note 14 to the Financial Statements for additional information concerning the potential impact on capital expenditures from environmental matters.

ENVIRONMENTAL MATTERS

PPL and certain PPL subsidiaries, including PPL Electric and PPL Generation subsidiaries, are subject to certain existing and developing federal, regional, state and local laws and regulations with respect to air and water quality, land use and other environmental matters.  See PPL's and PPL Energy Supply's "Financial Condition - Liquidity and Capital Resources" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Forecasted Uses of Cash - Capital Expenditures" for information concerning environmental capital expenditures during 2009 and projected environmental capital expenditures for the years 2010-2012.  See "Environmental Matters" in Note 14 to the Financial Statements for information regarding these laws and regulations and the status of PPL's and its subsidiaries' compliance and remediation activities, as well as legal and regulatory proceedings involving PPL and its subsidiaries.

PPL and its subsidiaries are unable to predict the ultimate effect of evolving environmental laws and regulations upon their existing and proposed facilities and operations and competitive positions.  In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including, among other things, air and water quality, greenhouse gas emissions, hazardous and solid waste management and disposal, and regulation of toxic substances, PPL's subsidiaries may be required to modify, replace or cease operating certain of their facilities.  PPL's subsidiaries may also incur significant capital expenditures and operating expenses in amounts which are not now determinable, but could be significant.

EMPLOYEE RELATIONS

As of December 31, 2009, PPL and its subsidiaries had the following full-time employees.

PPL Energy Supply
    
PPL Generation
2,665
  
PPL EnergyPlus
2,020
 (a)
PPL Global (primarily WPD)
2,369
  
Total PPL Energy Supply
7,054
  
PPL Electric
2,166
  
PPL Services and other
1,269
  
Total PPL
10,489
  

(a)
  
Includes union employees of mechanical contracting subsidiaries, whose numbers tend to fluctuate due to the nature of this business.

Approximately 4,980, or 61%, of PPL's domestic workforce are members of labor unions, with three IBEW locals representing approximately 3,540 employees.  Other unions primarily represent employees of the mechanical contractors.  The bargaining agreement with the largest IBEW local was negotiated in May 2006 and expires in May 2010.  This agreement covers approximately 3,200 employees.  The IBEW, representing approximately 260 employees at the Montana Colstrip power plants, is covered under a four-year labor agreement expiring in April 2012.  In January 2008, a four-year contract that expires in April 2012 was renegotiated with the IBEW local of Montana that represents approximately 80 employees at the hydroelectric facilities and at the Corette plant.

Approximately 1,860, or 79%, of PPL's U.K. workforce are members of labor unions.  WPD recognizes five unions, the largest of which represents 37% of its union workforce.  WPD's Electricity Business Agreement covers approximately 1,810 union employees; it may be amended by agreement between WPD and the unions and is terminable with 12 months notice by either side.

See "Separation Benefits" in Note 12 to the Financial Statements for information on a 2009 cost reduction initiative, which resulted in the elimination of approximately 200 domestic management and staff positions at PPL.

AVAILABLE INFORMATION

PPL's Internet Web site is www.pplweb.com.  On the Investor Center page of that Web site, PPL provides access to all SEC filings of PPL, PPL Energy Supply and PPL Electric free of charge, as soon as reasonably practicable after filing with the SEC.  Additionally, PPL registrants' filings are available at the SEC's Web site (www.sec.gov) and at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549, or by calling 1-800-SEC-0330.
ITEM 1A. RISK FACTORS

PPL, PPL Energy Supply and PPL Electric face various risks associated with their businesses.  While we have identified below the risks we currently consider material, these risks are not the only risks that we face.  Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.  Our businesses, financial condition, cash flows or results of operations could be materially adversely affected by any of these risks.  In addition, this report also contains forward-looking and other statements about our businesses that are subject to numerous risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 14 to the Financial Statements for more information concerning the risks described below and for other risks, uncertainties and factors that could impact our businesses and financial results.

As used in this Item 1A., the terms "we," "our" and "us" generally refer to PPL and its consolidated subsidiaries taken as a whole, or to PPL Energy Supply and its consolidated subsidiaries taken as a whole within the Supply and International Delivery segment discussions, or PPL Electric and its consolidated subsidiaries taken as a whole within the Pennsylvania Delivery segment discussion.

Risks Related to Supply Segment

(PPL and PPL Energy Supply)

We are exposed to operational, price and credit risks associated with selling and marketing products in the wholesale electricity markets.

We purchase and sell electricity in wholesale markets under market-based tariffs authorized by the FERC throughout the U.S. and also enter into short-term agreements to market available electricity and capacity from our generation assets with the expectation of profiting from market price fluctuations.  If we are unable to deliver firm capacity and electricity under these agreements, we could be required to pay damages.  These damages would generally be based on the difference between the market price to acquire replacement capacity or electricity and the contract price of any undelivered capacity or electricity.  Depending on price volatility in the wholesale electricity markets, such damages could be significant.  Extreme weather conditions, unplanned generation facility outages, environmental compliance costs, transmission disruptions, and other factors could affect our ability to meet our obligations, or cause significant increases in the market price of replacement capacity and electricity.
 
Our power agreements typically include provisions requiring us to post collateral for the benefit of our counterparties if the market price of energy varies from the contract prices in excess of certain pre-determined amounts.  At December 31, 2009, we had posted $242 million of collateral, in the form of letters of credit, under these contracts.  At December 31, 2009, we maintained $4.1 billion of liquidity facilities to provide for potential additional collateral obligations.  We currently believe that we have sufficient credit to fulfill our potential collateral obligations under these power contracts.  Our obligation to post collateral could exceed the amount of our facilities or our ability to increase our facilities could be limited by financial market or other factors.

We also face credit risk that parties with whom we contract will default in their performance, in which case we may have to sell our electricity into a lower-priced market or make purchases in a higher-priced market than existed at the time of contract.  Whenever feasible, we attempt to mitigate these risks by various means, including agreements that require our counterparties to post collateral for our benefit if the market price of energy varies from the contract price in excess of certain pre-determined amounts.  However, there can be no assurance that we will avoid counterparty nonperformance, which could adversely impact our ability to perform our obligations to other parties, which could in turn subject us to claims for damages.

Adverse changes in commodity prices and related costs may decrease our future energy margins, which could adversely affect our earnings and cash flows.

Our energy margins, or the amount by which our revenues from the sale of power exceed our costs to supply power, are impacted by changes in market prices for electricity, fuel, fuel transportation, emission allowances, RECs, electricity transmission and related congestion charges and other costs.  Unlike most commodities, the limited ability to store electric power requires that it must be consumed at the time of production.  As a result, wholesale market prices for electricity may fluctuate substantially over relatively short periods of time and can be unpredictable.  Among the factors that influence such prices are:

·
demand for electricity and supplies of electricity available from current or new generation resources;
·
variable production costs, primarily fuel (and the associated fuel transportation costs) and emission allowance expense for the generation resources used to meet the demand for electricity;
·
transmission capacity and service into, or out of, markets served;
·
changes in the regulatory framework for wholesale power markets;
·
liquidity in the wholesale electricity market, as well as general credit worthiness of key participants in the market; and
·
weather and economic conditions impacting demand for electricity or the facilities necessary to deliver electricity.

See Exhibit 99(a) for more information concerning the market fluctuations in wholesale energy, fuel and emission allowance prices over the past five years.  The volatility of these business factors has increased significantly with the current economic downturn.

Our risk management policy and programs relating to electricity and fuel prices, interest rates, foreign currency and counterparties may not work as planned, and we may suffer economic losses despite such programs.

We actively manage the market risk inherent in our generation energy marketing activities, as well as our debt, foreign currency and counterparty credit positions.  We have implemented procedures to monitor compliance with our risk management policy and programs, including independent validation of transaction and market prices, verification of risk and transaction limits, portfolio stress test, sensitivity analyses and daily portfolio reporting of various risk management metrics.  Nonetheless, our risk management programs may not work as planned.  For example, actual electricity and fuel prices may be significantly different or more volatile than the historical trends and assumptions upon which we based our risk management calculations.  Additionally, unforeseen market disruptions could decrease market depth and liquidity, negatively impacting our ability to enter into new transactions.  We enter into financial contracts to hedge commodity basis risk, and as a result are exposed to the risk that the correlation between delivery points could change with actual physical delivery.  Similarly, interest rates or foreign currency exchange rates could change in significant ways that our risk management procedures were not designed to address.  As a result, we cannot always predict the impact that our risk management decisions may have on us if actual events result in greater losses or costs than our risk models predict or greater volatility in our earnings and financial position.

In addition, our trading, marketing and hedging activities are exposed to counterparty credit risk and market liquidity risk.  We have adopted a credit risk management policy and program to evaluate counterparty credit risk.  However, if counterparties fail to perform, the risk of which has increased due to the economic downturn, we may be forced to enter into alternative arrangements at then-current market prices.  In that event, our financial results are likely to be adversely affected.

We do not always hedge against risks associated with electricity and fuel price volatility.

We attempt to mitigate risks associated with satisfying our contractual electricity sales obligations by either reserving generation capacity to deliver electricity or purchasing the necessary financial or physical products and services through competitive markets to satisfy our net firm sales contracts.  We also routinely enter into contracts, such as fuel and electricity purchase and sale commitments, to hedge our exposure to fuel requirements and other electricity-related commodities.  However, based on economic and other considerations, we may not hedge the entire exposure of our operations from commodity price volatility.  To the extent we do not hedge against commodity price volatility, our results of operations and financial position may be adversely affected.

We face intense competition in our energy supply business, which may adversely affect our ability to operate profitably.

Unlike our regulated delivery businesses, our energy supply business is dependent on our ability to operate in a competitive environment and is not assured of any rate of return on capital investments through a predetermined rate structure.  Competition is impacted by electricity and fuel prices, new market entrants, construction by others of generating assets and transmission capacity, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors.  These competitive factors may negatively impact our ability to sell electricity and related products and services, as well as the prices that we may charge for such products and services, which could adversely affect our results of operations and our ability to grow our business.

We sell our available energy and capacity into the competitive wholesale markets through contracts with various durations.  Competition in the wholesale power markets occurs principally on the basis of the price of products and, to a lesser extent, on the basis of reliability and availability.  We believe that the commencement of commercial operation of new electric facilities in the regional markets where we own or control generation capacity and the evolution of demand side management resources will continue to increase the competitiveness of the wholesale electricity market in those regions, which could have a material adverse effect on the prices we receive for electricity.

We also face competition in the wholesale markets for electricity capacity and ancillary services.  We primarily compete with other electricity suppliers based on our ability to aggregate supplies at competitive prices from different sources and to efficiently utilize transportation from third-party pipelines and transmission from electric utilities and ISOs.  We also compete against other energy marketers on the basis of relative financial condition and access to credit sources, and our competitors may have greater financial resources than we have.

Competitors in the wholesale power markets in which PPL Generation subsidiaries and PPL EnergyPlus operate include regulated utilities, industrial companies, non-utility generators and unregulated subsidiaries of regulated utilities.  In the past, PUHCA significantly restricted mergers and acquisitions and other investments in the electric utility sector.  Entirely new competitors, including financial institutions, have entered the energy markets as a result of the repeal of PUHCA.  The repeal of PUHCA also may lead to consolidation in our industry, resulting in competitors with significantly greater financial resources than we have.

Disruptions in our fuel supplies could occur, which could adversely affect our ability to operate our generation facilities.

We purchase fuel from a number of suppliers.  Disruption in the delivery of fuel and other products consumed during the production of electricity (such as lime, limestone and other chemicals), including disruptions as a result of weather, transportation difficulties, global demand and supply dynamics, labor relations, environmental regulations or the financial viability of our fuel suppliers, could adversely affect our ability to operate our facilities, which could result in lower sales and/or higher costs and thereby adversely affect our results of operations.

Despite federal and state deregulation initiatives, our supply business is still subject to extensive regulation, which may increase our costs, reduce our revenues, or prevent or delay operation of our facilities.

Our generation subsidiaries sell electricity into the wholesale market.  Generally, our generation subsidiaries and our marketing subsidiaries are subject to regulation by the FERC.  The FERC has authorized us to sell generation from our facilities and power from our marketing subsidiaries at market-based prices.  The FERC retains the authority to modify or withdraw our market-based rate authority and to impose "cost of service" rates if it determines that the market is not competitive, that we possess market power or that we are not charging just and reasonable rates.  Any reduction by the FERC in the rates we may receive or any unfavorable regulation of our business by state regulators could materially adversely affect our results of operations.  See "FERC Market-Based Rate Authority" in Note 14 to the Financial Statements for information regarding recent court decisions that could impact the FERC's market-based rate authority program, and "PJM RPM Litigation" in Note 14 to the Financial Statements for information regarding the FERC's proceedings that could impact PJM's capacity pricing model.

In addition, the acquisition, construction, ownership and operation of electricity generation facilities require numerous permits, approvals, licenses and certificates from federal, state and local governmental agencies.  We may not be able to obtain or maintain all required regulatory approvals.  If there is a delay in obtaining any required regulatory approvals or if we fail to obtain or maintain any required approval or fail to comply with any applicable law or regulation, the operation of our assets and our sales of electricity could be prevented or delayed or become subject to additional costs.

Our generation facilities may not operate as planned, which may increase our expenses or decrease our revenues and, thus, have an adverse effect on our financial performance.
 
Our ability to manage operational risk with respect to our generation plants is critical to our financial performance.  Operation of our power plants at expected capacity levels involves many risks, including the breakdown or failure of equipment or processes, accidents, labor disputes and fuel interruption.  In addition, weather and natural disasters can disrupt our generation plants.  Weather conditions also have a direct impact on the river flows required to operate our hydroelectric plants at expected capacity levels.  Depending on the timing and duration of both planned and unplanned, complete or partial outages at our power plants (in particular, if such outages are during peak periods or during periods of, or caused by, severe weather), or if our planned uprates at power plants are not completed as scheduled, our revenues from expected energy sales could significantly decrease and our expenses significantly increase, and we could be required to purchase power at then-current market prices to satisfy our energy sales commitments or, in the alternative, pay penalties and damages for failure to satisfy them.  Many of our generating units are reaching mid-life, and we face the potential for more frequent unplanned outages and the possibility of planned outages of longer duration to accommodate significant investments in major component replacements at these facilities.

Changes in technology may negatively impact the value of our power plants.

A basic premise of our business is that generating electricity at central power plants achieves economies of scale and produces electricity at relatively low prices.  There are alternate technologies to produce electricity, most notably fuel cells, microturbines, windmills and photovoltaic (solar) cells, the development of which has been expanded due to global climate change concerns.  Research and development activities are ongoing to seek improvements in alternate technologies.  It is possible that advances will reduce the cost of alternate methods of electricity production to a level that is equal to or below that of certain central station production.  Also, as new technologies are developed and become available, the quantity and pattern of electricity usage (the "demand") by customers could decline, with a corresponding decline in revenues derived by generators.  These alternative energy sources could result in a decline to the dispatch and capacity factors of our plants.  As a result of all of these factors, the value of our generation facilities could be significantly reduced.

The load following contracts that PPL EnergyPlus is awarded do not provide for specific levels of load, and actual load significantly below or above our forecasts could adversely affect our energy margins.

We generally hedge our load following obligations with energy purchases from third parties, and to a lesser extent with its owned generation.  If the actual load is significantly lower than the expected load, we may be required to resell power at a lower price than was purchased to supply the load obligation, resulting in a financial loss.  Alternatively, a significant increase in load could adversely affect our energy margins because we are required under the terms of the load following contracts to provide the energy necessary to fulfill increased demand at the contract price, which could be lower than the cost to procure additional energy on the open market.  Therefore, any significant decrease or increase in load compared to our forecasts, could have a material adverse effect on our results of operations or financial position.

Our earnings may be affected by whether we decide to, or are able to, continue to enter into or renew long-term power sale, fuel purchase and fuel transportation agreements to mitigate market price and supply risk.

As a result of the PLR contracts and certain other agreements, a substantial portion of our generation production and capacity value was committed through 2009 under power sales agreements of various terms that included fixed prices for electric power.  With the expiration of these agreements we have been actively selling our generation at fixed prices in the wholesale energy market and participating in load-following or full requirements auctions with utility companies in the PJM, New England Power Pool and Midwest ISO regions.  In connection with these activities, we have entered into longer-term fuel purchase and fuel transportation agreements that include fixed prices for a significant portion of our forecasted needs.  Whether we decide to, or are able to, continue to enter into such agreements or renew existing agreements in the future, prevailing market conditions will affect our financial performance.  For example, in the absence of long-term power sales agreements, we would sell the energy, capacity and other products from our facilities in the competitive wholesale power markets under contracts of shorter duration at then-current market prices.  Current forward prices for electricity are lower than the prices under some of our existing power sales agreements.  In addition, if we do not secure or maintain favorable fuel purchase and transportation agreements for our power generation facilities, our fuel costs (and associated fuel transportation costs) could exceed the revenues we derive from our energy sales.  Given the volatility and potential for material differences between actual electricity prices and fuel and other costs, if we do not secure or maintain long-term electricity sales and fuel purchase and fuel transportation agreements, our margins will be subject to increased volatility and, depending on future electricity and fuel costs (and associated fuel transportation costs), our financial results may be materially adversely affected.

If market deregulation is reversed or discontinued, our business prospects and financial condition could be materially adversely affected.

In some markets, state legislators, government agencies and other interested parties have made proposals to change the use of market-based pricing, re-regulate areas of these markets that have previously been deregulated or permit electricity delivery companies to construct or acquire generating facilities.  The ISOs that oversee the transmission systems in certain wholesale electricity markets have from time to time been authorized to impose price limitations and other mechanisms to address volatility in the power markets.  These types of price limitations and other mechanisms may reduce profits that our wholesale power marketing and trading business would have realized under competitive market conditions absent such limitations and mechanisms.  Although we generally expect electricity markets to continue to be competitive, other proposals to re-regulate our industry may be made, and legislative or other action affecting the electric power restructuring process may cause the process to be delayed, discontinued or reversed in states in which we currently, or may in the future, operate.

We rely on transmission and distribution assets that we do not own or control to deliver our wholesale electricity.  If transmission is disrupted, or not operated efficiently, or if capacity is inadequate, our ability to sell and deliver power may be hindered.

We depend on transmission and distribution facilities owned and operated by utilities and other energy companies to deliver the electricity and natural gas we sell to the wholesale market, as well as the natural gas we purchase for use in our electric generation facilities.  If transmission is disrupted (as a result of weather, natural disasters or other reasons) or not operated efficiently by ISOs, in applicable markets, or if capacity is inadequate, our ability to sell and deliver products and satisfy our contractual obligations may be hindered, or we may be unable to sell products on the most favorable terms.

The FERC has issued regulations that require wholesale electric transmission services to be offered on an open-access, non-discriminatory basis.  Although these regulations are designed to encourage competition in wholesale market transactions for electricity, there is the potential that fair and equal access to transmission systems will not be available or that transmission capacity will not be available in the amounts we desire.  We cannot predict the timing of industry changes as a result of these initiatives or the adequacy of transmission facilities in specific markets or whether ISOs in applicable markets will efficiently operate transmission networks and provide related services.

Our costs to comply with existing and new environmental laws are expected to continue to be significant, and we plan to incur significant capital expenditures for pollution control improvements that, if delayed, would adversely affect our profitability and liquidity.

Our business is subject to extensive federal, state and local statutes, rules and regulations relating to environmental protection.  To comply with existing and future environmental requirements and as a result of voluntary pollution control measures we may take, we have spent and expect to spend substantial amounts in the future on environmental control and compliance.

In order to comply with existing and recently enacted federal and state environmental laws and regulations primarily governing air emissions from coal-fired plants, in 2005 PPL began a program to install scrubbers and other pollution control equipment (primarily aimed at sulfur dioxide, particulate and nitrogen oxides with co-benefits for mercury emissions reduction).  The cost to install this equipment was approximately $1.6 billion, of which $19 million remains to be spent.  The remaining unspent balance is included in the 2010 through 2012 capital budget.  The scrubbers at our Montour and Brunner Island plants are now in service.  Many states and environmental groups have challenged certain federal laws and regulations relating to air emissions as not being sufficiently strict.  As a result, it is possible that state and federal regulations will be adopted that impose more stringent restrictions than are currently in effect, which could require us to significantly increase capital expenditures for pollution control equipment.

We may not be able to obtain or maintain all environmental regulatory approvals necessary for our planned capital projects or which are otherwise necessary to our business.  If there is a delay in obtaining any required environmental regulatory approval or if we fail to obtain, maintain or comply with any such approval, operations at our affected facilities could be halted or subjected to additional costs.  Furthermore, at some of our older generating facilities it may be uneconomic for us to install necessary equipment, which could cause us to close those units.

Additionally, the expanding national and international focus on climate change and the related desire to reduce carbon dioxide and other greenhouse gas emissions has lead to numerous federal legislative and regulatory proposals, and several states already have passed legislation capping carbon dioxide emissions.  The continuation of this trend may heighten or make more likely the risks identified above.

For more information regarding environmental matters, including existing and proposed federal, state and local statutes, rules and regulations to which we are subject, see "Environmental Matters - Domestic" in Note 14 to the Financial Statements.

We are subject to the risks of nuclear generation, including the risk that our Susquehanna nuclear plant could become subject to revised security or safety requirements that would increase our capital and operating expenditures, and uncertainties associated with decommissioning our plant at the end of its licensed life.

Nuclear generation accounted for about 32% of our 2009 generation output.  The risks of nuclear generation generally include:

·
the potential harmful effects on the environment and human health from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials;
·
limitations on the amounts and types of insurance commercially available to cover losses and liabilities that might arise in connection with nuclear operations; and
·
uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives.  The licenses for our two nuclear units expire in 2042 and 2044.  See Note 20 to the Financial Statements for additional information on the ARO related to the decommissioning.

The NRC has broad authority under federal law to impose licensing requirements, including security, safety and employee-related requirements for the operation of nuclear generation facilities.  In the event of noncompliance, the NRC has authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved.  In addition, revised security or safety requirements promulgated by the NRC could necessitate substantial capital or operating expenditures at our Susquehanna nuclear plant.  In addition, although we have no reason to anticipate a serious nuclear incident at our Susquehanna plant, if an incident did occur, any resulting operational loss, damages and injuries could have a material adverse effect on our results of operations, cash flows or financial condition.

Risks Related to International Delivery Segment

(PPL and PPL Energy Supply)

Our U.K. delivery business is subject to risks with respect to rate regulation and operational performance.

Our U.K. delivery business is rate regulated and operates under an incentive-based regulatory framework.  In addition, its ability to manage operational risk is critical to its financial performance.  Disruption to the distribution network could reduce profitability both directly through the higher costs for network restoration and also through the system of penalties and rewards that Ofgem has in place relating to customer service levels.

In December 2009, Ofgem completed its rate review for the five-year period from April 1, 2010 through March 31, 2015, thus reducing regulatory rate risk in the International Delivery Segment until the next rate review which will be effective April 1, 2015.  The results of the rate review are further discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations."  The regulated income of the International Delivery Segment and also the RAB are to some extent linked to movements in the Retail Price Index (RPI).  Reductions in the RPI would adversely impact revenues and the debt/RAB ratio.

Our U.K. delivery business exposes us to risks related to U.K. laws and regulations, taxes, economic conditions, foreign currency exchange rate fluctuations, and political conditions and policies of the U.K. government.  These risks may reduce the results of operations from our U.K. delivery business.

The acquisition, financing, development and operation of projects in the U.K. entail significant financial risks including:

·
changes in laws or regulations relating to U.K. operations, including tax laws and regulations;
·
changes in government policies, personnel or approval requirements;
·
changes in general economic conditions affecting the U.K.;
·
regulatory reviews of tariffs for distribution companies;
·
severe weather and natural disaster impacts on the electric sector and our assets;
·
changes in labor relations;
·
limitations on foreign investment or ownership of projects and returns or distributions to foreign investors;
·
limitations on the ability of foreign companies to borrow money from foreign lenders and lack of local capital or loans;
·
fluctuations in currency exchange rates and in converting U.K. revenues to U.S. dollars, which can increase our expenses and/or impair our ability to meet such expenses, and difficulty moving funds out of the country in which the funds were earned; and
·
compliance with U.S. foreign corrupt practices laws.

Risks Related to Pennsylvania Delivery Segment

(PPL and PPL Electric)

Regulators may not approve the rates we request.

Our Pennsylvania delivery business is rate-regulated.  While such regulation is generally premised on the recovery of prudently incurred costs, including energy supply costs for customers, and a reasonable rate of return on invested capital, the rates that we may charge our delivery customers are subject to authorization of the applicable regulatory authorities.  Our Pennsylvania delivery business is subject to substantial capital expenditure requirements over the next several years, which will require rate increase requests to the regulators.  There is no guarantee that the rates authorized by regulators will match our actual costs or provide a particular return on invested capital at any given time.

Our transmission and distribution facilities may not operate as planned, which may increase our expenses or decrease our revenues and, thus, have an adverse effect on our financial performance.

Our ability to manage operational risk with respect to our transmission and distribution systems is critical to the financial performance of our delivery business.  Our delivery business also faces several risks, including the breakdown or failure of or damage to equipment or processes (especially due to severe weather or natural disasters), accidents and labor disputes and other factors.  Operation of our delivery systems below our expectations may result in lost revenues or increased expenses, including higher maintenance costs.

We may be subject to higher transmission costs and other risks as a result of PJM's regional transmission expansion plan (RTEP) process.

PJM and the FERC have the authority to require upgrades or expansion of the regional transmission grid, which can result in substantial expenditures for transmission owners.  As discussed in Note 8 to the Financial Statements, we expect to make substantial expenditures to construct the Susquehanna-Roseland transmission line that PJM has determined is necessary for the reliability of the regional transmission grid.  Although the FERC has granted our request for incentive rate treatment of such facilities, we cannot predict the date when these facilities will be in service or whether delays may occur due to public opposition or other factors.  Delays could result in significant cost increases for these facilities and decreased reliability of the regional transmission grid.  As a result, we cannot predict the ultimate financial or operational impact of this project or other RTEP projects on PPL Electric.

We could be subject to higher costs and/or penalties related to mandatory reliability standards.

Under the Energy Policy Act, owners and operators of the bulk power transmission system are now subject to mandatory reliability standards promulgated by the NERC and enforced by the FERC.  Compliance with reliability standards may subject us to higher operating costs and/or increased capital expenditures, and violations of these standards could result in substantial penalties.

We could be subject to higher costs and/or penalties related to Pennsylvania Conservation and Energy Efficiency Programs.

Act 129 became effective in October 2008.  This law created requirements for energy efficiency and conservation programs and for the use of smart metering technology, imposed new PLR electricity supply procurement rules, provided remedies for market misconduct, and made changes to the existing Alternative Energy Portfolio Standard.  Utilities not meeting the requirements of Act 129 are subject to significant penalties that cannot be recovered in rates.  The law also requires electric utilities to meet specified goals for reduction in customer electricity usage and peak demand by specified dates (2011 and 2013).  Although we expect to meet these requirements, numerous factors outside of our control could prevent compliance with these requirements and result in penalties to us.  See "Regulatory Issues - Energy Policy Act of 2005 - Reliability Standards" in Note 14 to the Financial Statements for additional information.

Rate deregulation remains subject to political risks.

Although prior initiatives have not resulted in the enactment of legislation, the possibility remains that certain Pennsylvania legislators could introduce legislation to extend generation rate caps or otherwise limit cost recovery through rates for Pennsylvania utilities after the end of applicable transition periods, which in PPL Electric's case was December 31, 2009.  If such legislation were introduced and ultimately enacted, PPL Electric could face severe financial consequences including operating losses and significant cash flow shortfalls.  In addition, continuing uncertainty regarding PPL Electric's ability to recover its market supply and other costs of operating its business could adversely affect its credit quality, financing costs and availability of credit facilities necessary to operate its business.

Other Risks Related to All Segments

(PPL, PPL Energy Supply and PPL Electric)

We will selectively pursue growth of generation and transmission and distribution capacity, which involves a number of uncertainties and may not achieve the desired financial results.

We will pursue expansion of our generation and transmission and distribution capacity over the next several years through power uprates at certain of our existing power plants, the potential construction of new power plants, the potential acquisition of existing plants, the potential construction or acquisition of transmission and distribution projects and capital investments to upgrade transmission and distribution infrastructure.  We will rigorously scrutinize opportunities to expand our generating capability and may determine not to proceed with any expansion.  These types of projects involve numerous risks.  Any planned power uprates could result in cost overruns, reduced plant efficiency and higher operating and other costs.  With respect to the construction of new plants, the acquisition of existing plants, or the construction or acquisition of transmission and distribution projects, we may be required to expend significant sums for preliminary engineering, permitting, resource exploration, legal and other expenses before it can be established whether a project is feasible, economically attractive or capable of being financed.  The success of both a new or acquired project would likely be contingent, among other things, upon the negotiation of satisfactory operating contracts, obtaining acceptable financing, maintaining acceptable credit ratings, as well as receipt of required and appropriate governmental approvals.  If we were unable to complete construction or expansion of a facility, we would generally be unable to recover our investment in the project.  Furthermore, we might be unable to run any new or acquired plants as efficiently as projected, which could result in higher than projected operating and other costs and reduced earnings.

The economic and financial markets in which we operate could adversely affect our financial condition and results of operations.

In 2008, conditions in the financial markets became disruptive to the processes of managing credit risk, responding to liquidity needs, measuring at fair value derivatives and other financial instruments and managing market risk.  The contraction of liquidity in the wholesale energy markets and accompanying significant decline in wholesale energy prices significantly impacted our earnings during the second half of 2008 and the first half of 2009.  The breadth and depth of these negative economic conditions had a wide-ranging impact on the U.S. and international business environment, including our businesses, and may continue to do so.  As a result of the economic downturn, demand for energy commodities has declined significantly.  This reduced demand will continue to impact the key domestic wholesale energy markets we serve (such as PJM) and our Pennsylvania delivery business, especially industrial customer demand.  The combination of lower demand for power and natural gas and other fuels has put downward price pressure on the wholesale energy market in general, further impacting our energy marketing results.  In general, current economic and commodity market conditions will continue to challenge the predictability regarding our unhedged future energy margins, liquidity and overall financial condition.

Our businesses are heavily dependent on credit and capital, among other things, for providing collateral to support hedging in our energy marketing business.  Global bank credit capacity was reduced and the cost of renewing or establishing new credit facilities increased significantly in 2008, primarily as a result of general credit concerns nationwide, thereby introducing uncertainties as to our businesses' ability to enter into long-term energy commitments or reliably estimate the longer-term cost and availability of credit.  Although bank credit conditions have improved since mid-2009, and we currently expect to have adequate access to needed credit and capital based on current conditions, deterioration in the financial markets could adversely affect our financial condition and liquidity.

The current condition of the economic and financial markets in which we operate is expected to continue to impact numerous other aspects of our business operations discussed elsewhere in this Risk Factor section.

Our operating results could fluctuate on a seasonal basis, especially as a result of severe weather conditions.

Our businesses are subject to seasonal demand cycles.  For example, in some markets demand for, and market prices of, electricity peak during hot summer months, while in other markets such peaks occur in cold winter months.  As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis if weather conditions such as heat waves, extreme cold weather or severe storms occur.  The patterns of these fluctuations may change depending on the type and location of our facilities and the terms of our contracts to sell electricity.

We cannot predict the outcome of the legal proceedings and investigations currently being conducted with respect to our current and past business activities.  An adverse determination could have a material adverse effect on our financial condition, results of operations or cash flows.

We are involved in legal proceedings, claims and litigation and subject to ongoing state and federal investigations arising out of our business operations, the most significant of which are summarized in "Legal Matters," "Regulatory Issues" and in "Environmental Matters - Domestic" in Note 14 to the Financial Statements.  We cannot predict the ultimate outcome of these matters, nor can we reasonably estimate the costs or liability that could potentially result from a negative outcome in each case.

We may need significant additional financing to pursue growth opportunities.

We continually review potential acquisitions and development projects and may enter into significant acquisition agreements or development commitments in the future.  An acquisition agreement or development commitment may require access to substantial capital from outside sources on acceptable terms.  We also may need external financing to fund capital expenditures, including capital expenditures necessary to comply with environmental or other regulatory requirements.  Our ability to arrange financing and our cost of capital are dependent on numerous factors, including general economic conditions, credit availability and our financial performance.  The inability to obtain sufficient financing on terms that are acceptable to us could adversely affect our ability to pursue acquisition and development opportunities and fund capital expenditures.

A downgrade in our credit ratings could negatively affect our ability to access capital and increase the cost of maintaining our credit facilities and any new debt.

Our current credit ratings by Moody's, Fitch and S&P, including a January 2009 review by S&P that resulted in a negative outlook for us, are listed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Liquidity and Capital Resources - Credit Ratings."  While we do not expect these ratings to limit our ability to fund short-term liquidity needs or access new long-term debt, any ratings downgrade could increase our short-term borrowing costs and negatively affect our ability to fund short-term liquidity needs and access new long-term debt.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Liquidity and Capital Resources - Ratings Triggers" for additional information on the impact of a downgrade in our credit rating.

Significant increases in our operation and maintenance expenses, including health care and pension costs, could adversely affect our future earnings and liquidity.

We continually focus on limiting and reducing where possible our operation and maintenance expenses.  However, we expect to continue to face increased cost pressures in our operations. Increased costs of materials and labor may result from general inflation, increased regulatory requirements, especially in respect of environmental protection, the need for higher cost expertise in the workforce or other factors.  In addition, pursuant to collective bargaining agreements, we are contractually committed to provide specified levels of health care and pension benefits to certain current employees and retirees.  We provide a similar level of benefits to our management employees.  These benefits give rise to significant expenses.  Due to general inflation with respect to such costs, the aging demographics of our workforce and other factors, we have experienced significant health care cost inflation in recent years, and we expect our health care costs, including prescription drug coverage, to continue to increase despite measures that we have taken and expect to take to require employees and retirees to bear a higher portion of the costs of their health care benefits.  In addition, we expect to continue to incur significant costs with respect to the defined benefit pension plans for our employees and retirees.  The measurement of our expected future health care and pension obligations, costs and liabilities is highly dependent on a variety of assumptions, most of which relate to factors beyond our control.  These assumptions include investment returns, interest rates, health care cost trends, benefit improvements, salary increases and the demographics of plan participants.  If our assumptions prove to be inaccurate, our future costs and cash contribution requirements to fund these benefits could increase significantly.

There is a risk that we may be required to record impairment charges in the future for certain of our investments, which could adversely affect our earnings.

Under GAAP, we are required to test our recorded goodwill for impairment on an annual basis, or more frequently if events or circumstances indicate that these assets may be impaired.  Although no goodwill impairments were recorded based on our annual review in the fourth quarter of 2009, we are unable to predict whether future impairment charges may be necessary.

We also review our long-lived assets for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable.  During 2009, PPL recorded impairment charges related to certain sulfur dioxide emission allowances and the Long Island generation business that is being sold.  During 2008, PPL recorded impairment charges related to a cancelled hydroelectric expansion project, certain emission allowances and its natural gas distribution and propane businesses that were sold in 2008.  During 2007, PPL impaired certain transmission rights, certain domestic telecommunications assets, certain assets of the natural gas distribution and propane businesses, and the net assets of our Bolivian businesses prior to their sale in 2007.  See Notes 8, 9 and 17 to the Financial Statements for additional information on these charges.  We are unable to predict whether impairment charges, or other losses on sales of other assets or businesses, may occur in future years.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS

PPL Corporation, PPL Energy Supply, LLC and PPL Electric Utilities Corporation

None.
ITEM 2. PROPERTIES

Supply Segment

PPL Energy Supply's system capacity (winter rating) at December 31, 2009, was:

Plant
  
Total MW
Capacity (a)
  
% Ownership
  
PPL Energy Supply's Ownership
or Lease Interest
in MW
  
Primary Fuel
                 
Pennsylvania
                
Susquehanna
  
2,451
  
90.00
  
2,206
  
Nuclear
Montour
  
1,530
  
100.00
  
1,530
  
Coal
Brunner Island
  
1,476
  
100.00
  
1,476
(b)
Coal
Martins Creek
  
1,672
  
100.00
  
1,672
  
Natural Gas/Oil
Keystone
  
1,718
  
12.34
  
212
  
Coal
Conemaugh
  
1,718
  
16.25
  
279
  
Coal
Ironwood (c)
  
759
  
100.00
  
759
  
Natural Gas
Lower Mt. Bethel
  
624
  
100.00
  
624
  
Natural Gas
Combustion turbines
  
465
  
100.00
  
465
  
Natural Gas/Oil
Safe Harbor Water Power Corp.
  
421
  
33.33
  
140
  
Hydro
Hydroelectric
  
172
  
100.00
  
172
  
Hydro
Other (c) (d)
  
48
  
100.00
  
48
  
Various
   
13,054
      
9,583
    
Montana
                
Colstrip Units 1 & 2
  
614
  
50.00
  
307
  
Coal
Colstrip Unit 3
  
740
  
30.00
  
222
  
Coal
Corette
  
153
  
100.00
  
153
  
Coal
Hydroelectric
  
604
  
100.00
  
604
  
Hydro
   
2,111
      
1,286
    
                 
Illinois
                
University Park
  
585
  
100.00
  
585
  
Natural Gas
                 
Connecticut
                
Wallingford
  
244
  
100.00
  
244
  
Natural Gas
                 
New York
                
Shoreham and Edgewood
  
159
  
100.00
    
(e)
Natural Gas/Oil
                 
Maine
                
Hydroelectric
  
12
  
100.00
  
12
  
Hydro
                 
New Jersey
                
Other
  
11
  
100.00
  
5
(f)
Landfill Gas/Solar
                 
Vermont
                
Moretown
  
3
  
100.00
  
3
  
Landfill Gas
                 
New Hampshire
                
Colebrook
  
1
  
100.00
  
1
  
Landfill Gas
                 
Total System Capacity
  
16,180
      
11,719
    

(a)
  
The capacity of generation units is based on a number of factors, including the operating experience and physical conditions of the units, and may be revised periodically to reflect changed circumstances.
(b)
  
PPL Energy Supply expects a reduction of up to 30 MW in net generation capability due to the estimated increase in station service usage during the scrubber operation.
(c)
  
Facilities not owned by PPL Energy Supply, but there is a tolling agreement or power purchase agreement in place.
(d)
  
Includes renewable energy facilities owned by a PPL Energy Supply subsidiary.
(e)
  
Facilities owned by PPL Energy Supply, but there are tolling agreements in place for 100% of the output.  In May 2009, PPL Generation signed a definitive agreement to sell the Long Island generation business.  The tolling agreements related to these plants will be transferred to the new owner upon completion of the sale.  See Note 9 to the Financial Statements for additional information on the anticipated sale.
(f)
  
Includes renewable energy facilities owned by a PPL Energy Supply subsidiary for which there are power purchase agreements in place.

PPL Energy Supply continuously reexamines development projects based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options.  At December 31, 2009, PPL Generation planned to implement the following incremental capacity increases.

Project
  
Primary Fuel
  
Total MW
Capacity (a)
  
PPL Energy Supply
Ownership or Lease
Interest in MW
  
Expected
In-Service Date (b)
  
                   
Pennsylvania
                      
Holtwood (c)
  
Hydro
  
125
  
125
  
(100%)
  
2013
  
Susquehanna (d)
  
Nuclear
  
59
  
53
  
(90%)
  
2010 - 2011
  
Martins Creek (e)
  
Natural Gas/Oil
  
30
  
30
  
(100%)
  
2011
  
Chrin Landfill
  
Landfill Gas
  
3
  
3
  
(100%)
  
2011
  
Montana
                      
Great Falls (f)
  
Hydro
  
28
  
28
  
(100%)
  
2012
  
Total
      
245
  
239
          

(a)
  
The capacity of generation units is based on a number of factors, including the operating experience and physical condition of the units, and may be revised periodically to reflect changed circumstances.
(b)
  
The expected in-service dates are subject to receipt of required approvals, permits and other contingencies.
(c)
  
This project includes installation of two additional large turbine-generators.
(d)
  
This project involves the extended upgrade of Units 1 and 2 and is being implemented in two uprates per unit, the first increase being an average of 50 MW per unit.  The first uprate for Unit 1 occurred in 2008.  The second uprate is planned to occur in 2010.  The first uprate for Unit 2 occurred in 2009.  The second uprate is planned to occur in 2011.
(e)
  
This project involves the replacement of LP rotors and stationary blading for Unit 4.
(f)
  
This project involves reconstruction of a powerhouse.

Pennsylvania Delivery Segment

For a description of PPL Electric's service territory, see "Item 1. Business - Background."  At December 31, 2009, PPL Electric had electric transmission and distribution lines in public streets and highways pursuant to franchises and rights-of-way secured from property owners.  PPL Electric's system included 371 substations with a total capacity of 30 million kVA, 33,053 circuit miles of overhead lines and 7,310 cable miles of underground conductors.  All of PPL Electric's facilities are located in Pennsylvania.  Substantially all of PPL Electric's distribution properties and certain transmission properties are subject to the lien of PPL Electric's 2001 Senior Secured Bond Indenture.

See Note 8 to the Financial Statements for information on the construction of a new 500-kilovolt transmission line.

International Delivery Segment

For a description of WPD's service territory, see "Item 1. Business - Background."  At December 31, 2009, WPD had electric distribution lines in public streets and highways pursuant to legislation and rights-of-way secured from property owners.  In 2009, electricity distributed totaled 26,358 GWh based on operating revenues recorded by WPD.  WPD's distribution system in the U.K. includes 651 substations with a total capacity of 25 million kVA, 28,877 miles of overhead lines and 23,896 cable miles of underground conductors.


  ITEM 3. LEGAL PROCEEDINGS

See Note 14 to the Financial Statements for information regarding legal, regulatory and environmental proceedings and matters.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2009.
EXECUTIVE OFFICERS OF THE REGISTRANTS

Officers of PPL, PPL Energy Supply and PPL Electric are elected annually by their Boards of Directors (or Board of Managers for PPL Energy Supply) to serve at the pleasure of the respective Boards.  There are no family relationships among any of the executive officers, nor is there any arrangement or understanding between any executive officer and any other person pursuant to which the officer was selected.

There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years.

Listed below are the executive officers at December 31, 2009.

PPL Corporation
             
Name
  
Age
  
Positions Held During the Past Five Years
  
Dates
             
James H. Miller
  
61
  
Chairman, President and Chief Executive Officer
  
October 2006 - present
       
President
  
June 2006 - September 2006
       
President and Chief Operating Officer
  
August 2005 - June 2006
       
Executive Vice President and Chief Operating Officer
  
September 2004 - July 2005
             
William H. Spence
  
52
  
Executive Vice President and Chief Operating Officer
  
June 2006 - present
       
President-PPL Generation
  
June 2008 - present
       
Senior Vice President-Pepco Holdings, Inc.
  
August 2002 - June 2006
       
Senior Vice President-Conectiv Holdings
  
September 2000 - June 2006
             
Paul A. Farr
  
42
  
Executive Vice President and Chief Financial Officer
  
April 2007 - present
       
Senior Vice President-Financial
  
January 2006 - March 2007
       
Senior Vice President-Financial and Controller
  
August 2005 - January 2006
       
Vice President and Controller
  
August 2004 - July 2005
             
Robert J. Grey
  
59
  
Senior Vice President, General Counsel and Secretary
  
March 1996 - present
             
Robert D. Gabbard (a)
  
50
  
President-PPL EnergyPlus
  
June 2008 - present
       
Senior Vice President-Trading-PPL EnergyPlus
  
June 2008 - June 2008
       
Senior Vice President Merchant Trading Operations-Conectiv Energy
  
June 2005 - May 2008
 
       
Vice President and General Manager Power Trading-Conectiv Energy
  
April 1998 - June 2005
 
             
Rick L. Klingensmith (a)
  
49
  
President-PPL Global
  
August 2004 - present
             
David G. DeCampli (a)
  
52
  
President-PPL Electric
  
April 2007 - present
       
Senior Vice President-Transmission and Distribution Engineering and Operations-PPL Electric
  
December 2006 - April 2007
       
Vice President-Asset Investment Strategy and Development-Exelon Energy Delivery-Exelon Corporation
  
April 2004 - December 2006
             
James E. Abel
  
58
  
Vice President-Finance and Treasurer
  
June 1999 - present
             
J. Matt Simmons, Jr.
  
44
  
Vice President and Controller
  
January 2006 - present
       
Vice President-Finance and Controller-Duke Energy Americas
  
October 2003 - January 2006

(a)
  
Designated an executive officer of PPL by virtue of their respective positions at a PPL subsidiary.


PPL Electric Utilities Corporation
             
Name
  
Age
  
Positions Held During the Past Five Years
  
Dates
             
David G. DeCampli
  
52
  
President
  
April 2007 - present
       
Senior Vice President-Transmission and Distribution Engineering and Operations
  
December 2006 - April 2007
       
Vice President-Asset Investment Strategy and Development-Exelon Energy Delivery-Exelon Corporation
  
April 2004 - December 2006
             
Gregory N. Dudkin (a)
  
52
  
Senior Vice President-Operations
  
June 2009 - present
       
Independent Consultant
  
February 2009 - June 2009
       
Senior Vice President of Technical Operations and Fulfillment-Comcast Corporation
  
July 2006 - January 2009
       
Regional Senior Vice President-Comcast Corporation
  
January 2005 - June 2006
             
James E. Abel
  
58
  
Treasurer
  
July 2000 - present
             
J. Matt Simmons, Jr.
  
44
  
Vice President and Controller
  
January 2006 - present
       
Vice President-Finance and Controller-Duke Energy Americas
  
October 2003 - January 2006
             

(a)
  
On June 29, 2009, Gregory N. Dudkin was elected Senior Vice President-Operations of PPL Electric.

PPL Energy Supply, LLC

Item 4 is omitted as PPL Energy Supply meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K.
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

PPL Corporation

Additional information for this item is set forth in the sections entitled "Quarterly Financial, Common Stock Price and Dividend Data," "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" and "Shareowner and Investor Information" of this report.  At January 29, 2010, there were 72,013 common stock shareowners of record.


Issuer Purchases of Equity Securities during the Fourth Quarter of 2009:

 
(a)
(b)
(c)
(d)
Period
Total Number of
Shares (or Units)
Purchased (1)
Average Price Paid
per Share
(or Unit)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
Maximum Number (or
Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2)
October 1 to October 31, 2009
      
$57,495
November 1 to November 30, 2009
14,124
$29.44
  
$57,495
December 1 to December 31, 2009
      
$57,495
Total
14,124
$29.44
  
$57,495

(1)
  
Represents shares of common stock withheld by PPL at the request of its executive officers to pay taxes upon the vesting of the officers' restricted stock awards, as permitted under the terms of PPL's ICP and ICPKE.
(2)
  
In June 2007, PPL announced a program to repurchase from time to time up to $750 million of its common stock in open market purchases, pre-arranged trading plans or privately negotiated transactions.

PPL Energy Supply, LLC

There is no established public trading market for PPL Energy Supply's membership interests.  PPL Energy Funding, a direct wholly owned subsidiary of PPL, owns all of PPL Energy Supply's outstanding membership interests.  Distributions on the membership interests will be paid as determined by PPL Energy Supply's Board of Managers.  PPL Energy Supply made cash distributions to PPL Energy Funding of $943 million in 2009 and $750 million in 2008.

PPL Electric Utilities Corporation

There is no established public trading market for PPL Electric's common stock, as PPL owns 100% of the outstanding common shares.  Dividends paid to PPL on those common shares are determined by PPL Electric's Board of Directors.  PPL Electric paid common stock dividends to PPL of $274 million in 2009 and $98 million in 2008.

ITEM 6. SELECTED FINANCIAL AND OPERATING DATA

PPL Energy Supply, LLC

Item 6 is omitted as PPL Energy Supply meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K.
ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA
 
PPL Corporation (a)(b)
    
2009
      
2008
      
2007
      
2006
      
2005
  
Income Items - millions
                                        
Operating revenues
  
$
7,556
    
$
8,007
    
$
6,462
    
$
6,096
    
$
5,498
  
Operating income
    
961
      
1,793
      
1,659
      
1,485
      
1,242
  
Income from continuing operations after income taxes attributable to PPL
    
447
      
907
      
1,001
      
825
      
666
  
Net income attributable to PPL
    
407
      
930
      
1,288
      
865
      
669
  
Balance Sheet Items - millions (c)
                                        
Total assets
    
22,165
      
21,405
      
19,972
      
19,747
      
17,926
  
Short-term debt
    
639
      
679
      
92
      
42
      
214
  
Long-term debt (d)
    
7,143
      
7,838
      
7,568
      
7,746
      
7,081
  
Long-term debt with affiliate trusts
                            
89
      
89
  
Noncontrolling interests
    
319
      
319
      
320
      
361
      
107
  
Common equity
    
5,496
      
5,077
      
5,556
      
5,122
      
4,418
  
Total capitalization (d)
    
13,597
      
13,913
      
13,536
      
13,360
      
11,909
  
Capital lease obligations
                            
10
      
11
  
Financial Ratios
                                        
Return on average common equity - %
    
7.48
      
16.88
      
24.47
      
17.81
      
15.44
  
Ratio of earnings to fixed charges - total enterprise basis (e)
    
2.0
      
3.2
      
2.9
      
2.8
      
2.3
  
Common Stock Data
                                        
Number of shares outstanding - Basic - thousands
                                        
Year-end
    
377,183
      
374,581
      
373,271
      
385,039
      
380,145
  
Average
    
376,082
      
373,626
      
380,563
      
380,754
      
379,132
  
Income from continuing operations after income taxes available to PPL common shareowners - Basic EPS
  
$
1.18
    
$
2.42
    
$
2.62
    
$
2.16
    
$
1.75
  
Income from continuing operations after income taxes available to PPL common shareowners - Diluted EPS
  
$
1.18
    
$
2.41
    
$
2.60
    
$
2.13
    
$
1.74
  
Net income available to PPL common shareowners - Basic EPS
  
$
1.08
    
$
2.48
    
$
3.37
    
$
2.26
    
$
1.76
  
Net income available to PPL common shareowners - Diluted EPS
  
$
1.08
    
$
2.47
    
$
3.34
    
$
2.24
    
$
1.74
  
Dividends declared per share of common stock
  
$
1.38
    
$
1.34
    
$
1.22
    
$
1.10
    
$
0.96
  
Book value per share (c)
  
$
14.57
    
$
13.55
    
$
14.88
    
$
13.30
    
$
11.62
  
Market price per share (c)
  
$
32.31
    
$
30.69
    
$
52.09
    
$
35.84
    
$
29.40
  
Dividend payout ratio - % (f)
    
128
      
54
      
37
      
49
      
55
  
Dividend yield - % (g)
    
4.27
      
4.37
      
2.34
      
3.07
      
3.27
  
Price earnings ratio (f) (g)
    
29.92
      
12.43
      
15.60
      
16.00
      
16.90
  
Sales Data - millions of kWh
                                        
Domestic - Electric energy supplied - retail
    
38,912
      
40,374
      
40,074
      
38,810
      
39,413
  
Domestic - Electric energy supplied - wholesale (h)
    
38,988
      
42,712
      
33,515
      
30,427
      
31,530
  
Domestic - Electric energy delivered
    
36,717
      
38,058
      
37,950
      
36,683
      
37,358
  
International - Electric energy delivered (i)
    
26,358
      
27,724
      
31,652
      
33,352
      
33,146
  

(a)
  
The earnings each year were affected by several items that management considers special.  See "Results of Operations - Segment Results" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of special items in 2009, 2008 and 2007.
(b)
  
See "Item 1A. Risk Factors" and Note 14 to the Financial Statements for a discussion of uncertainties that could affect PPL's future financial condition.
(c)
  
As of each respective year-end.
(d)
  
The year 2007 excludes amounts related to PPL's natural gas distribution and propane businesses that had been classified as held for sale at December 31, 2007.
(e)
  
Computed using earnings and fixed charges of PPL and its subsidiaries.  Fixed charges consist of interest on short- and long-term debt, amortization of debt discount, expense and premium - net, other interest charges, the estimated interest component of operating rentals and preferred securities distributions of subsidiaries.  See Exhibit 12(a) for additional information.
(f)
  
Based on diluted EPS.
(g)
  
Based on year-end market prices.
(h)
  
All years include kWh associated with the Long Island generation business and the majority of PPL Maine's hydroelectric generation business that have been classified as Discontinued Operations.
(i)
  
Years 2007 and earlier include the deliveries associated with the Latin American businesses, until the dates of their sales in 2007.
ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA
 
PPL Electric Utilities Corporation (a)(b)
    
2009
      
2008
      
2007
      
2006
      
2005
  
Income Items - millions
                                        
Operating revenues
  
$
3,292
    
$
3,401
    
$
3,410
    
$
3,259
    
$
3,163
  
Operating income
    
329
      
375
      
350
      
418
      
377
  
Net income
    
142
      
176
      
163
      
194
      
147
  
Income available to PPL
    
124
      
158
      
145
      
180
      
145
  
Balance Sheet Items - millions (c)
                                        
Total assets
    
5,092
      
5,416
      
4,986
      
5,315
      
5,537
  
Short-term debt
            
95
      
41
      
42
      
42
  
Long-term debt
    
1,472
      
1,769
      
1,674
      
1,978
      
2,411
  
Shareowners' equity
    
1,896
      
1,646
      
1,586
      
1,559
      
1,375
  
Total capital provided by investors
    
3,368
      
3,510
      
3,301
      
3,579
      
3,828
  
Financial Ratios
                                        
Return on average common equity - %
    
9.08
      
12.00
      
11.35
      
14.33
      
11.20
  
Ratio of earnings to fixed charges (d)
    
2.8
      
3.4
      
2.7
      
2.9
      
2.1
  
Ratio of earnings to combined fixed charges and preferred stock dividends (e)
    
2.3
      
2.7
      
2.3
      
2.5
      
2.1
  
Sales Data
                                        
Customers (thousands) (c)
    
1,398
      
1,394
      
1,387
      
1,377
      
1,365
  
Electric energy delivered - millions of kWh
                                        
Residential
    
14,256
      
14,419
      
14,411
      
13,714
      
14,218
  
Commercial
    
13,837
      
13,942
      
13,801
      
13,174
      
13,196
  
Industrial
    
8,435
      
9,508
      
9,547
      
9,638
      
9,777
  
Other
    
189
      
189
      
191
      
157
      
167
  
                                         
Total electric energy delivered
    
36,717
      
38,058
      
37,950
      
36,683
      
37,358
  
                                         
Electric energy supplied as a PLR - millions of kWh
    
36,695
      
38,043
      
37,919
      
36,577
      
36,917
  

(a)
  
Earnings for the years 2009, 2007, 2006 and 2005 were affected by several items that management considers special.  See "Results of Operations - Earnings" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of special items in 2009 and 2007.
(b)
  
See "Item 1A. Risk Factors" and Note 14 to the Financial Statements for a discussion of uncertainties that could affect PPL Electric's future financial condition.
(c)
  
As of each respective year-end.
(d)
  
Computed using earnings and fixed charges of PPL Electric and its subsidiaries.  Fixed charges consist of interest on short- and long-term debt, other interest charges, amortization of debt discount, expense and premium - net, and the estimated interest component of operating rentals.  See Exhibit 12(c) for additional information.
(e)
  
Computed using earnings, fixed charges and preferred stock dividend requirements of PPL Electric and its subsidiaries.  Fixed charges consist of interest on short- and long-term debt, other interest charges, amortization of debt discount, expense and premium - net, and the estimated interest component of operating rentals.  See Exhibit 12(c) for additional information.
PPL CORPORATION AND SUBSIDIARIES

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

PPL is an energy and utility holding company with headquarters in Allentown, Pennsylvania.  Refer to "Item 1. Business - Background" for descriptions of its reportable segments, which are Supply, International Delivery and Pennsylvania Delivery.  Through its subsidiaries, PPL is primarily engaged in the generation and marketing of electricity in two key markets - the northeastern and western U.S. - and in the delivery of electricity in Pennsylvania and the U.K.  PPL's overall strategy is to achieve disciplined growth in energy supply margins while limiting volatility in both cash flows and earnings and to achieve stable, long-term growth in its regulated electricity delivery businesses through efficient operations and strong customer and regulatory relations.  More specifically, PPL's strategy for its electricity generation and marketing business is to match energy supply with load, or customer demand, under contracts of varying lengths with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL's strategy for its electricity delivery businesses is to own and operate these businesses at the most efficient cost while maintaining high quality customer service and reliability.

PPL faces several risks in its supply business, principally electricity and capacity wholesale price risk, fuel supply and price risk, electricity and fuel basis risk, power plant performance, evolving regulatory frameworks and counterparty credit risk.  PPL attempts to manage these risks through various means.  For instance, PPL operates a portfolio of generation assets that is diversified as to geography, fuel source, cost structure and operating characteristics.  PPL expects to expand its generation capacity over the next several years through power uprates at certain of its existing power plants, and is continually evaluating the potential construction of new plants and the potential acquisition of existing plants or businesses.  PPL is and will continue to remain focused on the operating efficiency and availability of its existing and any newly constructed or acquired power plants.

In addition, PPL has executed and continues to pursue contracts of varying lengths for energy sales and fuel supply, while using other means to mitigate risks associated with adverse changes in the difference, or margin, between the cost to produce electricity and the price at which PPL sells it.  PPL's future profitability will be affected by prevailing market conditions and whether PPL decides to, or is able to, continue to enter into long-term or intermediate-term power sales and fuel purchase agreements or renew its existing agreements.  Currently, PPL's commitments for energy sales are satisfied through its own generation assets and supply purchased from third parties.  PPL markets and trades around its physical portfolio of generating assets through integrated generation, marketing and trading functions.

PPL has adopted financial and operational risk management programs that, among other things, are designed to monitor and manage its exposure to earnings and cash flow volatility related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of its generating units.

The principal challenge that PPL faces in its electricity delivery businesses is to maintain high quality customer service and reliability in a cost-effective manner.  PPL's electricity delivery businesses are rate-regulated.  Accordingly, these businesses are subject to regulatory risk with respect to costs that may not be recovered and investment returns that may not be collected through customer rates.  See "Customer Choice - End of Transition Period" below for information on additional risks PPL's domestic electricity business may face.

PPL faces additional financial risks in conducting U.K. operations, such as fluctuations in foreign currency exchange rates and the effect these rates have on the conversion of U.K. earnings and cash flows to U.S. dollars.  PPL attempts to manage these financial risks through its risk management programs.

In order to manage financing costs and access to credit markets, a key objective for PPL's business as a whole is to maintain a strong credit profile.  PPL continually focuses on maintaining an appropriate capital structure and liquidity position.

See "Item 1A. Risk Factors" for more information concerning these and other material risks PPL faces in its businesses.

In May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and related tolling agreements, and expects the sale to close on or about February 26, 2010.  In November 2009, PPL Maine completed the sale of the majority of its hydroelectric generation business.  These businesses are included in the Supply segment.  In 2008, PPL sold its natural gas distribution and propane businesses, which were included in the Pennsylvania Delivery segment.  In 2007, PPL sold its regulated electricity delivery businesses in Latin America, which were included in the International Delivery segment.  See Note 9 to the Financial Statements for additional information.

The purpose of "Management's Discussion and Analysis of Financial Condition and Results of Operations" is to provide information concerning PPL's performance in implementing the strategies and managing the risks and challenges mentioned above.  Specifically:

·
"Results of Operations" provides an overview of PPL's operating results in 2009, 2008 and 2007, including a review of earnings, with details of results by reportable segment.  It also provides a brief outlook for 2010.
   
·
"Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL's liquidity position and credit profile, including its sources of cash (including bank credit facilities and sources of operating cash flow) and uses of cash (including contractual obligations and capital expenditure requirements) and the key risks and uncertainties that impact PPL's past and future liquidity position and financial condition.  This subsection also includes a listing and discussion of PPL's current credit ratings.
   
·
"Financial Condition - Risk Management - Energy Marketing & Trading and Other" provides an explanation of PPL's risk management programs relating to market risk and credit risk.
   
·
"Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of PPL and that require its management to make significant estimates, assumptions and other judgments.

The information provided in this Item 7 should be read in conjunction with PPL's Consolidated Financial Statements and the accompanying Notes.

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

Customer Choice – End of Transition Period

In 1996, the Customer Choice Act was enacted to restructure Pennsylvania's electric utility industry in order to create retail access to a competitive market for generation of electricity.  The Customer Choice Act required each Pennsylvania electric utility, including PPL Electric, to file a restructuring plan to "unbundle" its rates into separate generation, transmission and distribution components and to permit its customers to directly access alternate suppliers of electricity.  Under the Customer Choice Act, PPL Electric was required to act as a PLR.  As part of a settlement approved by the PUC and in connection with the restructuring plan PPL Electric filed under the Customer Choice Act, PPL Electric agreed to provide electricity as a PLR at predetermined "capped" rates through 2009.  In addition, the PUC authorized recovery of approximately $2.97 billion of competitive transition or "stranded" costs (generation-related costs that might not otherwise be recovered in a competitive market) from customers during an 11-year transition period.  For PPL Electric, this transition period ended on December 31, 2009.

As a result of the PUC settlement order and the PLR obligation, PPL Electric, through 2009, generally bore the risk that it would not be able to obtain adequate energy supply at the "capped" rates it could charge to its customers who did not select an alternate electricity supplier.  To mitigate this risk, PPL Electric entered into full requirements energy supply agreements with PPL EnergyPlus.  Under these agreements, through 2009, PPL EnergyPlus supplied PPL Electric's entire PLR load at predetermined prices equal to the capped generation rates that PPL Electric was authorized to charge its customers.

Related to PPL Electric's transition period, the following has occurred or will occur:

·
In August 1999, CTC of $2.4 billion were converted to intangible transition costs when they were securitized by the issuance of transition bonds.  The intangible transition costs were amortized over the life of the transition bonds, through December 2008, in accordance with an amortization schedule filed with the PUC.  These transition bonds matured in tranches, with the final tranche being repaid in December 2008.
   
·
During the transition period, PPL Electric was authorized by the PUC to bill its customers $130 million for a portion of the costs associated with decommissioning of the Susquehanna nuclear plant.  Under the power supply agreements between PPL Electric and PPL EnergyPlus, these revenues were passed on to PPL EnergyPlus.  Similarly, these revenues were passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna and invested in the NDT funds.  Effective January 1, 2010, these ratepayer billings have ceased.
   
·
In December 2009, PPL Electric filed with the PUC a final reconciliation of CTC and ITC recoveries during the transition period.  At December 31, 2009, PPL Electric has recorded a net regulatory liability of $33 million related to these recoveries.  The net overcollection will be reflected in customer rates in 2010.
   
·
At December 31, 2009, PPL Electric's long-term power purchase agreements with PPL EnergyPlus (effective since 2000 and 2002) expired.
   
·
To mitigate 2010 rate increases, PPL Electric implemented two programs in 2008 and 2009 that allowed customers to make prepayments toward their 2010 and 2011 electric bills or to defer any 2010 electric bill increases exceeding 25%.  Any deferred amounts are to be repaid by 2012.  At December 31, 2009, PPL Electric has recorded a liability of $36 million for these programs.
   
·
Effective January 1, 2010, PPL Electric's rates for generation supply as a PLR are no longer capped and the cost of electric generation is based on a competitive solicitation process.  During 2007 through 2009, PPL Electric procured through PUC-approved solicitation procedures, the electric generation supply it will need in 2010 for customers who do not choose an alternative supplier.  The prices in these contracts will result in an average residential customer paying approximately 30% higher rates, as compared to the previously-capped rates on delivered electricity.  PPL Electric is currently procuring the PLR supply it will need for the January 2011 through May 2013 period.  The results of all procurements continue to require the approval of the PUC.
   
·
For those customers who choose to procure generation supply from other providers, PPL Electric will provide services for these alternative generation suppliers to bill usage charges, among other duties.  As required by a PUC-approved plan, PPL Electric will be purchasing certain receivables from alternative suppliers at a discount.

In October 2008, Act 129 became effective.  This law created requirements for energy efficiency and conservation programs and for the use of smart metering technology, imposed new PLR electricity supply procurement rules, provided remedies for market misconduct, and made changes to the existing Alternative Energy Portfolio Standard.

Prior to the expiration of the generation rate caps, customers' interest in purchasing generation supply from other providers was limited because in recent years, the long-term supply agreement between PPL Electric and PPL EnergyPlus provided a below-market cost of generation supply for these customers.  As a result, a limited amount of "shopping" occurred.  In 2010, several alternative suppliers have offered to provide generation supply in PPL Electric's service territory.  When its customers purchase supply from these alternative suppliers or from PPL Electric as PLR, the purchase of such supply has no significant impact on the operating results of PPL Electric.  The cost to purchase PLR supply is passed directly by PPL Electric to its customers without markup.  For those customers who receive their supply from an alternative supplier, PPL Electric may act as billing agent or the alternative supplier may bill for their supply directly, and in either case, PPL Electric does not record revenues or expenses related to this supply.  PPL Electric remains the distribution provider for all the customers in its service territory and charges a regulated rate for the service of delivering that electricity.

Lower demand for electric power due to increased prices, the economic downturn or the conservation provisions of Act 129 that require PPL Electric to reduce its customers' electricity usage in future periods, could impact future revenues.  The reduction in volume could be offset by changes in customer rates for this service, subject to PUC approval, depending on PPL Electric's cost structure.  Act 129 includes one-time penalties of up to $20 million for not attaining the required reductions by 2011 and 2013.  At this time, PPL Electric expects to meet these targeted reductions.  The costs of complying with the other provisions of Act 129 would, subject to PUC approval, be recoverable through an automatic adjustment clause.  None of the above changes are expected to have a significant impact on PPL Electric's 2010 financial condition, operating results or cash flows.

With the expiration of the long-term power purchase agreements between PPL Electric and PPL EnergyPlus, PPL EnergyPlus now has multiple options as to how, and to whom, it sells the electricity produced by PPL Energy Supply's generation plants.  These sales are based on prevailing market rates, as compared to pre-determined capped rates under the expired supply agreements with PPL Electric.  PPL EnergyPlus has entered into various wholesale and retail contracts to sell this power and at this time has hedged almost 100% of expected 2010 baseload generation output.  The expiration of the long-term supply agreements with PPL Electric also provides PPL Energy Supply the ability to adjust its exposure to fluctuations in demand that existed with supplying PPL Electric's PLR load.  Entry of new generation suppliers into the Pennsylvania marketplace provides PPL Energy Supply the ability to provide generation supply to additional wholesale customers.  Overall, these changes and the resulting level of hedged electricity prices are expected to have a positive impact on the financial condition, operating results and cash flows of PPL Energy Supply.

PPL Electric's customers are no longer funding contributions to Susquehanna's NDT funds.  PPL will continue to manage the NDT funds until the PPL Susquehanna plant is decommissioned.  If the balance of the NDT funds is not adequate to cover decommissioning costs, PPL Susquehanna will be responsible to fund 90% of the shortfall.  The Susquehanna nuclear units currently are licensed to operate until 2042 and 2044.

The final expiration of generation rate caps in Pennsylvania, applicable to three other large regulated utilities, is scheduled to occur at the end of 2010.  Discussions concerning generation rate caps and rate increase mitigation are continuing.  The final result of those discussions and the future impact on the financial condition and future cash flows of PPL cannot be predicted at this time.

See Note 14 to the Financial Statements for additional information on Pennsylvania legislative and other regulatory activities.

Market Events

In 2008, conditions in the financial markets became disruptive to the processes of managing credit risk, responding to liquidity needs, measuring derivatives and other financial instruments at fair value, and managing market risk.  Bank credit capacity was reduced and the cost of renewing or establishing new credit facilities increased, thereby introducing uncertainties as to PPL's ability to enter into long-term energy commitments or reliably estimate the longer-term cost and availability of credit.  In general, bank credit capacity has increased from the significantly constrained levels of 2008 and early 2009.  In addition, the cost of renewing or establishing new credit facilities has improved when compared with the 2008 and early 2009 periods.

Commodity Price Risk

The contraction in wholesale energy market liquidity and accompanying decline in wholesale energy prices due to conditions in the financial and commodity markets significantly impacted PPL's earnings during the second half of 2008 and the first half of 2009.  See "Statement of Income Analysis - Domestic Gross Energy Margins - Domestic Gross Energy Margins By Region" for further discussion.

Credit Risk

Credit risk is the risk that PPL would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL maintains credit policies and procedures to limit counterparty credit risk.  Conditions in the financial and commodity markets have generally increased PPL's exposure to credit risk.  See Notes 17 and 18 to the Financial Statements, and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" for more information on credit risk.

Liquidity Risk

PPL expects to continue to have access to adequate sources of liquidity through operating cash flows, cash and cash equivalents, credit facilities and, from time to time, the issuance of capital market securities.  PPL's ability to access capital markets may be impacted by conditions in the overall financial and capital markets, as well as conditions specific to the utility sector.  See "Financial Condition - Liquidity and Capital Resources" for an expanded discussion of PPL's liquidity position and a discussion of its forecasted sources of cash.

Valuations in Inactive Markets

Conditions in the financial markets have generally made it difficult to determine the fair value of certain assets and liabilities in inactive markets.  Management has reviewed the activity in the energy and financial markets in which PPL transacts, concluding that all of these markets were active at December 31, 2009, with the exception of the market for auction rate securities.  See Notes 17 and 21 to the Financial Statements and "Financial Condition - Liquidity and Capital Resources - Auction Rate Securities" for a discussion of these investments.

Securities Price Risk

Declines in the market price of debt and equity securities result in unrealized losses that reduce the asset values of PPL's investments in its defined benefit plans and NDT funds.  Both the defined benefit plans and the NDT funds earned positive returns in the second half of 2009, thereby recovering a portion of the negative returns incurred in 2008 and the first quarter of 2009.  PPL actively monitors the performance of the investments held in its defined benefit plans and NDT funds and periodically reviews the funds' investment allocations.  See "Financial Condition - Risk Management - Energy Marketing & Trading and Other - NDT Funds - Securities Price Risk" for additional information on securities price risk.

Determination of the funded status of defined benefit plans, contribution requirements and net periodic defined benefit costs for future years are subject to changes in various assumptions, in addition to the actual performance of the assets in the plans.  See "Application of Critical Accounting Policies - Defined Benefits" for a discussion of the assumptions and sensitivities regarding those assumptions.

The Economic Stimulus Package

The Economic Stimulus Package was intended to stimulate the U.S. economy through federal tax relief, expansion of unemployment benefits and other social stimulus provisions, domestic spending for education, health care and infrastructure, including the energy sector.  A portion of the benefits included in the Economic Stimulus Package are offered in the form of loan fee reductions, expanded loan guarantees and secondary market incentives, including delayed recognition for tax purposes of income related to the cancellation of certain types of debt.  See "Financial Condition - Liquidity and Capital Resources" for a discussion of the applicability to the purchase of notes by PPL.

Funds from the Economic Stimulus Package have been allocated to various federal agencies, such as the DOE, and provided to state agencies through block grants.  The DOE has made awards of the funds for smart grid, efficiency-related and renewable energy programs.  The Commonwealth of Pennsylvania has also made awards for funding certain energy projects, including solar projects.  As discussed in Note 8 to the Financial Statements, PPL has reconsidered and decided to pursue its Holtwood expansion project in view of the tax incentives and potential loan guarantees for renewable energy projects contained in the Economic Stimulus Package.  PPL Energy Supply has applied for DOE loan guarantees for the Holtwood expansion project and, through its subsidiary PPL Montana, for the Rainbow redevelopment project.  In addition, in July 2009, PPL Electric proposed to the DOE that the agency provide funding for one-half of a $38 million smart grid project.  The project would use smart grid technology to strengthen reliability, save energy and improve electric service for 60,000 Harrisburg, Pennsylvania area customers.  It would also provide benefits beyond the Harrisburg region, helping to speed power restoration across PPL Electric's 29-county service territory.  In October 2009, PPL Electric received notification that its grant proposal had been selected by the DOE for award negotiations.  PPL Electric cannot predict the outcome of these award negotiations.

Results of Operations

PPL presents tables analyzing changes in amounts between periods within "Segment Results" and "Statement of Income Analysis" on a constant U.K. foreign currency exchange rate basis, where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained.  Results computed on a constant U.K. foreign currency exchange rate basis are calculated by translating current year results at the prior year weighted-average foreign currency exchange rate.

Earnings

Net income attributable to PPL and the related EPS were:

   
2009
    
2008
    
2007
  
                   
Net income attributable to PPL
  
$
407
    
$
930
    
$
1,288
  
EPS - basic
  
$
1.08
    
$
2.48
    
$
3.37
  
EPS - diluted
  
$
1.08
    
$
2.47
    
$
3.34
  

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

The year-to-year changes in significant earnings components, including domestic gross energy margins by region and significant income statement line items, are explained in the "Statement of Income Analysis."

PPL's earnings beyond 2009 are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1A. Risk Factors," the rest of this Item 7 and Note 14 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact PPL's future earnings.

Segment Results

Net income attributable to PPL by segment was:

   
2009
  
2008
  
2007
                         
Supply
  
$
40
    
$
479
    
$
568
  
International Delivery
    
243
      
290
      
610
  
Pennsylvania Delivery
    
124
      
161
      
110
  
Total
  
$
407
    
$
930
    
$
1,288
  

Supply Segment

The Supply segment primarily consists of the domestic energy marketing and trading activities, as well as the generation and development operations of PPL Energy Supply.  In December 2009, PPL Maine sold its 8.33% ownership interest in Wyman Unit 4.  In November 2009, PPL Maine completed the sale of the majority of its hydroelectric generation business.  In May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and expects the sale to close on or about February 26, 2010.  In August 2007, PPL completed the sale of its domestic telecommunication operations.  See Notes 8 and 9 to the Financial Statements for additional information.

The Supply segment results reflect the classification of the Long Island generation business, the majority of the Maine hydroelectric generation business, and the 8.33% ownership interest in Wyman Unit 4, as Discontinued Operations.  See Note 9 to the Financial Statements for additional information.

Supply segment net income attributable to PPL was:

   
2009
  
2008
  
2007
Energy revenues
                        
External (a)
  
$
3,227
    
$
3,371
    
$
1,576
  
Intersegment
    
1,806
      
1,826
      
1,810
  
Energy-related businesses
    
391
      
486
      
732
  
Total operating revenues
    
5,424
      
5,683
      
4,118
  
                         
Fuel and energy purchases
                        
External (a)
    
3,608
      
3,108
      
1,419
  
Intersegment
    
70
      
108
      
156
  
Other operation and maintenance
    
867
      
827
      
707
  
Depreciation
    
226
      
193
      
163
  
Taxes, other than income
    
29
      
19
      
31
  
Energy-related businesses
    
380
      
467
      
745
  
Total operating expenses
    
5,180
      
4,722
      
3,221
  
                         
Other Income - net
    
50
      
24
      
40
  
Other-Than-Temporary Impairments
    
18
      
36
      
3
  
Interest Expense
    
191
      
200
      
154
  
Income Taxes
    
31
      
283
      
221
  
Income (Loss) from Discontinued Operations
    
(13
)
    
15
      
12
  
Net Income
    
41
      
481
      
571
  
Net Income Attributable to Noncontrolling Interests
    
1
      
2
      
3
  
Net Income Attributable to PPL
  
$
40
    
$
479
    
$
568
  

(a)
  
Includes impact from energy-related economic activity.  See "Commodity Price Risk (Non-trading) - Economic Activity" in Note 18 to the Financial Statements for additional information.

The after-tax changes in net income attributable to PPL between these periods were due to the following factors.


   
2009 vs. 2008
  
2008 vs. 2007
             
Eastern U.S. non-trading margins
  
$
(3
)
  
$
(62
)
Western U.S. non-trading margins
    
20
      
5
  
Net energy trading margins
    
81
      
(95
)
Energy-related businesses
    
(3
)
    
(4
)
Other operation and maintenance
    
(30
)
    
18
  
Depreciation
    
(19
)
    
(18
)
Taxes, other than income
    
(6
)
    
7
  
Other income - net
    
9
      
(8
)
Interest expense
    
5
      
(28
)
Income taxes
    
(16
)
    
(61
)
Discontinued operations (Note 9)
    
(9
)
    
3
  
Other
    
1
      
2
  
Special items
    
(469
)
    
152
  
   
$
(439
)
  
$
(89
)

·
See "Domestic Gross Energy Margins" for an explanation of non-trading margins and net energy trading margins.
   
·
Other operation and maintenance expenses increased in 2009 compared with 2008, primarily due to increased payroll-related costs, higher contractor-related costs and other costs at PPL's generation plants.
 
Other operation and maintenance expenses decreased in 2008 compared with 2007, primarily due to lower costs at PPL's nuclear power plants and lower defined benefit costs.
   
·
Depreciation expense increased in 2009 compared with 2008, primarily due to the scrubbers at Brunner Island and Montour and the portions of the Susquehanna uprate projects that were placed in service in 2008 and 2009.
 
Depreciation expense increased in 2008 compared with 2007, primarily due to the Montour scrubbers and the Susquehanna uprate project that were placed in service in 2008.
   
·
Interest expense increased in 2008 compared with 2007, primarily due to increased interest on long-term debt resulting from new issuances, partially offset by hedging activities.
   
·
Income taxes increased in 2009 compared with 2008, in part due to lower domestic manufacturing deductions in 2009.
 
Income taxes increased in 2008 compared with 2007, primarily due to the loss of synfuel tax credits as the projects ceased operation at the end of 2007.
   
·
Special items decreased in 2009 compared with 2008, primarily due to a $476 million after-tax change in energy-related economic activity.  The change is primarily the result of certain power and gas cash flow hedges failing hedge effectiveness testing in the third and fourth quarters of 2008, as well as the first quarter of 2009.  Hedge accounting is not permitted for the quarter in which this occurs and, accordingly, the entire change in fair value for the periods that failed was recorded to the income statement.  However, these transactions were not dedesignated as hedges, as prospective regression analysis demonstrated that these hedges are expected to be highly effective over their term.  For 2008, an after-tax gain of $298 million was recognized in earnings as a result of these hedge failures.  During the second, third and fourth quarters of 2009, fewer power and gas cash flow hedges failed hedge effectiveness testing; therefore, a portion of the previously recognized unrealized gains recorded in the second half of 2008 and the first quarter of 2009 associated with these hedges were reversed.  For 2009, after-tax losses of $215 million were recognized in earnings.

The following after-tax amounts, which management considers special items, also impacted the Supply segment's earnings.

   
2009
  
2008
  
2007
                         
Energy-related economic activity (Note 18)
  
$
(225
)
  
$
251
    
$
32
  
Sales of assets
                        
Long Island generation business (a)
    
(33
)
                
Interest in Wyman Unit 4 (Note 9)
    
(4
)
                
Majority of Maine hydroelectric generation business (Note 9)
    
22
                  
Domestic telecommunication operations (Note 8)
                    
(23
)
Impairments
                        
Impacts from emission allowances (b)
    
(19
)
    
(25
)
        
Other asset impairments (c)
    
(4
)
    
(15
)
        
Adjustments - NDT investments (d)
            
(17
)
        
Transmission rights (e)
                    
(13
)
Workforce reduction (Note 12)
    
(6
)
    
(1
)
    
(4
)
Other
                        
Change in tax accounting method related to repairs (Note 5)
    
(21
)
                
Montana hydroelectric litigation (Note 14)
    
(3
)
                
Synthetic fuel tax adjustment (Note 14)
            
(13
)
        
Montana basin seepage litigation (Note 14)
            
(5
)
        
Off-site remediation of ash basin leak (Note 14)
            
1
          
Settlement of Wallingford cost-based rates (f)
                    
33
  
PJM billing dispute
                    
(1
)
Total
  
$
(293
)
  
$
176
    
$
24
  

(a)
  
Consists primarily of the initial impairment charge recorded in June 2009 when this business was classified as held for sale.  See Note 9 to the Financial Statements for additional information on the anticipated sale.
(b)
  
2009 primarily consists of a pre-tax charge of $37 million related to sulfur dioxide emission allowances.  See Note 17 to the Financial Statements for additional information.
 
2008 consists of charges related to annual nitrogen oxide allowances and put options.  See Note 14 to the Financial Statements for additional information.
(c)
  
2008 primarily consists of a pre-tax charge of $22 million related to the cancellation of the Holtwood hydroelectric expansion project.  See Note 8 to the Financial Statements for additional information.
(d)
  
Represents other-than-temporary impairment charges on securities, including reversals of previous impairments when previously impaired securities were sold.
(e)
  
See "Other Operation and Maintenance" for more information on the $23 million pre-tax impairment recorded in 2007.
(f)
  
In 2003, PPL Wallingford and PPL EnergyPlus sought from the FERC cost-based payments based upon the RMR status of four units at the Wallingford, Connecticut generating facility.  In 2007, as a result of a settlement agreement, PPL recognized $55 million of revenue and $4 million of interest income.

2010 Outlook

Excluding special items, PPL projects higher earnings from its Supply segment in 2010 compared with 2009, due to growth in energy margins.  The forecast for growth in energy margins is based on hedged power and fuel prices as well as established capacity prices in PJM.  These positive factors are expected to be partially offset by higher depreciation, financing costs and operation and maintenance expenses.

International Delivery Segment

The International Delivery segment consists primarily of the electricity distribution operations in the U.K.  In 2007, PPL completed the sale of its Latin American businesses.  In 2008, the International Delivery segment recognized income tax benefits and miscellaneous expenses in Discontinued Operations in connection with the dissolution of certain Latin American holding companies.  In 2009, the International Delivery segment recognized $24 million of income tax expense in Discontinued Operations related to a correction of the calculation of tax bases of the Latin American businesses sold in 2007.  See Note 9 to the Financial Statements for additional information.

The International Delivery segment results reflect the classification of its Latin American businesses as Discontinued Operations.

International Delivery segment net income attributable to PPL was:

   
2009
  
2008
  
2007
                         
Utility revenues
  
$
684
    
$
824
    
$
863
  
Energy-related businesses
    
32
      
33
      
37
  
Total operating revenues
    
716
      
857
      
900
  
Other operation and maintenance
    
140
      
186
      
252
  
Depreciation
    
115
      
134
      
147
  
Taxes, other than income
    
57
      
66
      
67
  
Energy-related businesses
    
16
      
14
      
17
  
Total operating expenses
    
328
      
400
      
483
  
Other Income - net
    
(11
)
    
17
      
26
  
Interest Expense
    
87
      
144
      
183
  
Income Taxes
    
20
      
45
      
(43
)
Income (Loss) from Discontinued Operations
    
(27
)
    
5
      
313
  
Net Income
    
243
      
290
      
616
  
Net Income Attributable to Noncontrolling Interests
                    
6
  
Net Income Attributable to PPL
  
$
243
    
$
290
    
$
610
  

The after-tax changes in net income attributable to PPL between these periods were due to the following factors.

   
2009 vs. 2008
  
2008 vs. 2007
U.K.
                
Delivery margins
  
$
17
    
$
12
  
Other operating expenses
    
7
      
22
  
Other income - net
    
(4
)
    
(7
)
Depreciation
    
(4
)
    
4
  
Interest expense
    
28
      
5
  
Income taxes
    
24
      
24
  
Foreign currency exchange rates
    
(69
)
    
(14
)
Gain on transfer of equity investment
            
(5
)
Other
    
(4
)
    
(3
)
Discontinued Operations (Note 9)
    
(5
)
    
(49
)
U.S. interest expense
            
17
  
U.S. income taxes
    
1
      
(32
)
Gain (loss) on economic hedges (Note 15)
    
(12
)
    
10
  
Other
    
2
      
6
  
Special items
    
(28
)
    
(310
)
   
$
(47
)
  
$
(320
)

·
Lower U.K. other operating expenses in 2008 compared with 2007, were primarily due to lower compensation and lower pension costs.
   
·
Lower U.K. interest expense in 2009 compared with 2008, was primarily due to lower inflation rates on U.K. Index-linked Senior Unsecured Notes and lower debt balances.
   
·
Lower U.K. income taxes in 2009 compared with 2008, were primarily due to HMRC's determination related to the valuation of a business activity sold in 1999 and to the deductibility of foreign currency exchange losses, partially offset by the items in 2008 mentioned below.
 
Lower U.K. income taxes in 2008 compared with 2007, were primarily due to HMRC's determination related to deductibility of imputed interest on a loan from Hyder and a change in tax law that included the phase-out of tax depreciation on industrial buildings over a four-year period.
   
·
Changes in foreign currency exchange rates negatively impacted U.K. earnings for both periods.  The weighted-average exchange rates for the British pound sterling were approximately $1.53 in 2009, $1.91 in 2008 and $2.00 in 2007.
   
·
Higher U.S. income taxes in 2008 compared with 2007, was primarily due to the change in a U.S. income tax reserve resulting from the lapse in 2007 of an applicable statute of limitations.

The following after-tax amounts, which management considers special items, also impacted the International Delivery segment's earnings.

   
2009
  
2008
  
2007
                         
Foreign currency-related economic hedges - unrealized impacts (Note 18)
  
$
1
                  
Sales of assets
                        
Latin American businesses (Note 9)
    
(27
)
          
$
259
  
Impairments
    
(1
)
                
Workforce reduction (Note 12)
    
(2
)
  
$
(1
)
    
(4
)
Other
                        
Change in U.K. tax rate (Note 5)
                    
54
  
Total
  
$
(29
)
  
$
(1
)
  
$
309
  

2010 Outlook

Excluding special items, PPL projects lower earnings from its International Delivery segment in 2010 compared with 2009, as a result of higher income taxes, higher operation and maintenance expenses and higher financing costs.  These negative factors are expected to be partially offset by higher electricity delivery margins and a more favorable currency exchange rate.

In December 2009, Ofgem completed its rate review for the five-year period from April 1, 2010 through March 31, 2015.  Ofgem allowed WPD an average increase in total revenues, before inflationary adjustments, of 6.9% in each of the five years.  The revenue increase includes reimbursement to electricity distributors for higher operating and capital costs to be incurred.  Also, Ofgem set the weighted average cost of capital at 4.7%, which includes pre-tax debt and post-tax equity costs and excludes adjustments for inflation, for all distribution companies.  This is a 0.8% decrease from the previous regulatory period.  Additionally, Ofgem has established strong incentive mechanisms to provide companies significant opportunities to enhance overall returns by improving network efficiency, reliability or customer service.

Pennsylvania Delivery Segment

The Pennsylvania Delivery segment includes the regulated electric delivery operations of PPL Electric.  In October 2008, PPL sold its natural gas distribution and propane businesses.  See Note 9 to the Financial Statements for additional information.

The Pennsylvania Delivery segment results in 2008 and 2007 reflect the classification of PPL's natural gas distribution and propane businesses' as Discontinued Operations.

Pennsylvania Delivery segment net income attributable to PPL was:

   
2009
  
2008
  
2007
Operating revenues
                        
External
  
$
3,222
    
$
3,293
    
$
3,254
  
Intersegment
    
70
      
108
      
156
  
Total operating revenues
    
3,292
      
3,401
      
3,410
  
                         
Fuel and energy purchases
                        
External
    
114
      
163
      
207
  
Intersegment
    
1,806
      
1,826
      
1,810
  
Other operation and maintenance
    
417
      
410
      
406
  
Amortization of recoverable transition costs
    
304
      
293
      
310
  
Depreciation
    
128
      
131
      
132
  
Taxes, other than income
    
194
      
203
      
200
  
Total operating expenses
    
2,963
      
3,026
      
3,065
  
                         
Other Income - net
    
10
      
14
      
31
  
Interest Expense
    
118
      
111
      
135
  
Income Taxes
    
79
      
102
      
81
  
Income (Loss) from Discontinued Operations
            
3
      
(32
)
Net Income
    
142
      
179
      
128
  
Net Income Attributable to Noncontrolling Interests
    
18
      
18
      
18
  
Net Income Attributable to PPL
  
$
124
    
$
161
    
$
110
  

The after-tax changes in net income attributable to PPL between these periods were due to the following factors.

   
2009 vs. 2008
  
2008 vs. 2007
             
Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges)
  
$
(16
)
  
$
32
  
Other operation and maintenance
    
3
      
(5
)
Other income - net
    
(2
)
    
(10
)
Interest expense
    
(12
)
    
1
  
Discontinued operations (Note 9)
    
(9
)
    
(3
)
Other
    
2
      
(3
)
Special items
    
(3
)
    
39
  
   
$
(37
)
  
$
51
  

·
Delivery revenues decreased in 2009 compared with 2008, primarily due to unfavorable economic conditions, including industrial customers scaling back on production and the unfavorable impact of weather on sales volumes.  See "Revenue Recognition" in Note 1 to the Financial Statements for information on a true-up of FERC formula-based transmission revenues.
 
Delivery revenues increased in 2008 compared with 2007, primarily due to a base rate increase effective January 1, 2008 and normal load growth.
   
·
Other operation and maintenance expenses increased in 2008 compared with 2007, primarily due to insurance recovery of storm costs in 2007, higher vegetation management costs and higher regulatory asset amortization.
   
·
Other income - net decreased in 2008 compared with 2007, primarily due to a decrease in intersegment interest income resulting from a decrease in the average balance outstanding on a note receivable and a lower average floating interest rate.
   
·
Interest expense increased in 2009 compared with 2008, primarily due to $400 million of debt issuances in October 2008 that prefunded a portion of August 2009 debt maturities.

The following after-tax amounts, which management considers special items, also impacted the Pennsylvania Delivery segment's earnings.

   
2009
  
2008
  
2007
                         
Sales of assets
                        
Gas and propane businesses (Note 9)
          
$
(6
)
  
$
(44
)
Impairments
  
$
(1
)
                
Workforce reduction (a)
    
(5
)
            
(1
)
Other
                        
Change in tax accounting method related to repairs (Note 5)
    
(3
)
                
Total
  
$
(9
)
  
$
(6
)
  
$
(45
)

(a)
  
See Note 12 to the Financial Statements for additional information related to the 2009 workforce reduction.

2010 Outlook

Excluding special items, PPL projects lower earnings from its Pennsylvania Delivery segment in 2010 compared with 2009, as a net result of lower distribution revenues, primarily due to continued slow economic growth and weak customer demand; higher operation and maintenance expenses; offset by lower financing costs.

In late March 2010, PPL Electric expects to file a request with the PUC seeking an increase in its distribution rates beginning in January 2011.

See Note 14 to the Financial Statements for a discussion of items that could impact future earnings, including Pennsylvania legislative and other regulatory activities.

Statement of Income Analysis --

Domestic Gross Energy Margins

Non-GAAP Financial Measure

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

   
2009
  
2008
  
2007
                         
Operating Income (a)
  
$
961
    
$
1,793
    
$
1,659
  
Adjustments:
                        
Energy-related businesses, net (b)
    
(27
)
    
(38
)
    
(7
)
Other operation and maintenance (a)
    
1,424
      
1,423
      
1,365
  
Amortization of recoverable transition costs (a)
    
304
      
293
      
310
  
Depreciation (a)
    
469
      
458
      
442
  
Taxes, other than income (a)
    
280
      
288
      
298
  
Revenue adjustments (c)
    
(1,705
)
    
(3,219
)
    
(1,981
)
Expense adjustments (c)
    
25
      
566
      
(262
)
Domestic gross energy margins
  
$
1,731
    
$
1,564
    
$
1,824
  

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

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

   
2009
  
2008
  
Change
Revenue
                        
Utility (a)
  
$
3,902
    
$
4,114
    
$
(212
)
Unregulated retail electric and gas (a)
    
152
      
151
      
1
  
Wholesale energy marketing (a)
    
3,062
      
3,344
      
(282
)
Net energy trading margins (a)
    
17
      
(121
)
    
138
  
Revenue adjustments (b)
                        
WPD utility revenue
    
(684
)
    
(824
)
    
140
  
Domestic delivery component of utility revenue
    
(1,265
)
    
(1,325
)
    
60
  
Other utility revenue
    
(61
)
    
(52
)
    
(9
)
Impact from energy-related economic activity (c)
    
274
      
(1,061
)
    
1,335
  
Gains from sale of emission allowances (d)
    
2
      
6
      
(4
)
Revenues from Supply segment discontinued operations (e)
    
29
      
37
      
(8
)
Total revenue adjustments
    
(1,705
)
    
(3,219
)
    
1,514
  
     
5,428
      
4,269
      
1,159
  
Expense
                        
Fuel (a)
    
931
      
1,084
      
(153
)
Energy purchases (a)
    
2,791
      
2,187
      
604
  
Expense adjustments (b)
                        
Impact from energy-related economic activity (c)
    
(109
)
    
(632
)
    
523
  
Domestic electric ancillaries (f)
    
(43
)
    
(54
)
    
11
  
Gross receipts tax (g)
    
112
      
113
      
(1
)
Other
    
15
      
7
      
8
  
Total expense adjustments
    
(25
)
    
(566
)
    
541
  
     
3,697
      
2,705
      
992
  
Domestic gross energy margins
  
$
1,731
    
$
1,564
    
$
167
  

   
2008
  
2007
  
Change
Revenue
                        
Utility (a)
  
$
4,114
    
$
4,114
          
Unregulated retail electric and gas (a)
    
151
      
102
    
$
49
  
Wholesale energy marketing (a)
    
3,344
      
1,436
      
1,908
  
Net energy trading margins (a)
    
(121
)
    
41
      
(162
)
Revenue adjustments (b)
                        
WPD utility revenue
    
(824
)
    
(863
)
    
39
  
Domestic delivery component of utility revenue
    
(1,325
)
    
(1,308
)
    
(17
)
Other utility revenue
    
(52
)
    
(48
)
    
(4
)
RMR revenues
            
(52
)
    
52
  
Impact from energy-related economic activity (c)
    
(1,061
)
    
145
      
(1,206
)
Gains from sale of emission allowances (d)
    
6
      
109
      
(103
)
Revenues from Supply segment discontinued operations (e)
    
37
      
36
      
1
  
Total revenue adjustments
    
(3,219
)
    
(1,981
)
    
(1,238
)
     
4,269
      
3,712
      
557
  
Expense
                        
Fuel (a)
    
1,084
      
890
      
194
  
Energy purchases (a)
    
2,187
      
736
      
1,451
  
Expense adjustments (b)
                        
Impact from energy-related economic activity (c)
    
(632
)
    
200
      
(832
)
Domestic electric ancillaries (f)
    
(54
)
    
(50
)
    
(4
)
Gross receipts tax (g)
    
113
      
112
      
1
  
Other
    
7
              
7
  
Total expense adjustments
    
(566
)
    
262
      
(828
)
     
2,705
      
1,888
      
817
  
Domestic gross energy margins
  
$
1,564
    
$
1,824
    
$
(260
)

(a)
  
As reported on the Statements of Income.
(b)
  
To include/exclude the impact of any revenues and expenses not associated with domestic gross energy margins, consistent with the way management reviews domestic gross energy margins internally.
(c)
  
See Note 18 to the Financial Statements for additional information regarding economic activity.
(d)
  
Included in "Other operation and maintenance" on the Statements of Income.
(e)
  
Represents revenues associated with the Long Island generation business and the majority of the Maine hydroelectric generation business.  See Note 9 to the Financial Statements for additional information.
(f)
  
Included in "Energy purchases" on the Statements of Income.
(g)
  
Included in "Taxes, other than income" on the Statements of Income.

Domestic Gross Energy Margins By Region

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

   
2009
  
2008
  
Change
Non-trading
                        
Eastern U.S.
  
$
1,391
    
$
1,396
    
$
(5
)
Western U.S.
    
323
      
289
      
34
  
Net energy trading
    
17
      
(121
)
    
138
  
Domestic gross energy margins
  
$
1,731
    
$
1,564
    
$
167
  

   
2008
  
2007
  
Change
Non-trading
                        
Eastern U.S.
  
$
1,396
    
$
1,502
    
$
(106
)
Western U.S.
    
289
      
281
      
8
  
Net energy trading
    
(121
)
    
41
      
(162
)
Domestic gross energy margins
  
$
1,564
    
$
1,824
    
$
(260
)

Eastern U.S.

Eastern U.S. non-trading margins were $5 million lower in 2009 compared with 2008.  This decrease was primarily due to lower margins on full-requirement sales contracts resulting from mild weather, decreased demand, and customer migration.  Also contributing to the decrease were higher average baseload generation fuel costs of 7%, primarily due to higher coal prices.  Partially offsetting these lower margins were net gains resulting from the settlement of economic positions associated with rebalancing PPL's portfolios to better align them with current strategies, higher capacity revenue, higher baseload generation output due to unplanned major outages in 2008, and a 2.2% increase in the PLR sales prices in accordance with the PUC Final Order.

Eastern U.S. non-trading margins were $106 million lower in 2008 compared with 2007.  This decrease was primarily due to higher fuel costs, up 16%, primarily due to higher coal prices.  Also contributing to the decrease was lower baseload generation, down 4%, primarily due to the unplanned outages at the eastern coal-fired units and retirement of the Martins Creek coal-fired units in September 2007.  Partially offsetting these lower margins were higher margins from the hedged sale of generation in the wholesale market and a 1.4% increase in PLR sales prices in accordance with the PUC Final Order.

Western U.S.

Western U.S. non-trading margins were $34 million higher in 2009 compared with 2008.  This increase was primarily due to higher wholesale volumes of 6% and increased generation from the hydroelectric units of 5%.

Western U.S. non-trading margins were $8 million higher in 2008 compared with 2007.  This increase was primarily due to increased generation from the hydroelectric units of 2%.

Net Energy Trading

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

Net energy trading margins increased by $138 million in 2009 compared with 2008.  This increase consisted of $215 million of higher unrealized margins partially offset by $77 million of lower realized margins.  These changes were primarily due to increased margins in the power, gas and oil trading positions resulting from unrealized trading losses in 2008 due to a dramatic decline in energy prices and a severe contraction of liquidity in the wholesale power markets.

Net energy trading margins decreased by $162 million in 2008 compared with 2007.  This decrease consists of $135 million of lower unrealized margins and $27 million of lower realized margins, both driven by significant decreases in power and gas prices in the second half of 2008.

Utility Revenues

The changes in utility revenues were attributable to:

   
2009 vs. 2008
  
2008 vs. 2007
Domestic:
                
Retail electric revenue (PPL Electric)
                
Delivery
  
$
(60
)
  
$
17
  
PLR
    
(21
)
    
19
  
Other
    
9
      
3
  
                 
U.K.:
                
Foreign currency exchange rates
  
 
(154
)
    
(42
)
Electric delivery revenue
    
14
      
3
  
   
$
(212
)
  
$
    

The decreases in utility revenues for 2009 compared with 2008, excluding foreign currency exchange rate impacts, were primarily due to:

·
lower domestic retail electric revenues, attributable to unfavorable economic conditions, including industrial customers scaling back on production.  In addition, weather had an unfavorable impact on sales volumes.  These decreases were partially offset by favorable price increases.  See "Revenue Recognition" in Note 1 to the Financial Statements for information on a true-up of FERC formula-based transmission revenues.
·
higher U.K. electric delivery revenues, attributable primarily to an increase in prices effective April 1, a revised estimate of network electricity losses, and favorable changes in customer mix.  These increases were partially offset by lower volumes due to unfavorable economic conditions, including industrial customers scaling back on production, and a decrease in engineering and metering services performed for third parties.

The increases in utility revenues for 2008 compared with 2007, excluding foreign currency exchange rate impacts, were primarily due to higher PLR revenue, attributable to normal load growth and a favorable price increase, and higher domestic delivery revenue, primarily due to a base rate increase effective January 1, 2008, as well as normal load growth.  These increases were partially offset by the unfavorable impact of weather on residential and commercial sales in 2008.

Energy-related Businesses

Energy-related businesses contributed $11 million less to operating income in 2009 compared with 2008.  The decrease was primarily attributable to:

·
contributions from domestic energy services-related businesses decreasing by $7 million, primarily due to a decline in construction activity caused by the slowdown in the economy; and
·
contributions from U.K. energy-related businesses decreasing by $4 million, primarily due to changes in foreign currency exchange rates.

Energy-related businesses contributed $31 million more to operating income in 2008 compared with 2007.  The increase was primarily attributable to:

·
a $39 million impairment in 2007 of domestic telecommunication operations that were sold in 2007; and
·
an $11 million increase in contributions from domestic energy services-related businesses mainly due to increased construction activity; partially offset by
·
$11 million of lower pre-tax contributions from synfuel projects.  This reflects a $77 million net gain recorded in 2007 on options purchased to hedge the risk associated with the phase-out of synthetic fuel tax credits.  This decrease was partially offset by $66 million less in operating losses from synfuel projects as the projects ceased operation at the end of 2007; and
·
$5 million less in contributions from the domestic telecommunication operations sold in 2007.

See Note 8 to the Financial Statements for additional information on the sale of domestic telecommunications assets.  See Note 14 to the Financial Statements for additional information on the shutdown of the synfuel facilities in 2007.

Other Operation and Maintenance

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

   
2009 vs. 2008
  
2008 vs. 2007
                 
Payroll-related costs
  
$
29
    
$
2
  
Defined benefit costs - U.S. (Note 12)
    
18
      
(7
)
Domestic and international workforce reductions (Note 12)
    
18
      
(7
)
WPD distribution costs
    
15
      
7
  
Montana hydroelectric litigation (Note 14)
    
8
      
1
  
Other costs at fossil/hydroelectric stations
    
7
      
1
  
Other nuclear related expenses
    
7
      
(10
)
Lower gains on sales of emission allowances
    
4
      
103
  
Impairment of transmission rights (a)
            
(23
)
Contractor-related expenses
            
(15
)
U.K. foreign currency exchange rates
    
(24
)
    
(8
)
Impairment of cancelled generation expansion project in 2008 (Note 8)
    
(22
)
    
22
  
Defined benefit costs - U.K. (Note 12)
    
(16
)
    
(28
)
PUC-reportable storm costs
    
(11
)
    
(4
)
WPD recoverable engineering services
    
(9
)
    
(17
)
Impairment and other charges - emission allowances (Notes 14 and 17)
    
(9
)
    
42
  
Montana basin seepage litigation (Note 14)
    
(8
)
    
8
  
WPD meter operator expenses
    
(7
)
    
(6
)
Other - Domestic
    
6
          
Other - U.K.
    
(5
)
    
(3
)
   
$
1
    
$
58
  

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

Amortization of Recoverable Transition Costs

Amortization of recoverable transition costs increased by $11 million in 2009 compared with 2008 and decreased by $17 million in 2008 compared with 2007.  The amortization of recoverable transition costs was based on a PUC amortization schedule, adjusted for ITC and CTC recoveries in customer rates and related expenses.  Since the amortization substantially matches the revenue recorded based on recovery in customer rates, there is minimal impact on earnings.  At the end of 2009, PPL's recoverable transition costs have been fully amortized.

Depreciation

Increases in depreciation expense were due to:

   
2009 vs. 2008
  
2008 vs. 2007
             
Additions to PP&E (a)
  
$
43
    
$
39
  
U.K. foreign currency exchange rates
    
(25
)
    
(7
)
Extension of useful lives of certain WPD network assets in mid-2007 (Note 1)
            
(13
)
Other
    
(7
)
    
(3
)
   
$
11
    
$
16
  

(a)
  
Primarily attributable to the completion of the Susquehanna generation uprate and the Montour scrubber projects in 2008 and the Brunner Island scrubber projects in 2009.

Taxes, Other Than Income

The decreases in taxes, other than income were due to:

   
2009 vs. 2008
  
2008 vs. 2007
             
U.K. foreign currency exchange rates
  
$
(12
)
  
$
(3
)
Pennsylvania gross receipts tax (a)
    
(12
)
    
6
  
Domestic property tax expense (b)
    
10
      
(8
)
Domestic sales and use tax
    
4
      
(4
)
Other
    
2
      
(1
)
   
$
(8
)
  
$
(10
)

(a)
  
The decrease in 2009 compared with 2008 was primarily due to a decrease in the tax rate in 2009.  The increase in 2008 compared with 2007 was primarily due to an increase in the tax rate in 2008.  Gross receipts tax is passed through to customers.
(b)
  
The change in both periods was primarily due to a $7 million property tax credit recorded by PPL Montana in 2008.

Other Income - net

See Note 16 to the Financial Statements for details of other income.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased by $18 million in 2009 compared with 2008, primarily due to stronger investment returns caused by improved market conditions within the financial markets.

Other-than-temporary impairments increased by $33 million in 2008 compared with 2007, primarily due to negative investment returns caused by the downturn in the financial markets in 2008.

Interest Expense

The decreases in interest expense were due to:

   
2009 vs. 2008
  
2008 vs. 2007
             
Hedging activities
  
$
(30
)
  
$
(28
)
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes
    
(29
)
    
6
  
U.K. foreign currency exchange rates
    
(17
)
    
(8
)
Repayment of transition bonds
    
(13
)
    
(22
)
Capitalized interest
    
13
      
(1
)
Short-term debt interest expense
    
6
      
7
  
Long-term debt interest expense
    
4
      
28
  
Amortization of debt issuance costs
    
3
      
5
  
Other
    
4
      
(4
)
   
$
(59
)
  
$
(17
)

Income Taxes

The changes in income taxes were due to:

   
2009 vs. 2008
  
2008 vs. 2007
             
Higher (lower) pre-tax book income
  
$
(298
)
  
$
32
  
Tax on foreign earnings (a)
    
(43
)
    
(3
)
Synthetic fuel and other tax credits (b)
    
(17
)
    
72
  
Valuation allowance adjustments
    
(13
)
        
Tax return adjustments (c)
    
40
      
(8
)
Domestic manufacturing deduction
    
13
      
(2
)
U.K. Finance Act adjustments (d)
    
8
      
46
  
Tax reserve adjustments (a) (c) (e)
    
1
      
44
  
Other
    
9
      
(10
)
   
$
(300
)
  
$
171
  

(a)
  
During 2009, WPD recorded a $46 million foreign tax benefit (and a full tax reserve reflected in "Tax reserve adjustments") related to losses generated by restructuring.
(b)
  
The Section 29/45K synthetic fuel tax credits expired at the end of 2007.  During 2008, PPL recorded a $13 million adjustment to its estimated 2007 fuel tax credits as a result of the IRS publishing the final 2007 inflation-adjusted credit in April 2008.
(c)
  
During 2009, PPL received consent from the IRS to change its method of accounting for certain expenditures for tax purposes.  PPL deducted the resulting IRC Sec. 481 adjustment on its 2008 tax return and recorded a $24 million adjustment to federal and state income tax expense, which results from the reduction of federal income tax benefits, related to the domestic manufacturing deduction and a reduction of certain state tax benefits related to state net operating losses and regulated depreciation.  During 2008, WPD recorded tax benefits of approximately $17 million from tax return adjustments that were fully reserved.
(d)
  
The U.K.'s Finance Act of 2008, enacted in July 2008, included a phase-out of tax depreciation on certain buildings.  As a result, WPD recorded an $8 million deferred tax benefit during 2008 related to the reduction in its deferred tax liabilities.
 
The U.K.'s Finance Act of 2007, enacted in July 2007, included a reduction in the U.K.'s statutory income tax rate.  Effective April 1, 2008, the statutory income tax rate was reduced from 30% to 28%.  As a result, WPD recorded a $54 million deferred tax benefit during 2007 related to the reduction in its deferred tax liabilities.
(e)
  
PPL recorded an $8 million and $35 million benefit in 2008 and 2007 as a result of the expiration of applicable statutes of limitations.  Additionally, PPL recorded tax benefits of $27 million in 2009 for the settlement of a tax dispute and foreign currency exchange losses.

See Note 5 to the Financial Statements for additional information on income taxes.

Discontinued Operations

See Note 9 to the Financial Statements for information related to:

·
the anticipated sale of the Long Island generation business;
·
the sale of the majority of the Maine hydroelectric generation business in 2009;
·
the sale of the 8.33% interest in Wyman Unit 4 in 2009;
·
the sale of the Latin American businesses in 2007 and the substantial dissolution of the remaining holding companies in 2008; and
·
the sale of the natural gas distribution and propane businesses in 2008.

Financial Condition

Liquidity and Capital Resources

PPL expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents and its credit facilities.  Additionally, subject to market conditions, PPL currently plans to access debt capital markets in 2010.  PPL currently does not plan to access commercial paper markets or equity capital markets in 2010.

PPL's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including, but not limited to:

·
changes in market prices for electricity;
·
changes in commodity prices that may increase the cost of producing power or decrease the amount PPL receives from selling power;
·
operational and credit risks associated with selling and marketing products in the wholesale power markets;
·
potential ineffectiveness of the trading, marketing and risk management policy and programs used to mitigate PPL's risk exposure to adverse electricity and fuel prices, interest rates, foreign currency exchange rates and counterparty credit;
·
unusual or extreme weather that may damage PPL's transmission and distribution facilities or affect energy sales to customers;
·
reliance on transmission and distribution facilities that PPL does not own or control to deliver its electricity and natural gas;
·
unavailability of generating units (due to unscheduled or longer-than-anticipated generation outages, weather and natural disasters) and the resulting loss of revenues and additional costs of replacement electricity;
·
the ability to recover and the timeliness and adequacy of recovery of costs associated with regulated utility businesses;
·
costs of compliance with existing and new environmental laws and with new security and safety requirements for nuclear facilities;
·
any adverse outcome of legal proceedings and investigations with respect to PPL's current and past business activities;
·
deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly; and
·
a downgrade in PPL's or its rated subsidiaries' credit ratings that could adversely affect their ability to access capital and increase the cost of credit facilities and any new debt.

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affecting PPL's cash flows.

At December 31, PPL had the following:

   
2009
  
2008
  
2007
                         
Cash and cash equivalents
  
$
801
    
$
1,100
    
$
430
  
Short-term investments (a) (b)
            
150
      
108
  
   
$
801
    
$
1,250
    
$
538
  
Short-term debt
  
$
639
    
$
679
    
$
92
  

(a)
  
2008 amount represents tax-exempt bonds issued by the PEDFA in December 2008 on behalf of PPL Energy Supply and purchased by a subsidiary of PPL Energy Supply upon issuance.  Such bonds were refunded in April 2009.  See Note 7 to the Financial Statements for further discussion.
(b)
  
Includes $15 million of auction rate securities at December 31, 2007.  See below for a discussion of auction rate securities.

The changes in PPL's cash and cash equivalents position resulted from:

   
2009
  
2008
  
2007
                         
Net Cash Provided by Operating Activities
  
$
1,852
    
$
1,589
    
$
1,571
  
Net Cash Used in Investing Activities
    
(880
)
    
(1,627
)
    
(614
)
Net Cash Provided by (Used in) Financing Activities
    
(1,271
)
    
721
      
(1,326
)
Effect of Exchange Rates on Cash and Cash Equivalents
            
(13
)
    
5
  
Net Increase (Decrease) in Cash and Cash Equivalents
  
$
(299
)
  
$
670
    
$
(364
)

Auction Rate Securities

PPL held auction rate securities with an aggregate par value of $25 million and $29 million at December 31, 2009 and 2008.  Historically, an active market existed for such investments, and the auctions provided an opportunity for investors either to hold an investment at a periodically reset interest rate or to sell the investment at its par value for immediate liquidity.  In early 2008, investor concerns about credit and liquidity in the financial markets, generally, as well as investor concerns over specific insurers that guarantee the credit of certain of the underlying securities, created uncertainty in the auction rate securities market and these securities generally failed to be remarketed through their established auction process.  The auctions continue to fail and the resulting illiquidity continues to impact PPL's investment in auction rate securities.

At December 31, 2008, PPL estimated that the fair value of its auction rate securities was $24 million, which is reflected in "Other investments" on the Balance Sheet and represented a temporary decline of $5 million from par value.

In 2009, PPL liquidated $4 million of auction rate securities at par.  At December 31, 2009, PPL estimated that the fair value of its auction rate securities was equal to par value, which was $25 million and is reflected in "Other investments" on the Balance Sheet.  PPL reversed the previously recorded temporary impairment.

Because PPL intends and has the ability to hold these auction rate securities until they can be liquidated at par value, PPL believes that it does not have significant exposure to realize losses on these securities.  Based upon the evaluation of available information, PPL believes these investments continue to be of high credit quality.  Additionally, PPL does not anticipate having to sell these securities to fund operations.  See Notes 17 and 21 to the Financial Statements for further discussion of auction rate securities.

Operating Activities

Net cash provided by operating activities increased by 17%, or $263 million in 2009 compared with 2008, primarily as a result of cash collateral received from counterparties and the benefit of lower income tax payments due to the change in method of accounting for certain expenditures for tax purposes.  These increases were partially offset by a decrease in accounts payable and the unfavorable impact of foreign currency exchange rates in 2009 compared with 2008.

Net cash provided by operating activities increased by 1%, or $18 million, in 2008 compared with 2007, primarily as a result of higher revenues, primarily due to the hedged sale of generation in the wholesale market, increased retail electric sales volumes and a 1.4% increase in domestic delivery sales prices, as well as less U.S. income tax payments, primarily as a result of a refund received in 2008, and operating losses incurred in 2007 in connection with synfuel projects that ceased operation at the end of 2007.  The increases to cash provided by operating activities resulting from these items were partially offset by increased expenditures for fuel, primarily due to higher coal prices, lower realized net energy trading margins, driven by significant decreases in power and gas prices, higher interest paid, primarily due to higher debt levels in 2008, cash flows provided by Latin America's operations in 2007 but not 2008, due to the sale of the Latin American businesses in 2007, and an insurance recovery of storm costs in 2007.

A significant portion of PPL's operating cash flows is derived from its Supply segment baseload generation business activities.  PPL employs a formal hedging program for its baseload generation fleet, the primary objective of which is to provide a reasonable level of near-term cash flow and earnings certainty over the next three years, while preserving upside potential if power prices increase over the medium term.  See Note 18 to the Financial Statements for further discussion.  Based on its generation portfolio contracting practices (including related fuel purchases and commitments), PPL expects to achieve relatively stable cash flows related to baseload generation during the next three years, although, future cash flows from operating activities are expected to be influenced more by commodity prices than during the past nine years when long-term supply contracts were in place between PPL EnergyPlus and PPL Electric.  As discussed in "Item 1. Business," PPL estimates that, on average, approximately 94% of its total expected annual generation output (which includes baseload and other generation) for 2010 is committed under power sales contracts.  PPL has also entered into commitments of varying quantities and terms for the years 2011 and beyond.  In addition, PPL expects to be able to achieve relatively stable cash flows related to PPL Electric's role as PLR due to contracts it has entered into to procure the 2010 and a portion of 2011 PLR electricity supply it expects to need for residential, small commercial and small industrial customers who do not choose an alternative supplier.  See Note 14 to the Financial Statements for information on these energy purchase contracts.

PPL's contracts for the sale and purchase of electricity and fuel often require cash collateral or other credit enhancements, or reductions or terminations of a portion of the entire contract through cash settlement, in the event of a downgrade of PPL's or its subsidiaries' credit ratings or adverse changes in market prices.  For example, in addition to limiting its trading ability, if PPL's or its subsidiaries' ratings were lowered to below "investment grade" and there was a 10% adverse movement in energy prices, PPL estimates that, based on its December 31, 2009 positions, it would have had to post additional collateral of approximately $291 million, compared with $815 million at December 31, 2008.  PPL has in place risk management programs that are designed to monitor and manage its exposure to volatility of cash flows related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of its generating units.

Investing Activities

The primary use of cash in investing activities is capital expenditures.  See "Forecasted Uses of Cash" for detail regarding capital expenditures in 2009 and projected expenditures for the years 2010 through 2012.

Net cash used in investing activities decreased 46%, or $747 million in 2009 compared with 2008, primarily as a result of a change of $289 million from restricted cash and cash equivalents, a change of $249 million from purchases and sales of other investments, a change of $241 million from purchases and sales of intangible assets and a decrease of $193 million in capital expenditures.  See Note 1 to the Financial Statements for a discussion of restricted cash and cash equivalents and Note 7 to the Financial Statements for a discussion of the purchase and sale by a subsidiary of PPL Energy Supply of Exempt Facilities Revenue Bonds issued by the PEDFA on behalf of PPL Energy Supply.  The decrease in cash used in investing activities from the above items was partially offset by the change in proceeds received from the sale of businesses, which are discussed in Note 9 to the Financial Statements.  PPL received $303 million from the sale of the gas and propane businesses in 2008 compared to proceeds of $81 million received from the sale of the majority of the Maine hydroelectric generation business in 2009.

Net cash used in investing activities increased 165%, or $1.0 billion, in 2008 compared with 2007, as PPL received $303 million from the sale of the gas and propane businesses in 2008 compared to aggregate proceeds of $898 million received from the sale of the Latin American businesses and telecommunication operations in 2007.  See Notes 8 and 9 to the Financial Statements for a discussion of these sales.  Additionally, there was a change of $354 million from purchases and sales of other investments and a change of $359 million from purchases and sales of intangible assets.  The increase in cash used in investing activities from the above items was partially offset by a decrease of $239 million in capital expenditures and a decrease of $54 million in the amount of cash and cash equivalents that became restricted.

Financing Activities

Net cash used in financing activities was $1.3 billion in 2009 compared with $721 million of cash provided by financing activities in 2008 and net cash used in financing activities of $1.3 billion in 2007.  The change from 2008 to 2009 primarily reflects fewer issuances and increased retirements of long-term debt in 2009, as well as the net repayment of short-term borrowings in 2009.  The change from 2007 to 2008 primarily reflects increased issuances and lower retirements of long-term debt, lower repurchases of common stock and increased short-term borrowings in 2008.

In 2009, cash used in financing activities primarily consisted of net debt retirements of $770 million and common stock dividends paid of $517 million, partially offset by $60 million of common stock sale proceeds.

In 2008, cash provided by financing activities primarily consisted of net debt issuances of $1.3 billion and $19 million of common stock sale proceeds, partially offset by common stock dividends paid of $491 million and the repurchase of 802,816 shares of common stock for $38 million.

In 2007, cash used in financing activities primarily consisted of net debt retirements of $170 million, the repurchase of 14,929,892 shares of common stock for $712 million and common stock dividends paid of $459 million, partially offset by $32 million of common stock sale proceeds.  See Note 7 to the Financial Statements for a discussion of the common stock repurchase program.

See "Forecasted Sources of Cash" for a discussion of PPL's plans to issue debt and equity securities, as well as a discussion of credit facility capacity available to PPL.  Also see "Forecasted Uses of Cash" for a discussion of plans to pay dividends on common and preferred securities in the future, as well as maturities of long-term debt.

PPL's debt financing activity in 2009 was:

   
Issuances (a)
  
Retirements
                 
PPL Capital Funding Senior Unsecured Notes
          
$
(201
)
PPL Energy Supply Senior Unsecured Notes (a)
            
(220
)
PPL Electric Senior Secured Bonds (b)
  
$
298
      
(586
)
Variable Rate Pollution Control Facilities Note
            
(9
)
PPL Electric short-term debt
            
(95
)
WPD short-term debt (net change)
    
43
          
Total
  
$
341
    
$
(1,111
)
Net decrease
          
$
(770
)

(a)
  
In March 2009, PPL Energy Supply paid $220 million, plus accrued interest, to complete tender offers to purchase up to $250 million aggregate principal amount of certain of its outstanding senior notes in order to reduce future interest expense.  Under the Economic Stimulus Package, PPL will be permitted to defer recognition of income related to the extinguishment of these notes for tax purposes.  No amounts will be included in taxable income for the first five years.  Beginning in 2014, income related to the extinguishment of these notes will be included in taxable income ratably over five years.
(b)
  
Issuance is net of pricing discount.  Retirements exclude a $9 million premium paid in connection with the December 2009 redemption of PPL Electric's 4.30% Senior Secured Bonds due 2013.

See Note 7 to the Financial Statements for more detailed information regarding PPL's financing activities in 2009.

Forecasted Sources of Cash

PPL expects to continue to have significant sources of cash available in the near term, including various credit facilities, a commercial paper program and operating leases.  PPL currently does not plan to access commercial paper markets in 2010 and plans to issue up to $300 million and £400 million in long-term debt securities in 2010, subject to market conditions.

Credit Facilities

At December 31, 2009, PPL's total committed borrowing capacity under credit facilities and the use of this borrowing capacity were:

   
Committed Capacity
  
Borrowed
  
Letters of Credit Issued (a)
  
Unused Capacity
                         
PPL Energy Supply Domestic Credit Facilities (b)
  
$
4,125
    
$
285
    
$
662
    
$
3,178
  
PPL Electric Credit Facilities (c)
    
340
              
6
      
334
  
Total Domestic Credit Facilities (d)
  
$
4,465
    
$
285
    
$
668
    
$
3,512
  
                                 
WPDH Limited Credit Facility (e)
  
₤
150
    
₤
132
      
n/a
    
₤
18
  
WPD (South West) Credit Facilities (f)
    
214
      
60
    
₤
3
      
151
  
Total WPD Credit Facilities (g)
  
₤
364
    
₤
192
    
₤
3
    
₤
169
  

(a)
  
The borrower under each of these facilities has a reimbursement obligation to the extent any letters of credit are drawn upon.
     
(b)
  
PPL Energy Supply has the ability to borrow $3.6 billion under its credit facilities.  Such borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.  PPL Energy Supply also has the capability to cause the lenders to issue up to $3.9 billion of letters of credit under these facilities, which issuances reduce available borrowing capacity.  Under certain conditions, PPL Energy Supply may request that the capacity of one of its facilities be increased by up to $500 million.
     
   
These credit facilities contain a financial covenant requiring debt to total capitalization to not exceed 65%.  At December 31, 2009 and 2008, PPL Energy Supply's consolidated debt to total capitalization percentages, as calculated in accordance with its credit facilities, were 46% and 44%.  The credit facilities also contain standard representations and warranties that must be made for PPL Energy Supply to borrow under them.
     
   
The committed capacity expires as follows:  $600 million in 2010, $300 million in 2011 and $3.2 billion in 2012.  PPL Energy Supply intends to renew or replace the two credit facilities that expire in 2010 in order to maintain its current total committed capacity level.
     
(c)
  
Borrowings under PPL Electric's $190 million syndicated credit facility generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.  PPL Electric also has the capability to request the lenders to issue up to $190 million of letters of credit under this facility, which issuances reduce available borrowing capacity.  Under certain conditions, PPL Electric may request that the facility's capacity be increased by up to $100 million.
     
   
The syndicated credit facility contains a financial covenant requiring debt to total capitalization to not exceed 70%.  At December 31, 2009 and 2008, PPL Electric's consolidated debt to total capitalization percentages, as calculated in accordance with its credit facility, were 44% and 53%.  The syndicated credit facility also contains standard representations and warranties that must be made for PPL Electric to borrow under it.
     
   
Committed capacity includes a $150 million credit facility related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenues to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $150 million from a commercial paper conduit sponsored by a financial institution.  At December 31, 2009, based on accounts receivable and unbilled revenue pledged, $150 million was available for borrowing.
     
   
The committed capacity expires as follows:  $150 million in 2010 and $190 million in 2012.  PPL Electric intends to renew its existing $150 million asset-backed credit facility in 2010 in order to maintain its current total committed capacity level.
     
(d)
  
The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 15% of the total committed capacity.
     
(e)
  
Borrowings under WPDH Limited's credit facility bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.
     
   
This credit facility contains financial covenants that require WPDH Limited to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and a RAB that exceeds total net debt by the higher of an amount equal to 15% of total net debt or £150 million, in each case as calculated in accordance with the credit facility.  At December 31, 2009 and 2008, WPDH Limited's interest coverage ratios, as calculated in accordance with its credit facility, were 4.3 and 4.6.  At December 31, 2009 and 2008, WPDH Limited's RAB, as calculated in accordance with the credit facility, exceeded its total net debt by £325 million, or 25%, and £385 million, or 31%.
     
(f)
  
WPD (South West) has two credit facilities:  one under which it can make cash borrowings and another under which it has the capability to cause the lender to issue up to approximately £4 million of letters of credit.  Borrowings bear interest at LIBOR-based rates plus a margin.
     
   
The credit facility under which it can make cash borrowings contains financial covenants that require WPD (South West) to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and total net debt not in excess of 85% of RAB, in each case as calculated in accordance with the credit facility.  At December 31, 2009, WPD (South West)'s interest coverage ratio, as calculated in accordance with its credit facility, was 5.3.  At December 31, 2009, WPD (South West)'s total net debt, as calculated in accordance with the credit facility, was 67% of RAB.
     
(g)
  
The commitments under WPD's credit facilities are provided by eight banks, with no one bank providing more than 25% of the total committed capacity.
     
   
The committed capacity of WPD's credit facilities expires as follows:  £4 million in 2010, £210 million in 2012 and £150 million in 2013.  WPD (South West) intends to renew its letter of credit facility that expires in 2010 in order for WPD to maintain its current total committed capacity level.
     
   
At December 31, 2009, the unused capacity of WPD's credit facilities was approximately $276 million.

In addition to the financial covenants noted in the table above, the credit agreements governing the credit facilities contain various other covenants.  Failure to comply with the covenants after applicable grace periods could result in acceleration of repayment of borrowings and/or termination of the agreements.  PPL monitors compliance with the covenants on a regular basis.  At December 31, 2009, PPL was in material compliance with these covenants.  At this time, PPL believes that these covenants and other borrowing conditions will not limit access to these funding sources.

See Note 7 to the Financial Statements for further discussion of PPL's credit facilities.

Commercial Paper

PPL Energy Supply and PPL Electric usually maintain commercial paper programs, under which commercial paper issuances are supported by certain credit facilities of each company, to provide an additional financing source to fund their short-term liquidity needs, if and when necessary.

As discussed below under "Credit Ratings," S&P lowered its rating on PPL Energy Supply's commercial paper to A-3 from A-2 in January 2009.  Since PPL Energy Supply did not plan to issue any commercial paper during 2009 and there was essentially no liquidity in commercial paper markets for paper with an A-3 rating, PPL Energy Supply closed its $500 million commercial paper program in January 2009 and requested that Moody's, S&P and Fitch each withdraw their ratings on its commercial paper program, which each rating agency subsequently did.

PPL Energy Supply may reopen its commercial paper program in the future, depending on market conditions and credit ratings,  to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Any future commercial paper issuances would be supported by PPL Energy Supply's credit facilities.

PPL Electric has a $200 million commercial paper program in place.  As noted below under "Credit Ratings," commercial paper for PPL Electric is rated P-2, A-2 and F2 by Moody's, S&P and Fitch.  Market conditions to issue commercial paper with these ratings have strengthened significantly since 2008, when the downturn in the financial markets created extremely limited liquidity resulting in high borrowing rates.  PPL Electric did not issue any commercial paper during 2009.  Based on its current cash position and anticipated cash flows, PPL Electric currently does not plan to issue any commercial paper during 2010, but it may do so from time to time, subject to market conditions, to facilitate short-term cash flow needs.

Operating Leases

PPL and its subsidiaries also have available funding sources that are provided through operating leases.  PPL's subsidiaries lease office space, land, buildings and certain equipment.  These leasing structures provide PPL additional operating and financing flexibility.  The operating leases contain covenants that are typical for these agreements, such as maintaining insurance, maintaining corporate existence and timely payment of rent and other fees.

PPL, through its subsidiary PPL Montana, leases a 50% interest in Colstrip Units 1 and 2 and a 30% interest in Unit 3, under four 36-year, non-cancelable operating leases.  These operating leases are not recorded on PPL's Balance Sheets.  The leases place certain restrictions on PPL Montana's ability to incur additional debt, sell assets and declare dividends.  At this time, PPL believes that these restrictions will not limit access to these funding sources or cause acceleration or termination of the leases.  See Note 7 to the Financial Statements for a discussion of other dividend restrictions related to PPL subsidiaries.

See Note 10 to the Financial Statements for further discussion of the operating leases.

Long-Term Debt and Equity Securities

Subject to market conditions, PPL and its subsidiaries currently plan to issue up to $300 million and £400 million in long-term debt securities in 2010.  PPL expects to use the proceeds from these issuances for the repayment of short-term debt, to fund capital expenditures, and for general corporate purposes.

PPL currently plans to issue new shares of common stock in 2010 in an aggregate amount of approximately $75 million under various employee stock-based compensation plans and its dividend reinvestment plan.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, PPL currently expects to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common and preferred securities and possibly the purchase or redemption of a portion of debt securities.

Capital Expenditures

The table below shows PPL's actual spending for the year 2009 and current capital expenditure projections for the years 2010 through 2012.

   
Actual
  
Projected
   
2009
  
2010
  
2011
  
2012
  
Construction expenditures (a) (b)
                          
Generating facilities
  
$
361
  
$
671
  
$
673
  
$
507
  
Transmission and distribution facilities
    
511
    
862
    
1,097
    
990
  
Environmental
    
178
    
63
    
19
    
99
  
Other
    
75
    
114
    
107
    
106
  
Total Construction Expenditures
    
1,125
    
1,710
    
1,896
    
1,702
  
Nuclear fuel
    
140
    
151
    
173
    
171
  
Total Capital Expenditures
  
$
1,265
  
$
1,861
  
$
2,069
  
$
1,873
  

(a)
  
Construction expenditures include capitalized interest and AFUDC, which are expected to be approximately $190 million for the years 2010 through 2012.
(b)
  
Includes expenditures for certain intangible assets.

PPL's capital expenditure projections for the years 2010 through 2012 total approximately $5.8 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  This table includes projected costs related to the planned 239 MW of incremental capacity increases, PPL Electric's asset optimization program focused on the replacement of aging transmission and distribution assets, and the PJM-approved regional transmission line expansion project.  See Note 8 to the Financial Statements for information on the PJM-approved regional transmission line expansion project and the other significant development projects.

PPL plans to fund its capital expenditures in 2010 with cash on hand, cash from operations and proceeds from the issuance of debt securities.

Contractual Obligations

PPL has assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2009, the estimated contractual cash obligations of PPL were:

   
Total
  
Less Than 1 Year
  
1-3 Years
  
4-5 Years
  
After 5 Years
                               
Long-term Debt (a)
  
$
7,066
            
$
500
    
$
1,447
    
$
5,119
  
Interest on Long-term Debt (b)
    
8,342
    
$
421
      
812
      
705
      
6,404
  
Operating Leases
    
968
      
108
      
216
      
223
      
421
  
Purchase Obligations (c)
    
8,123
      
3,153
      
2,212
      
868
      
1,890
  
Other Long-term Liabilities Reflected on the Balance Sheet under GAAP (d) (e)
    
80
      
62
      
18
                  
Total Contractual Cash Obligations
  
$
24,579
    
$
3,744
    
$
3,758
    
$
3,243
    
$
13,834
  

(a)
  
Reflects principal maturities only based on legal maturity dates.  See Note 7 to the Financial Statements for a discussion of the remarketing feature related to PPL Energy Supply's 5.70% REset Put Securities, as well as discussion of variable-rate remarketable bonds issued by the PEDFA on behalf of PPL Energy Supply and PPL Electric.  PPL does not have any significant capital lease obligations.
(b)
  
Assumes interest payments through maturity.  The payments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated and payments denominated in British pounds sterling have been translated to U.S. dollars at a current foreign currency exchange rate.
(c)
  
The payments reflected herein are subject to change, as certain purchase obligations included are estimates based on projected obligated quantities and/or projected pricing under the contracts.  Purchase orders made in the ordinary course of business are excluded from the amounts presented.  The payments also include obligations related to nuclear fuel and the installation of the scrubbers, which are also reflected in the Capital Expenditures table presented above.
(d)
  
The amounts reflected represent WPD's contractual deficit pension funding requirements arising from an actuarial valuation performed in March 2007.  The U.K. electricity regulator currently allows a recovery of a substantial portion of the contributions relating to the plan deficit; however, WPD cannot be certain that this will continue beyond the current and next review periods, which extend to March 31, 2015.  Based on the current funded status of PPL's U.S. qualified pension plans, no cash contributions are required.  See Note 12 to the Financial Statements for a discussion of expected contributions.
(e)
  
At December 31, 2009, total unrecognized tax benefits of $212 million were excluded from this table as PPL cannot reasonably estimate the amount and period of future payments.  See Note 5 to the Financial Statements for additional information.

Dividends

PPL views dividends as an integral component of shareowner return and expects to continue to pay dividends in amounts that are within the context of maintaining a capitalization structure that supports investment grade credit ratings.  In 2009, PPL increased the annualized dividend rate on its common stock from $1.34 to $1.38 per share, effective with the April 1, 2009 dividend payment.  Future dividends will be declared at the discretion of the Board of Directors and will depend upon available earnings, cash flows, financial requirements and other relevant factors at the time.  As discussed in Note 7 to the Financial Statements, PPL may not declare or pay any cash dividend on its common stock during any period in which PPL Capital Funding defers interest payments on its 2007 Series A Junior Subordinated Notes due 2067.  No such deferrals have occurred or are currently anticipated.

PPL Electric expects to continue to pay quarterly dividends on its outstanding preferred securities, if and as declared by its Board of Directors.

See Note 7 to the Financial Statements for other restrictions related to distributions on capital interests for PPL subsidiaries.

Purchase or Redemption of Debt Securities

PPL will continue to evaluate purchasing or redeeming outstanding debt securities and may decide to take action depending upon prevailing market conditions and available cash.

Credit Ratings

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

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

The following table summarizes the credit ratings of PPL and its rated subsidiaries at December 31, 2009:

   
Moody's
  
S&P
  
Fitch (a)
PPL
            
 
Issuer Rating
  
Baa2
  
BBB
  
BBB
 
Outlook
  
Negative
  
Negative
  
STABLE
               
PPL Capital Funding
            
 
Issuer Rating
          
BBB
 
Senior Unsecured Debt
  
Baa2
  
BBB-
  
BBB
 
Junior Subordinated Notes
  
Baa3
  
BB+
  
BBB-
 
Outlook
  
Negative
      
STABLE
               
PPL Energy Supply (b)
            
 
Issuer Rating
      
BBB
  
BBB
 
Senior Unsecured Notes
  
Baa2
  
BBB
  
BBB
 
Outlook
  
STABLE
  
Negative
  
STABLE
               
PPL Electric (c)
            
 
Senior Unsecured/Issuer Rating
  
Baa1
  
A-
  
BBB
 
First Mortgage Bonds/ Senior Secured Bonds
  
A3
  
A-
  
A-
 
Commercial Paper
  
P-2
  
A-2
  
F2
 
Preferred Stock
  
Baa3
  
BBB
  
BBB
 
Preference Stock
  
Baa3
  
BBB
  
BBB
 
Outlook
  
Negative
  
Negative
  
STABLE
               
PPL Montana
            
 
Pass-Through Certificates
  
Baa3
  
BBB-
  
BBB
 
Outlook
  
STABLE
  
STABLE
    
             
WPDH Limited
            
 
Issuer Rating
  
Baa3
  
BBB-
  
BBB-
 
Senior Unsecured Debt
  
Baa3
  
BBB-
  
BBB
 
Short-term Debt
      
A-3
    
 
Outlook
  
STABLE
  
Negative
  
POSITIVE
               
WPD LLP
            
 
Issuer Rating
          
BBB
 
Outlook
          
POSITIVE
               
WPD (South Wales)
            
 
Issuer Rating
      
BBB+
  
BBB+
 
Senior Unsecured Debt
  
Baa1
  
BBB+
  
A-
 
Short-term Debt
      
A-2
  
F2
 
Outlook
  
STABLE
  
Negative
  
POSITIVE
             
WPD (South West)
            
 
Issuer Rating
  
Baa1
  
BBB+
  
BBB+
 
Senior Unsecured Debt
  
Baa1
  
BBB+
  
A-
 
Short-term Debt
  
P-2
  
A-2
  
F2
 
Outlook
  
STABLE
  
Negative
  
POSITIVE

(a)
  
All Issuer Ratings for Fitch are "Issuer Default Ratings."
(b)
  
Excludes Exempt Facilities Revenue Bonds issued by the PEDFA on behalf of PPL Energy Supply, which are each currently supported by a letter of credit and are rated on the basis of the credit enhancement.
(c)
  
Excludes Pollution Control Revenue Bonds issued by the LCIDA and the PEDFA on behalf of PPL Electric, of which the LCIDA bonds are insured and may be rated on the basis of relevant factors, including the insurer's ratings.

In January 2009, S&P completed a review of PPL, PPL Energy Supply and PPL Electric and revised its outlook for all three entities to negative from stable.  At that time, S&P affirmed the BBB issuer rating of both PPL and PPL Energy Supply and affirmed the A- issuer rating of PPL Electric.  As a result of the negative outlook at PPL Energy Supply, S&P lowered the commercial paper rating of PPL Energy Supply to A-3 from A-2.  S&P stated in its press release regarding PPL and PPL Energy Supply that the revision in the outlook for PPL and PPL Energy Supply was based primarily on lower than expected cash flows for 2008 combined with concerns over further pressure on financial metrics in 2009.  S&P stated in its press release regarding PPL Electric that the revision in its outlook reflects the linkage with PPL along with their expectation that PPL Electric's financial metrics could weaken beginning in 2010.

At the request of PPL Energy Supply, in the first quarter of 2009, Moody's, S&P and Fitch each withdrew their commercial paper rating for PPL Energy Supply.

In February 2009, S&P revised its outlook to negative from stable for each of WPDH Limited, WPD LLP, WPD (South Wales) and WPD (South West) and affirmed the issuer and short-term debt ratings of each of the entities.  S&P stated in its press release that the revision in the outlook is a reflection of the change to PPL's outlook and is not a result of any change in WPD's stand-alone credit profile.

In May 2009, Moody's completed a review of PPL, PPL Energy Supply and PPL Electric.  As a result of that review, Moody's revised its outlook for PPL, PPL Capital Funding, and PPL Electric to negative from stable.  At the same time, Moody's affirmed the Baa2 senior unsecured rating and stable outlook of PPL Energy Supply.  Moody's stated in its press release that the revision in the outlook for PPL Electric reflects Moody's expectation that PPL Electric's financial metrics will deteriorate beyond 2009 and considers the potential for additional pressure on cash flows.  Moody's also stated that the revision in the outlook for PPL and PPL Capital Funding reflects the increasing support for corporate earnings and cash flow anticipated from PPL Energy Supply and the subordinate position of the unsecured lenders at these entities relative to the unsecured lenders at the subsidiary levels.

At WPD's request, in September 2009, S&P withdrew its ratings for WPD LLP, since it did not have any securities outstanding.

In October 2009, Fitch completed a review of PPL, PPL Electric and PPL Energy Supply.  As a result of that review, Fitch lowered the rating of PPL Energy Supply's senior unsecured notes to BBB from BBB+ and affirmed all other ratings of PPL Energy Supply.  At the same time, Fitch affirmed all ratings of PPL, PPL Capital Funding and PPL Electric.  Fitch stated in its press release that the change in the rating of PPL Energy Supply's senior unsecured notes aligns such rating with the BBB Issuer Default Rating in a manner that is consistent with the approach Fitch applies to other competitive generators and also recognizes a lower valuation of PPL Energy Supply's power assets based on current and forward wholesale power prices.  The rating also reflects Fitch's forecast of lower than previously expected improvement in PPL Energy Supply's earnings and cash flow in 2010 and 2011.

In January 2010, as a result of implementing its recently revised guidelines for rating preferred stock and hybrid securities, Fitch lowered the rating of PPL Capital Funding's junior subordinated notes to BB+ from BBB- and lowered the ratings of PPL Electric's preferred stock and preference stock to BBB- from BBB.  Fitch stated in its press release that the new guidelines, which apply to instruments issued by companies in all sectors, typically resulted in downgrades of one notch for many instruments that provide for the ability to defer interest or dividend payments.  Fitch stated that it has no reason to believe that deferral will be activated.

Ratings Triggers

WPD (South West)'s 1.541% Index-linked Notes due 2053 and 2056 and WPD (South Wales)'s 4.80436% Notes due 2037 may be put by the holders back to the issuer for redemption if the long-term credit ratings assigned to the notes by Moody's, S&P or Fitch are withdrawn by any of the rating agencies or reduced to a non-investment grade rating of Ba1 or BB+ in connection with a restructuring event.  A restructuring event includes the loss of, or a material adverse change to, the distribution license under which WPD (South West) and WPD (South Wales) operate.  These notes totaled £467 million (approximately $766 million) at December 31, 2009.

PPL and PPL Energy Supply have various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements, and interest rate and foreign currency instruments, which contain provisions requiring PPL and PPL Energy Supply to post additional collateral, or permit the counterparty to terminate the contract, if PPL's or PPL Energy Supply's credit rating were to fall below investment grade.  See Note 18 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at December 31, 2009.  At December 31, 2009, if PPL's and PPL Energy Supply's credit ratings had been below investment grade, PPL would have been required to post an additional $298 million of collateral to counterparties for both derivative and non-derivative commodity and commodity-related contracts used in its generation, marketing and trading operations and interest rate and foreign currency contracts.

Guarantees for Subsidiaries

At times, PPL provides guarantees for financing arrangements to enable certain transactions for its consolidated affiliates, excluding PPL Electric.  Some of the guarantees contain financial and other covenants that, if not met, would limit or restrict the consolidated affiliates' access to funds under these financing arrangements, require early maturity of such arrangements or limit the consolidated affiliates' ability to enter into certain transactions.  At this time, PPL believes that these covenants will not limit access to relevant funding sources.  See Note 14 to the Financial Statements for additional information about guarantees.

Off-Balance Sheet Arrangements

PPL has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party.  See Note 14 to the Financial Statements for a discussion of these agreements.

Risk Management - Energy Marketing & Trading and Other

Market Risk

See Notes 1, 17, and 18 to the Financial Statements for information about PPL's risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

PPL segregates its non-trading activities into two categories:  hedge activity and economic activity.  Transactions that are accounted for as hedge activity qualify for hedge accounting treatment.  The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.  This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL's generation assets, load-following and retail activities.  This economic activity is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power).  Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity.  The net fair value of economic positions at December 31, 2009 and 2008 was a net liability of $77 million and $52 million.  See Note 18 for additional information on economic activity.

To hedge the impact of market price volatility on PPL's energy-related assets, liabilities and other contractual arrangements, PPL EnergyPlus sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  PPL's non-trading commodity derivative contracts mature at various times through 2017.

Within PPL's non-trading portfolio, the decision to enter into energy contracts is influenced by the expected value of PPL's generation.  In determining the number of MWhs that are available to be sold forward, PPL first reduces the potential output by the amount of unavailable generation due to planned maintenance on a particular unit.  The potential output is further reduced by the amount of MWhs that historically is not produced by a plant due to such factors as equipment breakage.  Finally, the potential output of certain plants (such as peaking units) is reduced if their higher cost of production will not allow them to economically run during all hours.

PPL's non-trading portfolio also includes full requirements energy contracts.  The net obligation to serve these contracts changes minute-by-minute.  Anticipated usage patterns and energy peaks are affected by expected load changes, regional economic drivers, customer shopping or migration and seasonal weather patterns.  PPL analyzes historical on-peak and off-peak usage patterns, expected load changes, regional economic drivers, and weather patterns, among other factors, to determine monthly levels of electricity that best fits usage patterns to minimize earnings exposure.  To satisfy its full requirements obligations, PPL generally enters into contracts to purchase unbundled products of electricity, capacity, RECs and other ancillary products.  To a lesser extent, PPL reserves a portion of its generation for full requirements contracts that is expected to be the best match with anticipated usage patterns and energy peaks.

The following chart sets forth the net fair value of PPL's non-trading commodity derivative contracts.  See Notes 17 and 18 to the Financial Statements for additional information.

   
Gains (Losses)
   
2009
  
2008
                 
Fair value of contracts outstanding at the beginning of the period
  
$
402
    
$
(305
)
Contracts realized or otherwise settled during the period
    
189
      
(49
)
Fair value of new contracts entered into during the period
    
143
      
101
  
Changes in fair value attributable to changes in valuation techniques (a)
            
158
  
Other changes in fair value
    
546
      
497
  
Fair value of contracts outstanding at the end of the period
  
$
1,280
    
$
402
  

(a)
  
Amount represents the reduction of valuation reserves related to capacity and FTR contracts upon the adoption of fair value accounting guidance.

The following table segregates the net fair value of PPL's non-trading commodity derivative contracts at December 31, 2009 based on whether the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.

   
Net Asset (Liability)
   
Maturity Less Than 1 Year
  
Maturity
1-3 Years
  
Maturity
4-5 Years
  
Maturity
In Excess
of 5 Years
  
Total
Fair Value
Source of Fair Value
                                        
Prices quoted in active markets for identical instruments
                                        
Prices based on significant other observable inputs
  
$
363
    
$
736
    
$
73
            
$
1,172
  
Prices based on significant unobservable inputs
    
(1
)
    
13
      
30
    
$
66
      
108
  
Fair value of contracts outstanding at the end of the period
  
$
362
    
$
749
    
$
103
    
$
66
    
$
1,280
  

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

Commodity Price Risk (Trading)

PPL's trading contracts mature at various times through 2015.  The following table sets forth changes in the net fair value of PPL's trading commodity derivative contracts.  See Notes 17 and 18 to the Financial Statements for additional information.

   
Gains (Losses)
   
2009
  
2008
                 
Fair value of contracts outstanding at the beginning of the period
  
$
(75
)
  
$
16
  
Contracts realized or otherwise settled during the period
    
2
      
(18
)
Fair value of new contracts entered into during the period
    
31
      
28
  
Changes in fair value attributable to changes in valuation techniques (a)
            
11
  
Other changes in fair value
    
36
      
(112
)
Fair value of contracts outstanding at the end of the period
  
$
(6
)
  
$
(75
)

(a)
  
In the fourth quarter of 2008, PPL refined its valuation approach for FTR and PJM basis positions, consistent with PPL's practice of pricing other less active trading points, resulting in changes in valuation techniques.

PPL will reverse unrealized gains of approximately $1 million over the next three months as the transactions are realized.

The following table segregates the net fair value of PPL's trading commodity derivative contracts at December 31, 2009 based on whether the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.

   
Net Asset (Liability)
   
Maturity Less Than
1 Year
  
Maturity
1-3 Years
  
Maturity
4-5 Years
  
Maturity
in Excess
of 5 Years
  
Total Fair
Value
Source of Fair Value
                                        
Prices quoted in active markets for identical instruments
  
$
1
                            
$
1
  
Prices based on significant other observable inputs
    
(4
)
  
$
(5
)
  
$
2
    
$
1
      
(6
)
Prices based on significant unobservable inputs
    
(1
)
                            
(1
)
Fair value of contracts outstanding at the end of the period
  
$
(4
)
  
$
(5
)
  
$
2
    
$
1
    
$
(6
)

VaR Models

PPL utilizes a VaR model to measure commodity price risk in domestic gross energy margins for its non-trading and trading portfolios.  VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.  PPL calculates VaR using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's conservative hedging program, PPL's non-trading VAR exposure is expected to be limited in the short term.  At December 31, 2009 and December 31, 2008, the VaR for PPL's portfolios using end-of-quarter results for the period was as follows.

   
Trading VaR
  
Non-Trading VaR
   
2009
  
2008
  
2009
  
2008
95% Confidence Level, Five-Day Holding Period
                                
Period End
  
$
3
    
$
3
    
$
8
    
$
10
  
Average for the Period
    
4
      
10
      
9
      
14
  
High
    
8
      
22
      
11
      
20
  
Low
    
1
      
3
      
8
      
9
  

The trading portfolio includes all speculative positions, regardless of the delivery period.  All positions not considered speculative are considered non-trading.  PPL's non-trading portfolio includes PPL's entire portfolio, including generation, with delivery periods through the next 12 months.  Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets.  The fair value of the FTR positions at December 31, 2009 was an unrealized loss of $3 million and consisted of the following.

   
2010
  
2011
  
                   
Trading (a)
                  
Non-trading
  
$
(2
)
  
$
(1
)
  
Total
  
$
(2
)
  
$
(1
)
  

(a)
  
The amount of trading FTR positions was less than $1 million at December 31, 2009.

Interest Rate Risk

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

At December 31, 2009, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was $1 million, compared with $3 million at December 31, 2008.

PPL is also exposed to changes in the fair value of its domestic and international debt portfolios.  PPL estimated that a 10% decrease in interest rates at December 31, 2009 would increase the fair value of its debt portfolio by $285 million, compared with $327 million at December 31, 2008.

At December 31, PPL had the following interest rate hedges outstanding.

   
2009
  
2008
   
Exposure
Hedged
  
Fair Value, Net - Asset (Liability) (a)
  
Effect of a 10%
Adverse Movement
in Rates (b)
  
Exposure
Hedged
  
Fair Value, Net - Asset (Liability) (a)
  
Effect of a 10%
Adverse Movement
in Rates (b)
                                                 
Cash flow hedges
                                                
Interest rate swaps (c)
  
$
425
    
$
24
    
$
(24
)
  
$
200
    
$
(11
)
  
$
(12
)
Cross-currency swaps (d)
    
302
      
8
      
(41
)
    
302
      
54
      
(8
)
Fair value hedges
                                                
Interest rate swaps (e)
    
750
      
31
      
(12
)
    
500
      
54
      
(5
)

(a)
  
Includes accrued interest, if applicable.
(b)
  
Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(c)
  
PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of these instruments are recorded in equity and then reclassified into earnings in the same period during which the item being hedged affects earnings.  Sensitivities represent a 10% adverse movement in interest rates.
(d)
  
WPDH Limited uses cross-currency swaps to hedge the interest payments and principal of its U.S. dollar-denominated senior notes with maturity dates ranging from December 2017 to December 2028.  While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.  Sensitivities represent a 10% adverse movement in both interest rates and foreign currency exchange rates.
(e)
  
PPL utilizes various risk management instruments to adjust the mix of fixed and floating interest rates in its debt portfolio.  The change in fair value of these instruments, as well as the offsetting change in the value of the hedged exposure of the debt, is reflected in earnings.  Sensitivities represent a 10% adverse movement in interest rates.

Foreign Currency Risk

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL's domestic operations may make purchases of equipment in currencies other than U.S. dollars.  See Note 1 to the Financial Statements for additional information regarding foreign currency translation.


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

At December 31, PPL had the following foreign currency hedges outstanding.

   
2009
  
2008
   
Exposure
Hedged
  
Fair Value, Net - Asset (Liability)
  
Effect of a 10%
Adverse Movement
in Foreign Currency Exchange Rates (a)
  
Exposure
Hedged
  
Fair Value, Net - Asset (Liability)
  
Effect of a 10%
Adverse Movement
in Foreign Currency Exchange Rates (a)
                                                 
Net investment hedges (b)
  
£
40
    
$
13
    
$
(6
)
  
£
68
    
$
34
    
$
(10
)
Economic hedges (c)
    
48
      
2
      
(4
)
                        

(a)
  
Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(b)
  
To protect the value of a portion of its net investment in WPD, PPL executed forward contracts to sell British pounds sterling.  The settlement dates of these contracts range from March 2010 through June 2011.
(c)
  
To economically hedge the translation of 2010 expected income denominated in British pounds sterling to U.S. dollars, PPL entered into a combination of average rate forwards and average rate options to sell British pounds sterling.  The forwards and options have termination dates ranging from January 2010 through June 2010.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the Susquehanna nuclear station.  At December 31, 2009, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on PPL's Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At December 31, 2009, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $40 million reduction in the fair value of the trust assets, compared with $27 million at December 31, 2008.  See Notes 17 and 21 to the Financial Statements for additional information regarding the NDT funds.

Defined Benefit Plans - Securities Price Risk

See "Application of Critical Accounting Policies - Defined Benefits" for additional information regarding the effect of securities price risk on plan assets.

Credit Risk

Credit risk is the risk that PPL would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL maintains credit policies and procedures with respect to counterparty credit (including requirements that counterparties maintain specified credit ratings) and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk.  However, PPL has concentrations of suppliers and customers among electric utilities, financial institutions and other energy marketing and trading companies.  These concentrations may impact PPL's overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.

PPL includes the effect of credit risk on its fair value measurements to reflect the probability that a counterparty will default when contracts are out of the money (from the counterparty's standpoint).  In this case, PPL would have to sell into a lower-priced market or purchase from a higher-priced market.  When necessary, PPL records an allowance for doubtful accounts to reflect the probability that a counterparty will not pay for deliveries PPL has made but not yet billed, which are reflected in "Unbilled revenues" on the Balance Sheets.  PPL also has established a reserve with respect to certain sales to the California ISO for which PPL has not yet been paid, which is reflected in accounts receivable on the Balance Sheets.  See Note 14 to the Financial Statements for additional information.

In 2007, the PUC approved PPL Electric's post-rate cap plan to procure default electricity supply for retail customers who do not choose an alternative competitive supplier in 2010.  From 2007 through 2009, PPL Electric conducted six competitive solicitations to purchase electricity generation supply for these customers.

In October 2009, PPL Electric purchased 2010 supply for fixed-price default service to large commercial and large industrial customers who elect to take that service.  In November 2009, PPL Electric purchased supply to provide hourly default service to large commercial and industrial customers in 2010.

In June 2009, the PUC approved PPL Electric's procurement plan for the period January 2011 through May 2013.  The first two of 14 planned competitive solicitations occurred in 2009.

Under the standard Supply Master Agreement (the Agreement) for the bid solicitation process, PPL Electric requires all suppliers to post collateral if their credit exposure exceeds an established credit limit.  In the event a supplier defaults on its obligation, PPL Electric would be required to seek replacement power in the market.  All incremental costs incurred by PPL Electric would be recoverable from customers in future rates.  At December 31, 2009, all of the successful bidders under all of the solicitations had an investment grade credit rating from S&P, and were not required to post collateral under the Agreement.  There is no instance under the Agreement in which PPL Electric is required to post collateral to its suppliers.

See "Overview" in this Item 7 and Notes 14, 15, 17 and 18 to the Financial Statements for additional information on the competitive solicitations, the Agreement, credit concentration and credit risk.

Related Party Transactions

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

For additional information on related party transactions, see Note 15 to the Financial Statements.

Acquisitions, Development and Divestitures

PPL is currently planning incremental capacity increases of 239 MW, primarily at its existing generating facilities.  See "Item 2. Properties - Supply Segment" for additional information.

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

See Notes 8 and 9 to the Financial Statements for additional information on the more significant activities.

Environmental Matters

See "Item 1. Business - Environmental Matters" and Note 14 to the Financial Statements for a discussion of environmental matters.

Competition

See "Item 1. Business - Competition" under each of PPL's reportable segments and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL.

New Accounting Guidance

See Notes 1 and 22 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

PPL's financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations of PPL, and require estimates or other judgments of matters inherently uncertain.  Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements).  PPL's senior management has reviewed these critical accounting policies and the estimates and assumptions regarding them with its Audit Committee.  In addition, PPL's senior management has reviewed the following disclosures regarding the application of these critical accounting policies with the Audit Committee.

Effective January 1, 2009, PPL and its subsidiaries fully applied accounting guidance that provides a framework for measuring fair value.  The fair value measurement concepts provided by this guidance are used within its financial statements where applicable.  See Notes 1 and 17 to the Financial Statements for additional information regarding fair value measurements.

1)     Price Risk Management

See "Risk Management - Energy Marketing & Trading and Other" above and Note 18 to the Financial Statements.

2)     Defined Benefits

PPL and certain of its subsidiaries sponsor various defined benefit pension and other postretirement plans applicable to the majority of the employees of PPL and its subsidiaries.  PPL and certain of its subsidiaries record an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to OCI or regulatory assets for PPL Electric.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.  See Note 12 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

PPL makes certain assumptions regarding the valuation of benefit obligations and the performance of plan assets.  When accounting for defined benefits, delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle.  Annual net periodic defined benefit costs are recorded in current earnings based on estimated results.  Any differences between actual and estimated results are recorded in OCI or regulatory assets for PPL Electric.  These amounts in AOCI or regulatory assets are amortized to income over future periods.  The delayed recognition allows for a smoothed recognition of costs over the working lives of the employees who benefit under the plans.  The primary assumptions are:

·
Discount Rate - The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future. The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due.
   
·
Expected Return on Plan Assets - Management projects the long-term rates of return on plan assets based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  These projected returns reduce the net benefit costs PPL records currently.
   
·
Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.
   
·
Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.

In selecting a discount rate for its U.S. defined benefit plans, PPL starts with an analysis of the expected benefit payment stream for its plans.  This information is first matched against a spot-rate yield curve.  A portfolio of 526 Aa-graded non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $541 billion, serves as the base from which those with the lowest and highest yields are eliminated to develop the ultimate yield curve.  The results of this analysis are considered together with other economic data and movements in various bond indices to determine the discount rate assumption.  At December 31, 2009, PPL decreased the discount rate for its U.S. pension plans from 6.50% to 6.00% as a result of this assessment and decreased the discount rate for its other postretirement benefit plans from 6.45% to 5.81%.

A similar process is used to select the discount rate for the U.K. pension plans, which uses an iBoxx British pounds sterling denominated corporate bond index as its base.  At December 31, 2009, PPL decreased the discount rate for the U.K. pension plans from 7.47% to 5.55% as a result of this assessment.

The expected long-term rates of return for PPL's U.S. defined benefit pension and other postretirement benefit plans have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  PPL management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.

At December 31, 2009, PPL's expected return on plan assets remained at 8.00% for its U.S. pension plans and remained at 7.00% for its other postretirement benefit plans.  The expected long-term rates of return for PPL's U.K. pension plans have been developed by WPD management with assistance from an independent actuary using a best-estimate of expected returns, volatilities and correlations for each asset class.  For the U.K. plans, PPL's expected return on plan assets remained at 7.90% at December 31, 2009.

In selecting a rate of compensation increase, PPL considers past experience in light of movements in inflation rates.  At December 31, 2009, PPL's rate of compensation increase remained at 4.75% for its U.S. plans.  For the U.K. plans, PPL's rate of compensation increase remained at 4.00% at December 31, 2009.

In selecting health care cost trend rates, PPL considers past performance and forecasts of health care costs.  At December 31, 2009, PPL's health care cost trend rates were 8.00% for 2010, gradually declining to 5.50% for 2016.

A variance in the assumptions listed above could have a significant impact on accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI or regulatory assets for PPL Electric.  While the charts below reflect either an increase or decrease in each assumption, the inverse of this change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI or regulatory assets for PPL Electric by a similar amount in the opposite direction.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

At December 31, 2009, PPL had recorded the following defined benefit plan liabilities:

Pension liabilities
  
$
1,290
  
Other postretirement benefit liabilities
    
197
  

The following chart reflects the sensitivities in the December 31, 2009 Balance Sheet associated with a change in certain assumptions based on PPL's primary defined benefit plans.

   
Increase (Decrease)
Actuarial assumption
  
Change in assumption
  
Impact on defined benefit liabilities
  
Impact on OCI
  
Impact on regulatory assets
                                 
Discount Rate
    
(0.25)%
    
$
194
    
$
(163
)
  
$
31
  
Rate of Compensation Increase
    
0.25%
      
26
      
(21
)
    
5
  
Health Care Cost Trend Rate (a)
    
1.0%
      
12
      
(8
)
    
4
  

(a)
  
Only impacts other postretirement benefits.

In 2009, PPL recognized net periodic defined benefit costs charged to operating expense of $70 million.  This amount represents a $14 million increase from 2008.  This increase in expense was primarily attributable to actual asset losses in 2008.  As a result, the expected return on assets in 2009 was lower and amortization of gain/loss was impacted.

The following chart reflects the sensitivities in the 2009 Statement of Income (excluding income tax effects) associated with a change in certain assumptions based on PPL's primary defined benefit plans.

Actuarial assumption
  
Change in assumption
  
Impact on defined benefit costs
                   
Discount Rate
    
(0.25)%
    
$
7
    
Expected Return on Plan Assets
    
(0.25)%
      
12
    
Rate of Compensation Increase
    
0.25%
      
3
    
Health Care Cost Trend Rate (a)
    
1.0%
      
2
    

(a)
  
Only impacts other postretirement benefits.

3)  
Asset Impairment

PPL performs impairment analyses for long-lived assets that are subject to depreciation or amortization whenever events or changes in circumstances indicate that a long-lived asset's carrying value may not be recoverable.  For these long-lived assets to be held and used, such events or changes in circumstances are:

·
a significant decrease in the market price of an asset;
·
a significant adverse change in the manner in which an asset is being used or in its physical condition;
·
a significant adverse change in legal factors or in the business climate;
·
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
·
a current-period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
·
a current expectation that, more likely than not, an asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

For a long-lived asset to be held and used, an impairment is recognized when the carrying amount of the asset is not recoverable and exceeds its fair value.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying value to its estimated fair value.  Management must make significant judgments to estimate future cash flows including the useful lives of long-lived assets, the fair value of the assets and management's intent to use the assets.  PPL considers alternate courses of action to recover the carrying value of a long-lived asset, and uses estimated cash flows from the "most likely" alternative to assess impairment whenever one alternative is clearly the most likely outcome.  If no alternative is clearly the most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternatives.  For assets tested for impairment as of the balance sheet date, the estimates of future cash flows used in that test consider the likelihood of possible outcomes that existed at the balance sheet date, including the assessment of the likelihood of a future sale of the assets.  That assessment is not revised based on events that occur after the balance sheet date.  Changes in assumptions and estimates could result in significantly different results than those identified and recorded in the financial statements.

For a long-lived asset held for sale, an impairment exists when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If the asset (disposal group) is impaired, an impairment loss is recorded to adjust its carrying amount to its fair value less cost to sell.  A gain is recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative impairment previously recognized.

For determining fair value, quoted market prices in active markets are the best evidence of fair value.  However, when market prices are unavailable, PPL considers all valuation techniques appropriate in the circumstances and for which market participant inputs can be obtained.  PPL has generally used discounted cash flows to estimate fair value, which incorporates market participant inputs when available.  Discounted cash flows are calculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.

In 2009, PPL recorded impairments of certain long-lived assets.  See Note 17 to the Financial Statements for a discussion of impairments related to certain sulfur dioxide emission allowances and the Long Island generation business.

PPL tests goodwill for impairment at the reporting unit level.  PPL has determined its reporting units to be at or one level below its operating segments.  PPL performs a goodwill impairment test annually or more frequently if events or changes in circumstances indicate that the carrying value of the reporting unit may be greater than the unit's fair value.  Additionally, goodwill is tested for impairment after a portion of goodwill has been allocated to a business to be disposed of.

Goodwill is tested for impairment using a two-step approach.  The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying amount, including goodwill.  If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired.  If the carrying amount exceeds the estimated fair value of the reporting unit, the second step is performed to measure the amount of impairment loss, if any.

The second step requires a calculation of the implied fair value of goodwill.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill in a business combination.  That is, the estimated fair value of a reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the price paid to acquire the reporting unit.  The excess of the estimated fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  The implied fair value of the reporting unit's goodwill is then compared with the carrying amount of that goodwill.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of the reporting unit's goodwill.

In 2009, PPL was not required to impair any goodwill.  Management primarily used discounted cash flows, which required significant assumptions, to estimate the fair value of each reporting unit.  A decrease in the forecasted cash flows of 10%, or an increase of the discount rate by 25 basis points, would not have resulted in an impairment of goodwill.

Additionally, in 2009, PPL wrote off $3 million of goodwill allocated to discontinued operations.

4)  
Loss Accruals

PPL accrues losses for the estimated impacts of various conditions, situations or circumstances involving uncertain or contingent future outcomes.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that a loss has been incurred, given the likelihood of the uncertain future events, and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur."  PPL does not record the accrual of contingencies that might result in gains, unless recovery is assured.  PPL continuously assesses potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.

The accounting aspects of estimated loss accruals include (1) the initial identification and recording of the loss, (2) the determination of triggering events for reducing a recorded loss accrual, and (3) the ongoing assessment as to whether a recorded loss accrual is sufficient.  All three of these aspects require significant judgment by PPL's management.  PPL uses its internal expertise and outside experts (such as lawyers and engineers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

No new significant loss accruals were recorded in 2009.  In 2008, significant judgment was required by PPL's management to perform an assessment of the contingency related to the Montana hydroelectric litigation.

In June 2008, PPL's management assessed the loss exposure related to the Montana hydroelectric litigation, given the June 2008 decision by the Montana First Judicial District Court (District Court).  The District Court awarded compensation of approximately $34 million for the years 2000 through 2006, and approximately $6 million for 2007 as rent for the use of the State of Montana's streambeds by PPL Montana's hydroelectric facilities.  The District Court also deferred the determination of compensation for 2008 and subsequent years to the Montana State Land Board (Land Board).  In October 2008, PPL Montana filed an appeal of the decision to the Montana Supreme Court and a stay of judgment, including a stay of the Land Board's authority to assess compensation against PPL Montana for 2008 and future periods.  Oral agreement of the case was held before the Montana Supreme Court in September 2009.

As part of the preparation of its 2009 financial statements, PPL's management reassessed the loss exposure for the Montana hydroelectric litigation.  PPL's management concluded, based on its assessment and after consultations with its trial counsel, that it has meritorious arguments on appeal for the years 2000 through 2006.  PPL assessed the likelihood of a loss for these years as reasonably possible.  However, PPL Montana has not recorded a loss accrual for these years, as the likelihood of a loss was not deemed probable.

For 2007 and subsequent years, PPL's management believes that while it also has meritorious arguments, it is probable that its hydroelectric projects will be subject to annual estimated compensation ranging from $3 million to $6 million.  Given that there was no single amount within that range more likely than any other, PPL Montana accrued $3 million for each of the years 2007 through 2009 for a total of $9 million.  See Note 14 to the Financial Statements for additional information on this contingency.

PPL has identified certain other events that could give rise to a loss, but that do not meet the conditions for accrual.  Such events are disclosed, but not recorded, when it is "reasonably possible" that a loss has been incurred.  See Note 14 to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual.

When an estimated loss is accrued, PPL identifies, where applicable, the triggering events for subsequently reducing the loss accrual.  The triggering events generally occur when the contingency has been resolved and the actual loss is incurred, or when the risk of loss has diminished or been eliminated.  The following are some of the triggering events that provide for the reduction of certain recorded loss accruals:

·
Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected.
   
·
Environmental and other litigation contingencies are reduced when the contingency is resolved and PPL makes actual payments, a better estimate of the loss is determined or the loss is no longer considered probable.

PPL reviews its loss accruals on a regular basis to assure that the recorded potential loss exposures are appropriate.  This involves ongoing communication and analyses with internal and external legal counsel, engineers, operation management and other parties.

5)  
Asset Retirement Obligations

PPL is required to recognize a liability for legal obligations associated with the retirement of long-lived assets.  The initial obligation should be measured at its estimated fair value.  An equivalent amount should be recorded as an increase in the value of the capitalized asset and allocated to expense over the useful life of the asset.  Until the obligation is settled, the liability should be increased, through the recognition of accretion expense in the income statement, for changes in the obligation due to the passage of time.  A conditional ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.

In determining AROs, management must make significant judgments and estimates to calculate fair value.  Fair value is developed using an expected present value technique based on assumptions of market participants that considers estimated retirement costs in current period dollars that are inflated to the anticipated retirement date and then discounted back to the date the ARO was incurred.  Changes in assumptions and estimates included within the calculations of the fair value of AROs could result in significantly different results than those identified and recorded in the financial statements.  Estimated ARO costs and settlement dates, which affect the carrying value of various AROs and the related assets, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the obligations.

At December 31, 2009, PPL had AROs totaling $426 million recorded on the Balance Sheet, of which $10 million is included in "Other current liabilities."  Of the total amount, $348 million, or 82%, relates to PPL's nuclear decommissioning ARO.  The most significant assumptions surrounding AROs are the forecasted retirement costs, the discount rates and the inflation rates.  A variance in the forecasted retirement costs, the discount rates or the inflation rates could have a significant impact on the ARO liabilities.

The following chart reflects the sensitivities related to PPL's nuclear decommissioning ARO liability as of December 31, 2009, associated with a change in these assumptions at the time of initial recognition.  There is no significant change to the annual depreciation expense of the ARO asset or the annual accretion expense of the ARO liability as a result of changing the assumptions.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption.

   
Change in
Assumption
  
Impact on
ARO Liability
         
Retirement Cost
  
10%/(10)%
  
$32/$(32)
Discount Rate
  
0.25%/(0.25)%
  
$(31)/$34
Inflation Rate
  
0.25%/(0.25)%
  
$41/$(37)

6)  
Income Tax Uncertainties

Significant management judgment is required in developing PPL's provision for income taxes primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position.  PPL evaluates its tax positions following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  PPL's management considers a number of factors in assessing the benefit to be recognized, including negotiation of a settlement.

On a quarterly basis, PPL reassesses its uncertain tax positions by considering information known at the reporting date.  Based on management's assessment of new information, PPL may subsequently recognize a tax benefit for a previously unrecognized tax position, de-recognize a previously recognized tax position, or re-measure the benefit of a previously recognized tax position.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact PPL's financial statements in the future.

The balance sheet classification of unrecognized tax benefits and the need for valuation allowances to reduce deferred tax assets also require significant management judgment.  PPL classifies unrecognized tax benefits as current, to the extent management expects to settle an uncertain tax position, by payment or receipt of cash, within one year of the reporting date.  Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset.  Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies.  Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized by PPL to account for an uncertain tax positions.  See Note 5 to the Financial Statements for the required disclosures.

At December 31, 2009, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $34 million or decrease by up to $179 million for PPL.  This change could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positions related to the creditability of foreign taxes, the timing and utilization of foreign tax credits and the related impact on alternative minimum tax and other credits, the timing and/or valuation of certain deductions, intercompany transactions and unitary filing groups.  The events that could cause these changes are direct settlements with taxing authorities, litigation, legal or administrative guidance by relevant taxing authorities and the lapse of an applicable statute of limitation.

7)  
Regulatory Assets

PPL's domestic electricity delivery business is subject to cost-based rate-regulation.  As a result, PPL is required to reflect the effects of regulatory actions in its financial statements.  PPL records assets that result from the regulated ratemaking process that may not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in regulated customer rates.

Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders to other regulated entities, and the status of any pending or potential deregulation legislation.  Based on this continual assessment, management believes the existing regulatory assets are probable of recovery.  This assessment reflects the current political and regulatory climate at the state and federal levels, and is subject to change in the future.  If future recovery of costs ceases to be probable, then asset write-offs would be required to be recognized in operating income.  Additionally, the regulatory agencies can provide flexibility in the manner and timing of the depreciation of PP&E and amortization of regulatory assets.

At December 31, 2009 and 2008, PPL had regulatory assets of $531 million and $763 million.  All of PPL's regulatory assets are either currently being recovered under specific rate orders or represent amounts that will be recovered in future rates based upon established regulatory practices.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit and audit-related services and other services permitted by Sarbanes-Oxley and SEC rules.  The audit and audit-related services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews.
PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

PPL Energy Supply is an energy company with headquarters in Allentown, Pennsylvania.  Refer to "Item 1. Business - Background" for descriptions of its reportable segments, which are Supply and International Delivery.  Through its subsidiaries, PPL Energy Supply is primarily engaged in the generation and marketing of electricity in two key markets - the northeastern and western U.S. - and in the delivery of electricity in the U.K.  PPL Energy Supply's overall strategy is to achieve disciplined growth in energy supply margins while limiting volatility in both cash flows and earnings and to achieve stable, long-term growth in its regulated international electricity delivery business through efficient operations and strong customer and regulatory relations.  More specifically, PPL Energy Supply's strategy for its electricity generation and marketing business is to match energy supply with load, or customer demand, under contracts of varying lengths with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL Energy Supply's strategy for its U.K. electricity delivery business is to own and operate this business at the most efficient cost while maintaining high quality customer service and reliability.

PPL Energy Supply faces several risks in its supply business, principally electricity and capacity wholesale price risk, fuel supply and price risk, electricity and fuel basis risk, power plant performance, evolving regulatory frameworks and counterparty credit risk.  PPL Energy Supply attempts to manage these risks through various means.  For instance, PPL Energy Supply operates a portfolio of generation assets that is diversified as to geography, fuel source, cost structure and operating characteristics.  PPL Energy Supply expects to expand its generation capacity over the next several years through power uprates at certain of its existing power plants, and is continually evaluating the potential construction of new plants and the potential acquisition of existing plants or businesses.  PPL Energy Supply is and will continue to remain focused on the operating efficiency and availability of its existing and any newly constructed or acquired power plants.

In addition, PPL Energy Supply has executed and continues to pursue contracts of varying lengths for energy sales and fuel supply, while using other means to mitigate risks associated with adverse changes in the difference, or margin, between the cost to produce electricity and the price at which PPL Energy Supply sells it.  PPL Energy Supply's future profitability will be affected by prevailing market conditions and whether PPL Energy Supply decides to, or is able to, continue to enter into long-term or intermediate-term power sales and fuel purchase agreements or renew its existing agreements.  Currently, PPL Energy Supply's commitments for energy sales are satisfied through its own generation assets and supply purchased from third parties.  PPL Energy Supply markets and trades around its physical portfolio of generating assets through integrated generation, marketing and trading functions.

PPL Energy Supply has adopted financial and operational risk management programs that, among other things, are designed to monitor and manage its exposure to earnings and cash flow volatility related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of its generating units.

The principal challenge that PPL Energy Supply faces in its international electricity delivery business is to maintain high quality customer service and reliability in a cost-effective manner.  PPL Energy Supply's international electricity delivery business is rate-regulated.  Accordingly, the business is subject to regulatory risk with respect to the costs that may not be recovered and investment returns that may not be collected through customer rates.

PPL Energy Supply faces additional financial risks in conducting U.K. operations, such as fluctuations in foreign currency exchange rates and the effect these rates have on the conversion of U.K. earnings and cash flows to U.S. dollars.  PPL Energy Supply attempts to manage these financial risks through its risk management programs.

In order to manage financing costs and access to credit markets, a key objective for PPL Energy Supply's business as a whole is to maintain a strong credit profile.  PPL Energy Supply continually focuses on maintaining an appropriate capital structure and liquidity position.

See "Item 1A. Risk Factors" for more information concerning these and other material risks PPL Energy Supply faces in its businesses.

In May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and related tolling agreements and expects the sale to close on or about February 26, 2010.  In November 2009, PPL Maine completed the sale of the majority of its hydroelectric generation business.  These businesses are included in the Supply segment.  In 2007, PPL Energy Supply sold its regulated electricity delivery businesses in Latin America, which were included in the International Delivery segment.  See Note 9 to the Financial Statements for additional information.

The purpose of "Management's Discussion and Analysis of Financial Condition and Results of Operations" is to provide information concerning PPL Energy Supply's performance in implementing the strategies and managing the risks and challenges mentioned above.  Specifically:

·
"Results of Operations" provides an overview of PPL Energy Supply's operating results in 2009, 2008 and 2007, including a review of earnings, with details of results by reportable segment.  It also provides a brief outlook for 2010.
   
·
"Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Energy Supply's liquidity position and credit profile, including its sources of cash (including bank credit facilities and sources of operating cash flow) and uses of cash (including contractual obligations and capital expenditure requirements) and the key risks and uncertainties that impact PPL Energy Supply's past and future liquidity position and financial condition.  This subsection also includes a listing and discussion of PPL Energy Supply's current credit ratings.
   
·
"Financial Condition - Risk Management - Energy Marketing & Trading and Other" provides an explanation of PPL Energy Supply's risk management programs relating to market risk and credit risk.
   
·
"Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of PPL Energy Supply and that require its management to make significant estimates, assumptions and other judgments.

The information provided in this Item 7 should be read in conjunction with PPL Energy Supply's Consolidated Financial Statements and the accompanying Notes.

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

Customer Choice - End of Transition Period

In 1996, the Customer Choice Act was enacted to restructure Pennsylvania's electric utility industry in order to create retail access to a competitive market for generation of electricity.  The Customer Choice Act required each Pennsylvania electric utility, to file a restructuring plan to "unbundle" its rates into separate generation, transmission and distribution components and to permit its customers to directly access alternate suppliers of electricity.  Under the Customer Choice Act, regulated utilities were required to act as a PLR.  As part of a settlement approved by the PUC, PPL EnergyPlus and PPL Electric, a PPL EnergyPlus affiliate, entered into full requirements energy supply agreements at predetermined "capped" rates through 2009.  In addition, the PUC authorized recovery of approximately $2.97 billion of competitive transition or "stranded" costs (generation-related costs that might not otherwise be recovered in a competitive market) from customers during an 11-year transition period.  For PPL Electric, this transition period ended on December 31, 2009.

With the expiration of the long-term power purchase agreements between PPL Electric and PPL EnergyPlus, PPL EnergyPlus now has multiple options as to how, and to whom, it sells the electricity produced by PPL Energy Supply's generation plants.  These sales are based on prevailing market rates, as compared to pre-determined capped rates under the expired supply agreements with PPL Electric.  PPL EnergyPlus has entered into various wholesale and retail contracts to sell this power and at this time has hedged almost 100% of expected 2010 baseload generation output.  The expiration of the long-term supply agreements with PPL Electric also provides PPL Energy Supply the ability to adjust its exposure to fluctuations in demand that existed with supplying PPL Electric's PLR load.  Entry of new generation suppliers into the Pennsylvania marketplace provides PPL Energy Supply the ability to provide generation supply to additional wholesale customers.  Overall, these changes and the resulting level of hedged electricity prices are expected to have a positive impact on the financial condition, operating results and cash flows of PPL Energy Supply.

PPL Electric's customers are no longer funding contributions to Susquehanna's NDT funds.  PPL will continue to manage the NDT funds until the PPL Susquehanna plant is decommissioned.  If the balance of the NDT funds is not adequate to cover decommissioning costs, PPL Susquehanna will be responsible to fund 90% of the shortfall.  The Susquehanna nuclear units currently are licensed to operate until 2042 and 2044.

Market Events

In 2008, conditions in the financial markets became disruptive to the processes of managing credit risk, responding to liquidity needs, measuring derivatives and other financial instruments at fair value, and managing market risk.  Bank credit capacity was reduced and the cost of renewing or establishing new credit facilities increased, thereby introducing uncertainties as to PPL Energy Supply's ability to enter into long-term energy commitments or reliably estimate the longer-term cost and availability of credit.  In general, bank credit capacity has increased from the significantly constrained levels of 2008 and early 2009.  In addition, the cost of renewing or establishing new credit facilities has improved when compared with the 2008 and early 2009 periods.

Commodity Price Risk

The contraction in wholesale energy market liquidity and accompanying decline in wholesale energy prices due to conditions in the financial and commodity markets significantly impacted PPL Energy Supply's earnings during the second half of 2008 and the first half of 2009.  See "Statement of Income Analysis - Domestic Gross Energy Margins - Domestic Gross Energy Margins By Region" for further discussion.

Credit Risk

Credit risk is the risk that PPL Energy Supply would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL Energy Supply maintains credit policies and procedures to limit counterparty credit risk.  Conditions in the financial and commodity markets have generally increased PPL Energy Supply's exposure to credit risk.  See Notes 15, 17 and 18 to the Financial Statements, and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" for more information on credit risk.

Liquidity Risk

PPL Energy Supply expects to continue to have access to adequate sources of liquidity through operating cash flows, cash and cash equivalents, credit facilities and, from time to time, the issuance of capital market securities.  PPL Energy Supply's ability to access capital markets may be impacted by conditions in the overall financial and capital markets, as well as conditions specific to the utility sector.  See "Financial Condition - Liquidity and Capital Resources" for an expanded discussion of PPL Energy Supply's liquidity position and a discussion of its forecasted sources of cash.

Valuations in Inactive Markets

Conditions in the financial markets have generally made it difficult to determine the fair value of certain assets and liabilities in inactive markets.  Management has reviewed the activity in the energy and financial markets in which PPL Energy Supply transacts, concluding that all of these markets were active at December 31, 2009, with the exception of the market for auction rate securities.  See Notes 17 and 21 to the Financial Statements and "Financial Condition - Liquidity and Capital Resources - Auction Rate Securities" for a discussion of these investments.

Securities Price Risk

Declines in the market price of debt and equity securities result in unrealized losses that reduce the asset values of PPL Energy Supply's investments in its defined benefit plans and NDT funds.  Both the defined benefit plans and the NDT funds earned positive returns in the second half of 2009, thereby recovering a portion of the negative returns incurred in 2008 and the first quarter of 2009.  PPL Energy Supply actively monitors the performance of the investments held in its defined benefit plans and NDT funds and periodically reviews the funds' investment allocations.  See "Financial Condition - Risk Management - Energy Marketing & Trading and Other - NDT Funds - Securities Price Risk" for additional information on securities price risk.

PPL Energy Supply's subsidiaries sponsor various defined benefit plans and participate in and are allocated costs from defined benefit plans sponsored by PPL.  Determination of the funded status of defined benefit plans, contribution requirements and net periodic defined benefit costs for future years are subject to changes in various assumptions, in addition to the actual performance of the assets in the plans.  See "Application of Critical Accounting Policies - Defined Benefits" for a discussion of the assumptions and sensitivities regarding those assumptions.

The Economic Stimulus Package

The Economic Stimulus Package was intended to stimulate the U.S. economy through federal tax relief, expansion of unemployment benefits and other social stimulus provisions, domestic spending for education, health care and infrastructure, including the energy sector.  A portion of the benefits included in the Economic Stimulus Package are offered in the form of loan fee reductions, expanded loan guarantees and secondary market incentives, including delayed recognition for tax purposes of income related to the cancellation of certain types of debt.  See "Financial Condition - Liquidity and Capital Resources" for a discussion of the applicability to the purchase of notes by PPL Energy Supply.

Funds from the Economic Stimulus Package have been allocated to various federal agencies, such as the DOE, and provided to state agencies through block grants.  The DOE has made awards of the funds for smart grid, efficiency-related and renewable energy programs.  The Commonwealth of Pennsylvania has also made awards for funding certain energy projects, including solar projects.  As discussed in Note 8 to the Financial Statements, PPL Energy Supply has reconsidered and decided to pursue its Holtwood expansion project in view of the tax incentives and potential loan guarantees for renewable energy projects contained in the Economic Stimulus Package.  PPL Energy Supply has applied for DOE loan guarantees for the Holtwood expansion project and, through its subsidiary PPL Montana, for the Rainbow redevelopment project.
 
Results of Operations

PPL Energy Supply presents tables analyzing changes in amounts between periods within "Segment Results" and "Statement of Income Analysis" on a constant U.K. foreign currency exchange rate basis, where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained.  Results computed on a constant U.K. foreign currency exchange rate basis are calculated by translating current year results at the prior year weighted-average foreign currency exchange rate.

Earnings

Net income attributable to PPL Energy Supply was:

   
2009
    
2008
    
2007
  
                   
   
$
246
    
$
768
    
$
1,205
  

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

The year-to-year changes in significant earnings components, including domestic gross energy margins by region and significant income statement line items, are explained in the "Statement of Income Analysis."

PPL Energy Supply's earnings beyond 2009 are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1A. Risk Factors," the rest of this Item 7 and Note 14 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact PPL Energy Supply's future earnings.

Segment Results

Net income attributable to PPL Energy Supply by segment was:

   
2009
  
2008
  
2007
                         
Supply
  
$
3
    
$
478
    
$
595
  
International Delivery
    
243
      
290
      
610
  
Total
  
$
246
    
$
768
    
$
1,205
  

Supply Segment

The Supply segment primarily consists of the domestic energy marketing and trading activities, as well as the generation and development operations of PPL Energy Supply.  In December 2009, PPL Maine sold its 8.33% ownership interest in Wyman Unit 4.  In November 2009, PPL Maine completed the sale of the majority of its hydroelectric generation business.  In May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and expects the sale to close on or about February 26, 2010.  In August 2007, PPL Energy Supply completed the sale of its domestic telecommunication operations.  See Notes 8 and 9 to the Financial Statements for additional information.

The Supply segment results reflect the classification of the Long Island generation business, the majority of the Maine hydroelectric generation business, and the 8.33% ownership interest in Wyman Unit 4, as Discontinued Operations.  See Note 9 to the Financial Statements for additional information.

Supply segment net income attributable to PPL Energy Supply was:

   
2009
  
2008
  
2007
                         
Energy revenues (a)
  
$
5,037
    
$
5,200
    
$
3,389
  
Energy-related businesses
    
379
      
478
      
723
  
Total operating revenues
    
5,416
      
5,678
      
4,112
  
Fuel and energy purchases (a)
    
3,679
      
3,215
      
1,575
  
Other operation and maintenance
    
927
      
884
      
753
  
Depreciation
    
210
      
180
      
152
  
Taxes, other than income
    
29
      
20
      
31
  
Energy-related businesses
    
372
      
464
      
740
  
Total operating expenses
    
5,217
      
4,763
      
3,251
  
Other Income - net (b)
    
48
      
45
      
83
  
Other-Than-Temporary Impairments
    
18
      
36
      
3
  
Interest Expense (c)
    
185
      
169
      
106
  
Income Taxes
    
27
      
290
      
249
  
Income (Loss) from Discontinued Operations
    
(13
)
    
15
      
12
  
Net Income
    
4
      
480
      
598
  
Net Income Attributable to Noncontrolling Interests
    
1
      
2
      
3
  
Net Income Attributable to PPL Energy Supply
  
$
3
    
$
478
    
$
595
  

(a)
  
Includes impact from energy-related economic activity.  See "Commodity Price Risk (Non-trading) - Economic Activity" in Note 18 to the Financial Statements for additional information.
(b)
  
Includes interest income from affiliates.
(c)
  
Includes interest expense with affiliate.

The after-tax changes in net income attributable to PPL Energy Supply between these periods were due to the following factors.


   
2009 vs. 2008
  
2008 vs. 2007
             
Eastern U.S. non-trading margins
  
$
(3
)
  
$
(62
)
Western U.S. non-trading margins
    
20
      
5
  
Net energy trading margins
    
81
      
(95
)
Energy-related businesses
    
(4
)
    
(4
)
Other operation and maintenance
    
(32
)
    
12
  
Depreciation
    
(18
)
    
(16
)
Taxes, other than income
    
(5
)
    
6
  
Other income - net (a)
    
(4
)
    
(21
)
Interest expense (b)
    
(9
)
    
(38
)
Income taxes
    
(24
)
    
(61
)
Discontinued operations (Note 9)
    
(9
)
    
3
  
Other
    
1
      
2
  
Special items
    
(469
)
    
152
  
   
$
(475
)
  
$
(117
)

(a)
  
Includes interest income from affiliates.
(b)
  
Includes interest expense with affiliate.

·
See "Domestic Gross Energy Margins" for an explanation of non-trading margins and net energy trading margins.
   
·
Other operation and maintenance expenses increased in 2009 compared with 2008, primarily due to increased payroll-related costs, higher contractor-related costs and other costs at PPL Energy Supply's generation plants.
   
·
Depreciation expense increased in 2009 compared with 2008, primarily due to the scrubbers at Brunner Island and Montour and the portions of the Susquehanna uprate projects that were placed in service in 2008 and 2009.
 
Depreciation expense increased in 2008 compared with 2007, primarily due to the Montour scrubbers and the Susquehanna uprate project that were placed in service in 2008.
   
·
Other income - net decreased in 2008 compared with 2007, primarily due to a decrease in earnings on nuclear plant decommissioning trust investments and lower gains on sales of real estate.
   
·
Interest expense increased in 2008 compared with 2007, primarily due to increased interest on long-term debt resulting from new issuances.
   
·
Income taxes increased in 2009 compared with 2008, in part due to lower domestic manufacturing deductions in 2009.
 
Income taxes increased in 2008 compared with 2007, primarily due to the loss of synfuel tax credits as the projects ceased operation at the end of 2007.
   
·
Special items decreased in 2009 compared with 2008, primarily due to a $476 million after-tax change in energy-related economic activity.  The change is primarily the result of certain power and gas cash flow hedges failing hedge effectiveness testing in the third and fourth quarters of 2008, as well as the first quarter of 2009.  Hedge accounting is not permitted for the quarter in which this occurs and, accordingly, the entire change in fair value for the periods that failed was recorded to the income statement.  However, these transactions were not dedesignated as hedges, as prospective regression analysis demonstrated that these hedges are expected to be highly effective over their term.  For 2008, an after-tax gain of $298 million was recognized in earnings as a result of these hedge failures.  During the second, third and fourth quarters of 2009, fewer power and gas cash flow hedges failed hedge effectiveness testing; therefore, a portion of the previously recognized unrealized gains recorded in the second half of 2008 and the first quarter of 2009 associated with these hedges were reversed.  For 2009, after-tax losses of $215 million were recognized in earnings.

The following after-tax amounts, which management considers special items, also impacted the Supply segment's earnings.

   
2009
  
2008
  
2007
                         
Energy-related economic activity (Note 18)
  
$
(225
)
  
$
251
    
$
32
  
Sales of assets
                        
Long Island generation business (a)
    
(33
)
                
Interest in Wyman Unit 4 (Note 9)
    
(4
)
                
Majority of Maine hydroelectric generation business (Note 9)
    
22
                  
Domestic telecommunication operations (Note 8)
                    
(23
)
Impairments
                        
Impacts from emission allowances (b)
    
(19
)
    
(25
)
        
Other asset impairments (c)
    
(4
)
    
(15
)
        
Adjustments - NDT investments (d)
            
(17
)
        
Transmission rights (e)
                    
(13
)
Workforce reduction (Note 12)
    
(6
)
    
(1
)
    
(4
)
Other
                        
Change in tax accounting method related to repairs (Note 5)
    
(21
)
                
Montana hydroelectric litigation (Note 14)
    
(3
)
                
Synthetic fuel tax adjustment (Note 14)
            
(13
)
        
Montana basin seepage litigation (Note 14)
            
(5
)
        
Off-site remediation of ash basin leak (Note 14)
            
1
          
Settlement of Wallingford cost-based rates (f)
                    
33
  
PJM billing dispute
                    
(1
)
Total
  
$
(293
)
  
$
176
    
$
24
  

(a)
  
Consists primarily of the initial impairment charge recorded in June 2009 when this business was classified as held for sale.  See Note 9 to the Financial Statements for additional information on the anticipated sale.
(b)
  
2009 primarily consists of a pre-tax charge of $37 million related to sulfur dioxide emission allowances.  See Note 17 to the Financial Statements for additional information.
 
2008 consists of charges related to annual nitrogen oxide allowances and put options.  See Note 14 to the Financial Statements for additional information.
(c)
  
2008 primarily consists of a pre-tax charge of $22 million related to the cancellation of the Holtwood hydroelectric expansion project.  See Note 8 to the Financial Statements for additional information.
(d)
  
Represents other-than-temporary impairment charges on securities, including reversals of previous impairments when previously impaired securities were sold.
(e)
  
See "Other Operation and Maintenance" for more information on the $23 million pre-tax impairment recorded in 2007.
(f)
  
In 2003, PPL Wallingford and PPL EnergyPlus sought from the FERC cost-based payments based upon the RMR status of four units at the Wallingford, Connecticut generating facility.  In 2007, as a result of a settlement agreement, PPL Energy Supply recognized $55 million of revenue and $4 million of interest income.

2010 Outlook

Excluding special items, PPL Energy Supply projects higher earnings from its Supply segment in 2010 compared with 2009, due to growth in energy margins.  The forecast for growth in energy margins is based on hedged power and fuel prices as well as established capacity prices in PJM.  These positive factors are expected to be partially offset by higher depreciation, financing costs and operation and maintenance expenses.

International Delivery Segment

The International Delivery segment consists primarily of the electricity distribution operations in the U.K.  In 2007, PPL Energy Supply completed the sale of its Latin American businesses.  In 2008, the International Delivery segment recognized income tax benefits and miscellaneous expenses in Discontinued Operations in connection with the dissolution of certain Latin American holding companies.  In 2009, the International Delivery segment recognized $24 million of income tax expense in Discontinued Operations related to a correction of the calculation of tax bases of the Latin American businesses sold in 2007.  See Note 9 to the Financial Statements for additional information.

The International Delivery segment results reflect the classification of its Latin American businesses as Discontinued Operations.

International Delivery segment net income attributable to PPL Energy Supply was:

   
2009
  
2008
  
2007
                         
Utility revenues
  
$
684
    
$
824
    
$
863
  
Energy-related businesses
    
32
      
33
      
37
  
Total operating revenues
    
716
      
857
      
900
  
Other operation and maintenance
    
140
      
186
      
252
  
Depreciation
    
115
      
134
      
147
  
Taxes, other than income
    
57
      
66
      
67
  
Energy-related businesses
    
16
      
14
      
17
  
Total operating expenses
    
328
      
400
      
483
  
Other Income - net
    
(11
)
    
17
      
26
  
Interest Expense
    
87
      
144
      
183
  
Income Taxes
    
20
      
45
      
(43
)
Income (Loss) from Discontinued Operations
    
(27
)
    
5
      
313
  
Net Income
    
243
      
290
      
616
  
Net Income Attributable to Noncontrolling Interests
                    
6
  
Net Income Attributable to PPL Energy Supply
  
$
243
    
$
290
    
$
610
  

The after-tax changes in net income attributable to PPL Energy Supply between these periods were due to the following factors.

   
2009 vs. 2008
  
2008 vs. 2007
U.K.
                
Delivery margins
  
$
17
    
$
12
  
Other operating expenses
    
7
      
22
  
Other income – net
    
(4
)
    
(7
)
Depreciation
    
(4
)
    
4
  
Interest expense
    
28
      
5
  
Income taxes
    
24
      
24
  
Foreign currency exchange rates
    
(69
)
    
(14
)
Gain on transfer of equity investment
            
(5
)
Other
    
(4
)
    
(3
)
Discontinued Operations (Note 9)
    
(5
)
    
(49
)
U.S. interest expense
            
17
  
U.S. income taxes
    
1
      
(32
)
Gain (loss) on economic hedges (Note 15)
    
(12
)
    
10
  
Other
    
2
      
6
  
Special items
    
(28
)
    
(310
)
   
$
(47
)
  
$
(320
)

·
Lower U.K. other operating expenses in 2008 compared with 2007, were primarily due to lower compensation and lower pension costs.
   
·
Lower U.K. interest expense in 2009 compared with 2008, was primarily due to lower inflation rates on U.K. Index-linked Senior Unsecured Notes and lower debt balances.
   
·
Lower U.K. income taxes in 2009 compared with 2008, were primarily due to HMRC's determination related to the valuation of a business activity sold in 1999 and to the deductibility of foreign currency exchange losses, partially offset by the items in 2008 mentioned below.
 
Lower U.K. income taxes in 2008 compared with 2007, were primarily due to HMRC's determination related to deductibility of imputed interest on a loan from Hyder and a change in tax law that included the phase-out of tax depreciation on industrial buildings over a four-year period.
   
·
Changes in foreign currency exchange rates negatively impacted U.K. earnings for both periods.  The weighted-average exchange rates for the British pound sterling were approximately $1.53 in 2009, $1.91 in 2008 and $2.00 in 2007.
   
·
Higher U.S. income taxes in 2008 compared with 2007, was primarily due to the change in a U.S. income tax reserve resulting from the lapse in 2007 of an applicable statute of limitations.

The following after-tax amounts, which management considers special items, also impacted the International Delivery segment's earnings.

   
2009
  
2008
  
2007
                         
Foreign currency-related economic hedges - unrealized impacts (Note 18)
  
$
1
                  
Sales of assets
                        
Latin American businesses (Note 9)
    
(27
)
          
$
259
  
Impairments
    
(1
)
                
Workforce reduction (Note 12)
    
(2
)
  
$
(1
)
    
(4
)
Other
                        
Change in U.K. tax rate (Note 5)
                    
54
  
Total
  
$
(29
)
  
$
(1
)
  
$
309
  

2010 Outlook

Excluding special items, PPL Energy Supply projects lower earnings from its International Delivery segment in 2010 compared with 2009, as a result of higher income taxes, higher operation and maintenance expenses and higher financing costs. These negative factors are expected to be partially offset by higher electricity delivery margins and a more favorable currency exchange rate.

In December 2009, Ofgem completed its rate review for the five-year period from April 1, 2010 through March 31, 2015.  Ofgem allowed WPD an average increase in total revenues, before inflationary adjustments, of 6.9% in each of the five years.  The revenue increase includes reimbursement to electricity distributors for higher operating and capital costs to be incurred.  Also, Ofgem set the weighted average cost of capital at 4.7%, which includes pre-tax debt and post-tax equity costs and excludes adjustments for inflation, for all distribution companies.  This is a 0.8% decrease from the previous regulatory period.  Additionally, Ofgem has established strong incentive mechanisms to provide companies significant opportunities to enhance overall returns by improving network efficiency, reliability or customer service.

Statement of Income Analysis --

Domestic Gross Energy Margins

Non-GAAP Financial Measure

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

   
2009
  
2008
  
2007
                         
Operating Income (a)
  
$
587
    
$
1,372
    
$
1,278
  
Adjustments:
                        
Utility (a)
    
(684
)
    
(824
)
    
(863
)
Energy-related businesses, net (b)
    
(23
)
    
(33
)
    
(3
)
Other operation and maintenance (a)
    
1,067
      
1,070
      
1,005
  
Depreciation (a)
    
325
      
314
      
299
  
Taxes, other than income (a)
    
86
      
86
      
98
  
Revenue adjustments (c)
    
293
      
(1,032
)
    
223
  
Expense adjustments (c)
    
80
      
611
      
(213
)
Domestic gross energy margins
  
$
1,731
    
$
1,564
    
$
1,824
  

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

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

   
2009
  
2008
  
Change
Revenue
                        
Wholesale energy marketing (a)
  
$
3,062
    
$
3,344
    
$
(282
)
Wholesale energy marketing to affiliate (a)
    
1,806
      
1,826
      
(20
)
Unregulated retail electric and gas (a)
    
152
      
151
      
1
  
Net energy trading margins (a)
    
17
      
(121
)
    
138
  
Revenue adjustments (b)
                        
Miscellaneous wholesale energy marketing to affiliate
    
(12
)
    
(14
)
    
2
  
Impact from energy-related economic activity (c)
    
274
      
(1,061
)
    
1,335
  
Gains from sale of emission allowances (d)
    
2
      
6
      
(4
)
Revenues from Supply segment discontinued operations (e)
    
29
      
37
      
(8
)
Total revenue adjustments
    
293
      
(1,032
)
    
1,325
  
     
5,330
      
4,168
      
1,162
  
Expense
                        
Fuel (a)
    
931
      
1,084
      
(153
)
Energy purchases (a)
    
2,678
      
2,023
      
655
  
Energy purchases from affiliate (a)
    
70
      
108
      
(38
)
Expense adjustments (b)
                        
Impact from energy-related economic activity (c)
    
(109
)
    
(632
)
    
523
  
Other
    
29
      
21
      
8
  
Total expense adjustments
    
(80
)
    
(611
)
    
531
  
     
3,599
      
2,604
      
995
  
Domestic gross energy margins
  
$
1,731
    
$
1,564
    
$
167
  

   
2008
  
2007
  
Change
Revenue
                        
Wholesale energy marketing (a)
  
$
3,344
    
$
1,436
    
$
1,908
  
Wholesale energy marketing to affiliate (a)
    
1,826
      
1,810
      
16
  
Unregulated retail electric and gas (a)
    
151
      
102
      
49
  
Net energy trading margins (a)
    
(121
)
    
41
      
(162
)
Revenue adjustments (b)
                        
Miscellaneous wholesale energy marketing to affiliate
    
(14
)
    
(15
)
    
1
  
Impact from energy-related economic activity (c)
    
(1,061
)
    
145
      
(1,206
)
Gains from sale of emission allowances (d)
    
6
      
109
      
(103
)
RMR revenues
            
(52
)
    
52
  
Revenues from Supply segment discontinued operations (e)
    
37
      
36
      
1
  
Total revenue adjustments
    
(1,032
)
    
223
      
(1,255
)
     
4,168
      
3,612
      
556
  
Expense
                        
Fuel (a)
    
1,084
      
890
      
194
  
Energy purchases (a)
    
2,023
      
529
      
1,494
  
Energy purchases from affiliate (a)
    
108
      
156
      
(48
)
Expense adjustments (b)
                        
Impact from energy-related economic activity (c)
    
(632
)
    
200
      
(832
)
Other
    
21
      
13
      
8
  
Total expense adjustments
    
(611
)
    
213
      
(824
)
     
2,604
      
1,788
      
816
  
Domestic gross energy margins
  
$
1,564
    
$
1,824
    
$
(260
)

(a)
  
As reported on the Statements of Income.
(b)
  
To include/exclude the impact of any revenues and expenses not associated with domestic gross energy margins, consistent with the way management reviews domestic gross energy margins internally.
(c)
  
See Note 18 to the Financial Statements for additional information regarding economic activity.
(d)
  
Included in "Other operation and maintenance" on the Statements of Income.
(e)
  
Represents revenues associated with the Long Island generation business and the majority of the Maine hydroelectric generation business.  See Note 9 to the Financial Statements for additional information.

Domestic Gross Energy Margins By Region

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

   
2009
  
2008
  
Change
Non-trading
                        
Eastern U.S.
  
$
1,391
    
$
1,396
    
$
(5
)
Western U.S.
    
323
      
289
      
34
  
Net energy trading
    
17
      
(121
)
    
138
  
Domestic gross energy margins
  
$
1,731
    
$
1,564
    
$
167
  

   
2008
  
2007
  
Change
Non-trading
                        
Eastern U.S.
  
$
1,396
    
$
1,502
    
$
(106
)
Western U.S.
    
289
      
281
      
8
  
Net energy trading
    
(121
)
    
41
      
(162
)
Domestic gross energy margins
  
$
1,564
    
$
1,824
    
$
(260
)

Eastern U.S.

Eastern U.S. non-trading margins were $5 million lower in 2009 compared with 2008.  This decrease was primarily due to lower margins on full-requirement sales contracts resulting from mild weather, decreased demand, and customer migration.  Also contributing to the decrease were higher average baseload generation fuel costs of 7%, primarily due to higher coal prices.  Partially offsetting these lower margins were net gains resulting from the settlement of economic positions associated with rebalancing PPL Energy Supply's portfolios to better align them with current strategies, higher capacity revenue, higher baseload generation output due to unplanned major outages in 2008, and a 2.2% increase in the PLR sales prices in accordance with the PUC Final Order.

Eastern U.S. non-trading margins were $106 million lower in 2008 compared with 2007.  This decrease was primarily due to higher fuel costs, up 16%, primarily due to higher coal prices.  Also contributing to the decrease was lower baseload generation, down 4%, primarily due to the unplanned outages at the eastern coal-fired units and retirement of the Martins Creek coal-fired units in September 2007.  Partially offsetting these lower margins were higher margins from the hedged sale of generation in the wholesale market and a 1.4% increase in PLR sales prices in accordance with the PUC Final Order.

Western U.S.

Western U.S. non-trading margins were $34 million higher in 2009 compared with 2008.  This increase was primarily due to higher wholesale volumes of 6% and increased generation from the hydroelectric units of 5%.

Western U.S. non-trading margins were $8 million higher in 2008 compared with 2007.  This increase was primarily due to increased generation from the hydroelectric units of 2%.

Net Energy Trading

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

Net energy trading margins increased by $138 million in 2009 compared with 2008.  This increase consisted of $215 million of higher unrealized margins partially offset by $77 million of lower realized margins.  These changes were primarily due to increased margins in the power, gas and oil trading positions resulting from unrealized trading losses in 2008 due to a dramatic decline in energy prices and a severe contraction of liquidity in the wholesale power markets.

Net energy trading margins decreased by $162 million in 2008 compared with 2007.  This decrease consists of $135 million of lower unrealized margins and $27 million of lower realized margins, both driven by significant decreases in power and gas prices in the second half of 2008.

Utility Revenues

The changes in utility revenues were attributable to:

   
2009 vs. 2008
  
2008 vs. 2007
                 
U.K. foreign currency exchange rates
  
$
(154
)
  
$
(42
)
U.K. electric delivery revenue
    
14
      
3
  
   
$
(140
)
  
$
(39
)

Higher U.K. electric delivery revenues for 2009 compared with 2008, excluding foreign currency exchange rate impacts, were primarily due to an increase in prices effective April 1, a revised estimate of network electricity losses, and favorable changes in customer mix.  These increases were partially offset by lower volumes due to unfavorable economic conditions, including industrial customers scaling back on production, and a decrease in engineering and metering services performed for third parties.

Energy-related Businesses

Energy-related businesses contributed $10 million less to operating income in 2009 compared with 2008.  The decrease was primarily attributable to:

·
contributions from domestic energy services-related businesses decreasing by $6 million, primarily due to a decline in construction activity caused by the slowdown in the economy; and
·
contributions from U.K. energy-related businesses decreasing by $4 million, primarily due to changes in foreign currency exchange rates.

Energy-related businesses contributed $30 million more to operating income in 2008 compared with 2007.  The increase was primarily attributable to:

·
a $39 million impairment in 2007 of domestic telecommunication operations that were sold in 2007; and
·
an $11 million increase in contributions from domestic energy services-related businesses mainly due to increased construction activity; partially offset by
·
$11 million of lower pre-tax contributions from synfuel projects.  This reflects a $77 million net gain recorded in 2007 on options purchased to hedge the risk associated with the phase-out of synthetic fuel tax credits.  This decrease was partially offset by $66 million less in operating losses from synfuel projects as the projects ceased operation at the end of 2007; and
·
$5 million less in contributions from the domestic telecommunication operations sold in 2007.

See Note 8 to the Financial Statements for additional information on the sale of domestic telecommunication assets.  See Note 14 to the Financial Statements for additional information on the shutdown of the synfuel facilities in 2007.

Other Operation and Maintenance

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

   
2009 vs. 2008
  
2008 vs. 2007
             
U.K. foreign currency exchange rates
  
$
(24
)
  
$
(8
)
Impairment of cancelled generation expansion project in 2008 (Note 8)
    
(22
)
    
22
  
Defined benefit costs - U.K. (Note 12)
    
(16
)
    
(28
)
WPD recoverable engineering services
    
(9
)
    
(17
)
Impairment and other charges - emission allowances (Notes 14 and 17)
    
(9
)
    
42
  
Montana basin seepage litigation (Note 14)
    
(8
)
    
8
  
Uncollectible accounts
    
(8
)
    
4
  
Trademark royalty fees from a PPL subsidiary (Note 15)
    
(7
)
    
9
  
WPD meter operator expenses
    
(7
)
    
(6
)
Payroll-related costs
    
24
      
(6
)
Allocation of corporate service costs
    
16
      
(21
)
WPD distribution costs
    
15
      
7
  
Domestic and international workforce reductions (Note 12)
    
13
      
(10
)
Contractor-related expenses
    
11
      
(7
)
Defined benefit costs - U.S. (Note 12)
    
11
      
(3
)
Montana hydroelectric litigation (Note 14)
    
8
      
1
  
Other costs at fossil/hydroelectric stations
    
7
      
1
  
Other nuclear related expenses
    
7
      
(10
)
Lower gains on sales of emission allowances
    
4
      
103
  
Impairment of transmission rights (a)
            
(23
)
Other - Domestic
    
(4
)
    
10
  
Other - U.K.
    
(5
)
    
(3
)
   
$
(3
)
  
$
65
  

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

Depreciation

The increases in depreciation expense were due to:

   
2009 vs. 2008
  
2008 vs. 2007
                 
Additions to PP&E (a)
  
$
40
    
$
37
  
U.K. foreign currency exchange rates
    
(25
)
    
(7
)
Extension of useful lives of certain WPD network assets in mid-2007 (Note 1)
            
(13
)
Other
    
(4
)
    
(2
)
   
$
11
    
$
15
  

(a)
  
Primarily attributable to the completion of the Susquehanna generation uprate and the Montour scrubber projects in 2008 and the Brunner Island scrubber projects in 2009.

Taxes, Other Than Income

The changes in taxes, other than income were due to:

   
2009 vs. 2008
  
2008 vs. 2007
                 
Domestic property tax expense (a)
  
$
10
    
$
(7
)
U.K. foreign currency exchange rates
    
(12
)
    
(3
)
Other
    
2
      
(2
)
   
$
      
$
(12
)

(a)
  
The change in both periods was primarily due to a $7 million property tax credit recorded by PPL Montana in 2008.

Other Income - net

See Note 16 to the Financial Statements for details of other income.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased by $18 million in 2009 compared with 2008, primarily due to stronger investment returns caused by improved market conditions within the financial markets.

Other-than-temporary impairments increased by $33 million in 2008 compared with 2007, primarily due to negative investment returns caused by the downturn in the financial markets in 2008.

Interest Income from Affiliates

Interest income from affiliates decreased by $12 million in 2009 compared with 2008, and decreased by $15 million in 2008 compared with 2007.  The decrease in 2009 was primarily due to the decline in the average balance outstanding and the floating interest rate on the collateral deposit related to the PLR contract.  The decrease in 2008 was the result of reduced average balances outstanding on notes receivable from affiliates and the floating interest rate on the collateral deposit related to the PLR contract.

Interest Expense

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

   
2009 vs. 2008
  
2008 vs. 2007
             
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes
  
$
(29
)
  
$
6
  
U.K. foreign currency exchange rates
    
(17
)
    
(8
)
Long-term debt interest expense
    
(13
)
    
21
  
Hedging activities
    
(3
)
    
(4
)
Capitalized interest
    
12
      
(1
)
Short-term debt interest expense
    
6
      
8
  
Amortization of debt issuance costs
    
6
      
5
  
Other
    
(3
)
    
(3
)
   
$
(41
)
  
$
24
  

Income Taxes

The changes in income taxes were due to:

   
2009 vs. 2008
  
2008 vs. 2007
             
Lower pre-tax book income
  
$
(300
)
  
$
(6
)
Tax on foreign earnings (a)
    
(43
)
    
(3
)
Synthetic fuel and other tax credits (b)
    
(17
)
    
72
  
Tax reserve adjustments (a) (c) (d)
    
(2
)
    
44
  
Tax return adjustments (d)
    
44
      
(16
)
Domestic manufacturing deduction
    
13
      
(2
)
U.K. Finance Act adjustments (e)
    
8
      
46
  
Other
    
9
      
(6
)
   
$
(288
)
  
$
129
  

(a)
  
During 2009, WPD recorded a $46 million foreign tax benefit (and a full tax reserve reflected in "Tax reserve adjustments") related to losses generated by restructuring.
(b)
  
The Section 29/45K synthetic fuel tax credits expired at the end of 2007.  During 2008, PPL recorded a $13 million adjustment to its estimated 2007 fuel tax credits as a result of the IRS publishing the final 2007 inflation-adjusted credit in April 2008.
(c)
  
During 2007, PPL Energy Supply recorded a $35 million benefit as a result of the expiration of applicable statutes of limitations.  The expiration of applicable statues of limitations resulted in an $8 million benefit in 2008.  Additionally, PPL Energy Supply recorded tax benefits of $27 million in 2009 for the settlement of a tax dispute and foreign currency exchange losses.
(d)
  
During 2009, PPL Energy Supply received consent from the IRS to change its method of accounting for certain expenditures for tax purposes.  PPL Energy Supply deducted the resulting IRC Sec. 481 adjustment on its 2008 tax return and recorded a $21 million adjustment to federal and state income tax expense, which results from the reduction of federal income tax benefits, related to the domestic manufacturing deduction and a reduction of certain state tax benefits related to state net operating losses.  During 2008, WPD recorded tax benefits of approximately $17 million from tax return adjustments that were fully reserved.
(e)
  
The U.K.'s Finance Act of 2008, enacted in July 2008, included a phase-out of tax depreciation on certain buildings.  As a result, WPD recorded an $8 million deferred tax benefit during 2008 related to the reduction in its deferred tax liabilities.
 
The U.K.'s Finance Act of 2007, enacted in July 2007, included a reduction in the U.K.'s statutory income tax rate.  Effective April 1, 2008, the statutory income tax rate was reduced from 30% to 28%.  As a result, WPD recorded a $54 million deferred tax benefit during 2007 related to the reduction in its deferred tax liabilities.

See Note 5 to the Financial Statements for additional information on income taxes.

Discontinued Operations

See Note 9 to the Financial Statements for information related to:

·
the anticipated sale of the Long Island generation business;
·
the sale of the majority of the Maine hydroelectric generation business in 2009;
·
the sale of the 8.33% interest in Wyman Unit 4 in 2009; and
·
the sale of the Latin American businesses in 2007 and the substantial dissolution of the remaining holding companies in 2008.

Financial Condition

Liquidity and Capital Resources

PPL Energy Supply expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents and its credit facilities.  Additionally, subject to market conditions, PPL Energy Supply currently plans to access debt capital markets in 2010.

PPL Energy Supply's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including, but not limited to:

·
changes in market prices for electricity;
·
changes in commodity prices that may increase the cost of producing power or decrease the amount PPL Energy Supply receives from selling power;
·
operational and credit risks associated with selling and marketing products in the wholesale power markets;
·
potential ineffectiveness of the trading, marketing and risk management policy and programs used to mitigate PPL Energy Supply's risk exposure to adverse electricity and fuel prices, interest rates, foreign currency exchange rates and counterparty credit;
·
unusual or extreme weather that may damage PPL Energy Supply's international distribution facilities or affect energy sales to customers;
·
reliance on transmission and distribution facilities that PPL Energy Supply does not own or control to deliver its electricity and natural gas;
·
unavailability of generating units (due to unscheduled or longer-than-anticipated generation outages, weather and natural disasters) and the resulting loss of revenues and additional costs of replacement electricity;
·
the ability to recover and the timeliness and adequacy of recovery of costs associated with international electricity delivery businesses;
·
costs of compliance with existing and new environmental laws and with new security and safety requirements for nuclear facilities;
·
any adverse outcome of legal proceedings and investigations with respect to PPL Energy Supply's current and past business activities;
·
deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly; and
·
a downgrade in PPL Energy Supply's or its rated subsidiaries' credit ratings that could adversely affect their ability to access capital and increase the cost of credit facilities and any new debt.

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affecting PPL Energy Supply's cash flows.

At December 31, PPL Energy Supply had the following:

   
2009
  
2008
  
2007
                         
Cash and cash equivalents
  
$
245
     $
464
    
$
355
  
Short-term investments (a) (b)
            
150
      
102
  
   
$
245
     $
614
    
$
457
  
Short-term debt
  
$
639
     $
584
    
$
51
  

(a)
  
2008 amount represents tax-exempt bonds issued by the PEDFA in December 2008 on behalf of PPL Energy Supply and purchased by a subsidiary of PPL Energy Supply upon issuance.  Such bonds were refunded in April 2009.  See Note 7 to the Financial Statements for further discussion.
(b)
  
Includes $10 million of auction rate securities at December 31, 2007.  See below for a discussion of auction rate securities.

The changes in PPL Energy Supply's cash and cash equivalents position resulted from:

   
2009
  
2008
  
2007
                   
Net Cash Provided by Operating Activities
  
$
1,413
     $ 
1,039
    
$
1,094
  
Net Cash Used in Investing Activities
    
(551
)
    
(1,696
)
    
(305
)
Net Cash Provided by (Used in) Financing Activities
    
(1,081
)
    
779
      
(963
)
Effect of Exchange Rates on Cash and Cash Equivalents
            
(13
)
    
5
  
Net Increase (Decrease) in Cash and Cash Equivalents
  
$
(219
)
   $
109
    
$
(169
)

Auction Rate Securities

PPL Energy Supply held auction rate securities with an aggregate par value of $20 million and $24 million at December 31, 2009 and 2008.  Historically, an active market existed for such investments, and the auctions provided an opportunity for investors either to hold an investment at a periodically reset interest rate or to sell the investment at its par value for immediate liquidity.  In early 2008, investor concerns about credit and liquidity in the financial markets, generally, as well as investor concerns over specific insurers that guarantee the credit of certain of the underlying securities, created uncertainty in the auction rate securities market and these securities generally failed to be remarketed through their established auction process.  The auctions continue to fail and the resulting illiquidity continues to impact PPL Energy Supply's investment in auction rate securities.

At December 31, 2008, PPL Energy Supply estimated that the fair value of its auction rate securities was $19 million, which is reflected in "Other investments" on the Balance Sheet and represented a temporary decline of $5 million from par value.

In 2009, PPL Energy Supply liquidated $4 million of auction rate securities at par.  At December 31, 2009, PPL Energy Supply estimated that the fair value of its auction rate securities was equal to par value, which was $20 million and is reflected in "Other investments" on the Balance Sheet.  PPL Energy Supply reversed the previously recorded temporary impairment.

Because PPL Energy Supply intends and has the ability to hold these auction rate securities until they can be liquidated at par value, PPL Energy Supply believes that it does not have significant exposure to realize losses on these securities.  Based upon the evaluation of available information, PPL Energy Supply believes these investments continue to be of high credit quality.  Additionally, PPL Energy Supply does not anticipate having to sell these securities to fund operations.  See Notes 17 and 21 to the Financial Statements for further discussion of auction rate securities.

Operating Activities

Net cash provided by operating activities increased by 36%, or $374 million, in 2009 compared with 2008, primarily as a result of the return of $300 million in cash collateral from PPL Electric related to the long-term PLR energy supply agreements (which expired at the end of 2009); cash collateral received from counterparties; and the benefit of lower income tax payments due to the change in method of accounting for certain expenditures for tax purposes.  These increases were partially offset by a decrease in accounts payable and the unfavorable impact of foreign currency exchange rates in 2009 compared with 2008.

Net cash provided by operating activities decreased by 5%, or $55 million, in 2008 compared with 2007, primarily as a result of increased expenditures for fuel, primarily due to higher coal prices, lower realized net energy trading margins, driven by significant decreases in power and gas prices, higher interest paid, primarily due to higher debt levels in 2008, and cash flows provided by Latin America's operations in 2007 but not 2008, due to the sale of the Latin American businesses in 2007.  The decreases to cash provided by operating activities resulting from these items were partially offset by higher revenues, due primarily to the hedged sale of generation in the wholesale market, increased sales volumes to PPL Electric under the PLR contracts to support the PLR load and a 1.4% increase in PLR sales prices, as well as less U.S. income tax payments, primarily as a result of a refund received in 2008, and operating losses incurred in 2007 in connection with synfuel projects that ceased operation at the end of 2007.

A significant portion of PPL Energy Supply's operating cash flows is derived from its Supply segment baseload generation business activities.  PPL Energy Supply employs a formal hedging program for its baseload generation fleet, the primary objective of which is to provide a reasonable level of near-term cash flow and earnings certainty over the next three years, while preserving upside potential if power prices increase over the medium term.  See Note 18 to the Financial Statements for further discussion.  Based on its generation portfolio contracting practices (including related fuel purchases and commitments), PPL Energy Supply expects to achieve relatively stable cash flows related to baseload generation during the next three years, although, future cash flows from operating activities are expected to be influenced more by commodity prices than during the past nine years when long-term supply contracts were in place between PPL EnergyPlus and PPL Electric.  As discussed in "Item 1. Business," PPL Energy Supply estimates that, on average, approximately 94% of its total expected annual generation output (which includes baseload and other generation) for 2010 is committed under power sales contracts.  PPL Energy Supply has also entered into commitments of varying quantities and terms for the years 2011 and beyond.

PPL Energy Supply's contracts for the sale and purchase of electricity and fuel often require cash collateral or other credit enhancements, or reductions or terminations of a portion of the entire contract through cash settlement, in the event of a downgrade of PPL Energy Supply's or its subsidiary's credit ratings or adverse changes in market prices.  For example, in addition to limiting its trading ability, if PPL Energy Supply's or its subsidiary's ratings were lowered to below "investment grade" and there was a 10% adverse movement in energy prices, PPL Energy Supply estimates that, based on its December 31, 2009 positions, it would have had to post additional collateral of approximately $291 million, compared with $815 million at December 31, 2008.  PPL Energy Supply has in place risk management programs that are designed to monitor and manage its exposure to volatility of cash flows related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of its generating units.

Investing Activities

The primary use of cash in investing activities is capital expenditures.  See "Forecasted Uses of Cash" for detail regarding capital expenditures in 2009 and projected expenditures for the years 2010 through 2012.

Net cash used in investing activities decreased 68%, or $1.1 billion in 2009 compared with 2008, primarily as a result of a change of $371 million from restricted cash and cash equivalents, a change of $249 million from purchases and sales of other investments, a change of $244 million from purchases and sales of intangible assets, a decrease of $207 million in capital expenditures and $81 million of proceeds received in 2009 from the sale of the majority of the Maine hydroelectric generation business.  See Note 1 to the Financial Statements for a discussion of restricted cash and cash equivalents and Note 7 to the Financial Statements for a discussion of the purchase and sale by a subsidiary of PPL Energy Supply of Exempt Facilities Revenue Bonds issued by the PEDFA on behalf of PPL Energy Supply and Note 9 to the Financial Statements for a discussion of the sale of the majority of the Maine hydroelectric generation business.

Net cash used in investing activities increased 456%, or $1.4 billion, in 2008 compared with 2007, as PPL Energy Supply received aggregate proceeds of $898 million from the sale of its Latin American businesses and telecommunication operations in 2007, which are discussed in Notes 8 and 9 to the Financial Statements.  Additionally, there was a change of $329 million from purchases and sales of other investments, a change of $352 million from purchases and sales of intangible assets, and an increase of $42 million in the amount of cash and cash equivalents that became restricted.  The increase in cash used in investing activities from the above items was partially offset by a decrease of $217 million in capital expenditures.

Financing Activities

Net cash used in financing activities was $1.1 billion in 2009 compared with $779 million of net cash provided by financing activities in 2008 and net cash used in financing activities of $963 million in 2007.  The change from 2008 to 2009 primarily reflects no issuances of long-term debt in 2009, reduced contributions from Member, increased distributions to Member and less short-term borrowings in 2009.  The change from 2007 to 2008 primarily reflects increased issuances and lower retirements of long-term debt, reduced distributions to and contributions from Member and increased short-term borrowings in 2008.

In 2009, cash used in financing activities primarily consisted of $943 million in distributions to Member and net debt retirements of $177 million, partially offset by $50 million in contributions from Member.  In 2008, cash provided by financing activities primarily consisted of net debt issuances of $1.1 billion and $421 million in contributions from Member, partially offset by $750 million in distributions to Member.  In 2007, cash used in financing activities primarily consisted of net debt retirements of $180 million and $1.5 billion of distributions to Member, partially offset by $700 million in contributions from Member.

See "Forecasted Sources of Cash" for a discussion of PPL Energy Supply's plans to issue debt securities, as well as a discussion of credit facility capacity available to PPL Energy Supply.  Also see "Forecasted Uses of Cash" for information regarding maturities of PPL Energy Supply's long-term debt.

PPL Energy Supply's debt financing activity in 2009 was:

   
Issuances
  
Retirements
                 
PPL Energy Supply Senior Unsecured Notes (a)
          
$
(220
)
WPD short-term debt (net change)
  
$
43
          
Total
  
$
43
    
$
(220
)
Net decrease
          
$
(177
)

(a)
  
In March 2009, PPL Energy Supply paid $220 million, plus accrued interest, to complete tender offers to purchase up to $250 million aggregate principal amount of certain of its outstanding senior notes in order to reduce future interest expense.  Under the Economic Stimulus Package, PPL will be permitted to defer recognition of income related to the extinguishment of these notes for tax purposes.  No amounts will be included in taxable income for the first five years.  Beginning in 2014, income related to the extinguishment of these notes will be included in taxable income ratably over five years.

See Note 7 to the Financial Statements for more detailed information regarding PPL Energy Supply's financing activities in 2009.

Forecasted Sources of Cash

PPL Energy Supply expects to continue to have significant sources of cash available in the near term, including various credit facilities, operating leases and contributions from Member.  Additionally, PPL Energy Supply expects to have access to debt capital markets and currently plans to issue up to $300 million and £400 million in long-term debt securities in 2010, subject to market conditions.

Credit Facilities

At December 31, 2009, PPL Energy Supply's total committed borrowing capacity under credit facilities and the use of this borrowing capacity were:

   
Committed Capacity
  
Borrowed
  
Letters of Credit Issued (a)
  
Unused Capacity
                         
PPL Energy Supply Domestic Credit Facilities (b)
  
$
4,125
    
$
285
    
$
662
    
$
3,178
  
                                 
WPDH Limited Credit Facility (c)
  
₤
150
    
₤
132
      
n/a
    
₤
18
  
WPD (South West) Credit Facilities (d)
    
214
      
60
    
₤
3
      
151
  
Total WPD Credit Facilities (e)
  
₤
364
    
₤
192
    
₤
3
    
₤
169
  

(a)
  
The borrower under each of these facilities has a reimbursement obligation to the extent any letters of credit are drawn upon.
     
(b)
  
PPL Energy Supply has the ability to borrow $3.6 billion under its credit facilities.  Such borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.  PPL Energy Supply also has the capability to cause the lenders to issue up to $3.9 billion of letters of credit under these facilities, which issuances reduce available borrowing capacity.  Under certain conditions, PPL Energy Supply may request that the capacity of one of its facilities be increased by up to $500 million.
     
   
These credit facilities contain a financial covenant requiring debt to total capitalization to not exceed 65%.  At December 31, 2009 and 2008, PPL Energy Supply's consolidated debt to total capitalization percentages, as calculated in accordance with its credit facilities, were 46% and 44%.  The credit facilities also contain standard representations and warranties that must be made for PPL Energy Supply to borrow under them.
     
   
The commitments under PPL Energy Supply's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 16% of the total committed capacity.
     
   
The committed capacity expires as follows:  $600 million in 2010, $300 million in 2011 and $3.2 billion in 2012.  PPL Energy Supply intends to renew or replace the two credit facilities that expire in 2010 in order to maintain its current total committed capacity level.
     
(c)
  
Borrowings under WPDH Limited's credit facility bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.
     
   
This credit facility contains financial covenants that require WPDH Limited to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and a RAB that exceeds total net debt by the higher of an amount equal to 15% of total net debt or £150 million, in each case as calculated in accordance with the credit facility.  At December 31, 2009 and 2008, WPDH Limited's interest coverage ratios, as calculated in accordance with its credit facility, were 4.3 and 4.6.  At December 31, 2009 and 2008, WPDH Limited's RAB, as calculated in accordance with the credit facility, exceeded its total net debt by £325 million, or 25%, and £385 million, or 31%.
     
(d)
  
WPD (South West) has two credit facilities:  one under which it can make cash borrowings and another under which it has the capability to cause the lender to issue up to approximately £4 million of letters of credit.  Borrowings bear interest at LIBOR-based rates plus a margin.
     
   
The credit facility under which it can make cash borrowings contains financial covenants that require WPD (South West) to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and total net debt not in excess of 85% of RAB, in each case as calculated in accordance with the credit facility.  At December 31, 2009, WPD (South West)'s interest coverage ratio, as calculated in accordance with its credit facility, was 5.3.  At December 31, 2009, WPD (South West)'s total net debt, as calculated in accordance with the credit facility, was 67% of RAB.
     
(e)
  
The commitments under WPD's credit facilities are provided by eight banks, with no one bank providing more than 25% of the total committed capacity.
     
   
The committed capacity of WPD's credit facilities expires as follows:  £4 million in 2010, £210 million in 2012 and £150 million in 2013.  WPD (South West) intends to renew its letter of credit facility that expires in 2010 in order for WPD to maintain its current total committed capacity level.
     
   
At December 31, 2009, the unused capacity of WPD's credit facilities was approximately $276 million.

In addition to the financial covenants noted in the table above, the credit agreements governing the credit facilities contain various other covenants.  Failure to comply with the covenants after applicable grace periods could result in acceleration of repayment of borrowings and/or termination of the agreements.  PPL Energy Supply monitors compliance with the covenants on a regular basis.  At December 31, 2009, PPL Energy Supply was in material compliance with these covenants.  At this time, PPL Energy Supply believes that these covenants and other borrowing conditions will not limit access to these funding sources.

See Note 7 to the Financial Statements for further discussion of PPL Energy Supply's credit facilities.

Commercial Paper

As discussed below under "Credit Ratings," S&P lowered its rating on PPL Energy Supply's commercial paper to A-3 from A-2 in January 2009.  Since PPL Energy Supply did not plan to issue any commercial paper during 2009 and there was essentially no liquidity in commercial paper markets for paper with an A-3 rating, PPL Energy Supply closed its $500 million commercial paper program in January 2009 and requested that Moody's, S&P and Fitch each withdraw their ratings on its commercial paper program, which each rating agency subsequently did.

PPL Energy Supply may reopen its commercial paper program in the future, depending on market conditions and credit ratings,  to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Any future commercial paper issuances would be supported by PPL Energy Supply's credit facilities.

Operating Leases

PPL Energy Supply and its subsidiaries also have available funding sources that are provided through operating leases.  PPL Energy Supply's subsidiaries lease office space, land, buildings and certain equipment.  These leasing structures provide PPL Energy Supply additional operating and financing flexibility.  The operating leases contain covenants that are typical for these agreements, such as maintaining insurance, maintaining corporate existence and timely payment of rent and other fees.

PPL Energy Supply, through its subsidiary PPL Montana, leases a 50% interest in Colstrip Units 1 and 2 and a 30% interest in Unit 3, under four 36-year, non-cancelable operating leases.  These operating leases are not recorded on PPL Energy Supply's Balance Sheets.  The leases place certain restrictions on PPL Montana's ability to incur additional debt, sell assets and declare dividends.  At this time, PPL Energy Supply believes that these restrictions will not limit access to these funding sources or cause acceleration or termination of the leases.  See Note 7 to the Financial Statements for a discussion of other dividend restrictions related to WPD.

See Note 10 to the Financial Statements for further discussion of the operating leases.

Long-Term Debt Securities and Contributions from Member

Subject to market conditions, PPL Energy Supply currently plans to issue up to $300 million and £400 million in long-term debt securities in 2010.  PPL expects to use the proceeds from these issuances for the repayment of short-term debt, to fund capital expenditures, and for general corporate purposes.

From time to time, as determined by its Board of Directors, PPL Energy Supply's Member, PPL Energy Funding, makes capital contributions to PPL Energy Supply.  PPL Energy Supply uses these contributions for general corporate purposes.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, PPL Energy Supply currently expects to incur future cash outflows for capital expenditures, various contractual obligations, distributions to its Member and possibly the purchase or redemption of a portion of its debt securities.

Capital Expenditures

The table below shows PPL Energy Supply's actual spending for the year 2009 and current capital expenditure projections for the years 2010 through 2012.

   
Actual
  
Projected
   
2009
  
2010
  
2011
  
2012
Construction expenditures (a) (b)
                        
Generating facilities
  
$
361
  
$
671
  
$
673
  
$
507
Transmission and distribution facilities
    
247
    
320
    
358
    
385
Environmental
    
178
    
63
    
19
    
99
Other
    
11
    
31
    
33
    
31
Total Construction Expenditures
    
797
    
1,085
    
1,083
    
1,022
Nuclear fuel
    
140
    
151
    
173
    
171
Total Capital Expenditures
  
$
937
  
$
1,236
  
$
1,256
  
$
1,193

(a)
  
Construction expenditures include capitalized interest, which is expected to be approximately $156 million for the years 2010 through 2012.
(b)
  
Includes expenditures for certain intangible assets.

PPL Energy Supply's capital expenditure projections for the years 2010 through 2012 total approximately $3.7 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  This table includes projected costs related to the planned 239 MW of incremental capacity increases.  See Note 8 to the Financial Statements for information regarding the significant development projects.

PPL Energy Supply plans to fund its capital expenditures in 2010 with cash on hand, cash from operations, contributions from Member and proceeds from the issuance of debt securities.

Contractual Obligations

PPL Energy Supply has assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2009, the estimated contractual cash obligations of PPL Energy Supply were:

   
Total
  
Less Than 1 Year
  
1-3 Years
  
4-5 Years
  
After 5 Years
                               
Long-term Debt (a)
  
$
4,992
            
$
500
    
$
1,037
    
$
3,455
  
Interest on Long-term Debt (b)
    
4,497
    
$
291
      
558
      
477
      
3,171
  
Operating Leases
    
968
      
108
      
216
      
223
      
421
  
Purchase Obligations (c)
    
5,896
      
1,459
      
1,680
      
867
      
1,890
  
Other Long-term Liabilities Reflected on the Balance Sheet under GAAP (d) (e)
    
80
      
62
      
18
                  
Total Contractual Cash Obligations
  
$
16,433
    
$
1,920
    
$
2,972
    
$
2,604
    
$
8,937
  

(a)
  
Reflects principal maturities only based on legal maturity dates.  See Note 7 to the Financial Statements for a discussion of the remarketing feature related to PPL Energy Supply's 5.70% REset Put Securities, as well as discussion of variable-rate remarketable bonds issued by the PEDFA on behalf of PPL Energy Supply.  PPL Energy Supply does not have any significant capital lease obligations.
(b)
  
Assumes interest payments through maturity.  The payments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated and payments denominated in British pounds sterling have been translated to U.S. dollars at a current foreign currency exchange rate.
(c)
  
The payments reflected herein are subject to change, as certain purchase obligations included are estimates based on projected obligated quantities and/or projected pricing under the contracts.  Purchase orders made in the ordinary course of business are excluded from the amounts presented.  The payments also include obligations related to nuclear fuel and the installation of the scrubbers, which are also reflected in the Capital Expenditures table presented above.
(d)
  
The amounts reflected represent WPD's contractual deficit pension funding requirements arising from an actuarial valuation performed in March 2007.  The U.K. electricity regulator currently allows a recovery of a substantial portion of the contributions relating to the plan deficit; however, WPD cannot be certain that this will continue beyond the current and next review periods, which extend to March 31, 2015.  Based on the current funded status of PPL Energy Supply's U.S. qualified pension plans, no cash contributions are required.  See Note 12 to the Financial Statements for a discussion of expected contributions.
(e)
  
At December 31, 2009, total unrecognized tax benefits of $124 million were excluded from this table as PPL Energy Supply cannot reasonably estimate the amount and period of future payments.  See Note 5 to the Financial Statements for additional information.

Distributions to Member

From time to time, as determined by its Board of Managers, PPL Energy Supply makes return of capital distributions to its Member.

Purchase or Redemption of Debt Securities

PPL Energy Supply will continue to evaluate purchasing or redeeming outstanding debt securities and may decide to take action depending upon prevailing market conditions and available cash.

Credit Ratings

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

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

The following table summarizes the credit ratings of PPL Energy Supply and its rated subsidiaries at December 31, 2009:

   
Moody's
  
S&P
  
Fitch (a)
PPL Energy Supply (b)
            
 
Issuer Rating
      
BBB
  
BBB
 
Senior Unsecured Notes
  
Baa2
  
BBB
  
BBB
 
Outlook
  
STABLE
  
Negative
  
STABLE
               
PPL Montana
            
 
Pass-Through Certificates
  
Baa3
  
BBB-
  
BBB
 
Outlook
  
STABLE
  
STABLE
    
               
WPDH Limited
            
 
Issuer Rating
  
Baa3
  
BBB-
  
BBB-
 
Senior Unsecured Debt
  
Baa3
  
BBB-
  
BBB
 
Short-term Debt
      
A-3
    
 
Outlook
  
STABLE
  
Negative
  
POSITIVE
               
WPD LLP
            
 
Issuer Rating
          
BBB
 
Outlook
          
POSITIVE
               
WPD (South Wales)
            
 
Issuer Rating
      
BBB+
  
BBB+
 
Senior Unsecured Debt
  
Baa1
  
BBB+
  
A-
 
Short-term Debt
      
A-2
  
F2
 
Outlook
  
STABLE
  
Negative
  
POSITIVE
               
WPD (South West)
            
 
Issuer Rating
  
Baa1
  
BBB+
  
BBB+
 
Senior Unsecured Debt
  
Baa1
  
BBB+
  
A-
 
Short-term Debt
  
P-2
  
A-2
  
F2
 
Outlook
  
STABLE
  
Negative
  
POSITIVE

(a)
  
All Issuer Ratings for Fitch are "Issuer Default Ratings."
(b)
  
Excludes Exempt Facilities Revenue Bonds issued by the PEDFA on behalf of PPL Energy Supply, which are each currently supported by a letter of credit and are rated on the basis of the credit enhancement.

In January 2009, S&P completed a review of PPL Energy Supply, upon which it revised its outlook to negative from stable and affirmed its BBB issuer rating.  As a result of the negative outlook, S&P lowered PPL Energy Supply's commercial paper rating to A-3 from A-2.  S&P stated in its press release that the revision in the outlook for PPL Energy Supply was based primarily on lower than expected cash flows for 2008 combined with concerns over further pressure on financial metrics in 2009.

At the request of PPL Energy Supply, in the first quarter of 2009, Moody's, S&P and Fitch, each withdrew their commercial paper rating for PPL Energy Supply.

In February 2009, S&P revised its outlook to negative from stable for each of WPDH Limited, WPD LLP, WPD (South Wales) and WPD (South West) and affirmed the issuer and short-term debt ratings of each of the entities.  S&P stated in its press release that the revision in the outlook is a reflection of the change to PPL's outlook to negative from stable and is not a result of any change in WPD's stand-alone credit profile.

In May 2009, Moody's completed a review of PPL Energy Supply and affirmed the Baa2 senior unsecured rating and stable outlook of PPL Energy Supply.

At WPD's request, in September 2009, S&P withdrew its ratings for WPD LLP, since it did not have any securities outstanding.

In October 2009, Fitch completed a review of PPL Energy Supply.  As a result of that review, Fitch lowered the rating of PPL Energy Supply's senior unsecured notes to BBB from BBB+ and affirmed all other ratings of PPL Energy Supply.  Fitch stated in its press release that the change in the rating of PPL Energy Supply's senior unsecured notes aligns such rating with the BBB Issuer Default Rating in a manner that is consistent with the approach Fitch applies to other competitive generators and also recognizes a lower valuation of PPL Energy Supply's power assets based on current and forward wholesale power prices.  The rating also reflects Fitch's forecast of lower than previously expected improvement in PPL Energy Supply's earnings and cash flow in 2010 and 2011.

Ratings Triggers

WPD (South West)'s 1.541% Index-linked Notes due 2053 and 2056 and WPD (South Wales)'s 4.80436% Notes due 2037 may be put by the holders back to the issuer for redemption if the long-term credit ratings assigned to the notes by Moody's, S&P or Fitch are withdrawn by any of the rating agencies or reduced to a non-investment grade rating of Ba1 or BB+ in connection with a restructuring event.  A restructuring event includes the loss of, or a material adverse change to, the distribution license under which WPD (South West) and WPD (South Wales) operate.  These notes totaled £467 million (approximately $766 million) at December 31, 2009.

PPL Energy Supply has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements, and interest rate and foreign currency instruments, which contain provisions requiring PPL Energy Supply to post additional collateral, or permit the counterparty to terminate the contract, if PPL Energy Supply's credit rating were to fall below investment grade.  See Note 18 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at December 31, 2009.  At December 31, 2009, if PPL Energy Supply's credit rating had been below investment grade, PPL Energy Supply would have been required to post an additional $298 million of collateral to counterparties for both derivative and non-derivative commodity and commodity-related contracts used in its generation, marketing and trading operations and interest rate and foreign currency contracts.

Guarantees for Subsidiaries

At times, PPL Energy Supply provides guarantees for financing arrangements to enable certain transactions for its consolidated affiliates.  Some of the guarantees contain financial and other covenants that, if not met, would limit or restrict the consolidated affiliates' access to funds under these financing arrangements, require early maturity of such arrangements or limit the consolidated affiliates' ability to enter into certain transactions.  At this time, PPL Energy Supply believes that these covenants will not limit access to relevant funding sources.  See Note 14 to the Financial Statements for additional information about guarantees.

Off-Balance Sheet Arrangements

PPL Energy Supply has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party.  See Note 14 to the Financial Statements for a discussion of these agreements.

Risk Management - Energy Marketing & Trading and Other

Market Risk

See Notes 1, 17, and 18 to the Financial Statements for information about PPL Energy Supply's risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

PPL Energy Supply segregates its non-trading activities into two categories:  hedge activity and economic activity.  Transactions that are accounted for as hedge activity qualify for hedge accounting treatment.  The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.  This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL Energy Supply's generation assets, load-following and retail activities.  This economic activity is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power).  Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity.  The net fair value of economic positions at December 31, 2009 and 2008 was a net liability of $77 million and $52 million.  See Note 18 for additional information on economic activity.

To hedge the impact of market price volatility on PPL Energy Supply's energy-related assets, liabilities and other contractual arrangements, PPL EnergyPlus sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  PPL Energy Supply's non-trading commodity derivative contracts mature at various times through 2017.

Within PPL's non-trading portfolio, the decision to enter into energy contracts is influenced by the expected value of PPL Energy Supply's generation.  In determining the number of MWhs that are available to be sold forward, PPL Energy Supply first reduces the potential output by the amount of unavailable generation due to planned maintenance on a particular unit.  The potential output is further reduced by the amount of MWhs that historically is not produced by a plant due to such factors as equipment breakage.  Finally, the potential output of certain plants (such as peaking units) is reduced if their higher cost of production will not allow them to economically run during all hours.

PPL Energy Supply's non-trading portfolio also includes full requirements energy contracts.  The net obligation to serve these contracts changes minute-by-minute.  Anticipated usage patterns and energy peaks are affected by expected load changes, regional economic drivers, customer shopping or migration and seasonal weather patterns.  PPL Energy Supply analyzes historical on-peak and off-peak usage patterns, expected load changes, regional economic drivers, and weather patterns, among other factors, to determine monthly levels of electricity that best fits usage patterns to minimize earnings exposure.  To satisfy its full requirements obligations, PPL Energy Supply generally enters into contracts to purchase unbundled products of electricity, capacity, RECs and other ancillary products.  To a lesser extent, PPL Energy Supply reserves a portion of its generation for full requirements contracts that is expected to be the best match with anticipated usage patterns and energy peaks.

The following chart sets forth the net fair value of PPL Energy Supply's non-trading commodity derivative contracts.  See Notes 17 and 18 to the Financial Statements for additional information.

   
Gains (Losses)
   
2009
  
2008
                 
Fair value of contracts outstanding at the beginning of the period
  
$
402
    
$
(305
)
Contracts realized or otherwise settled during the period
    
189
      
(49
)
Fair value of new contracts entered into during the period
    
143
      
101
  
Changes in fair value attributable to changes in valuation techniques (a)
            
158
  
Other changes in fair value
    
546
      
497
  
Fair value of contracts outstanding at the end of the period
  
$
1,280
    
$
402
  

(a)
  
Amount represents the reduction of valuation reserves related to capacity and FTR contracts upon the adoption of fair value accounting guidance.

The following table segregates the net fair value of PPL Energy Supply's non-trading commodity derivative contracts at December 31, 2009 based on whether the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.

   
Net Asset (Liability)
   
Maturity Less Than 1 Year
  
Maturity 1-3 Years
  
Maturity 4-5 Years
  
Maturity in Excess of 5 Years
  
Total Fair Value
Source of Fair Value
                                        
Prices quoted in active markets for identical instruments
                                        
Prices based on significant other observable inputs
  
$
363
    
$
736
    
$
73
            
$
1,172
  
Prices based on significant unobservable inputs
    
(1
)
    
13
      
30
    
$
66
      
108
  
Fair value of contracts outstanding at the end of the period
  
$
362
    
$
749
    
$
103
    
$
66
    
$
1,280
  

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

Commodity Price Risk (Trading)

PPL Energy Supply's trading contracts mature at various times through 2015.  The following table sets forth changes in the net fair value of PPL Energy Supply's trading commodity derivative contracts.  See Notes 17 and 18 to the Financial Statements for additional information.

   
Gains (Losses)
   
2009
  
2008
                 
Fair value of contracts outstanding at the beginning of the period
  
$
(75
)
  
$
16
  
Contracts realized or otherwise settled during the period
    
2
      
(18
)
Fair value of new contracts entered into during the period
    
31
      
28
  
Changes in fair value attributable to changes in valuation techniques (a)
            
11
  
Other changes in fair value
    
36
      
(112
)
Fair value of contracts outstanding at the end of the period
  
$
(6
)
  
$
(75
)

(a)
  
In the fourth quarter of 2008, PPL Energy Supply refined its valuation approach for FTR and PJM basis positions, consistent with PPL Energy Supply's practice of pricing other less active trading points, resulting in changes in valuation techniques.

PPL Energy Supply will reverse unrealized gains of approximately $1 million over the next three months as the transactions are realized.

The following table segregates the net fair value of PPL Energy Supply's trading commodity derivative contracts at December 31, 2009 based on whether the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.

   
Net Asset (Liability)
   
Maturity Less Than 1 Year
  
Maturity 1-3 Years
  
Maturity 4-5 Years
  
Maturity in Excess of 5 Years
  
Total Fair Value
Source of Fair Value
                                        
Prices quoted in active markets for identical instruments
  
$
1
                            
$
1
  
Prices based on significant other observable inputs
    
(4
)
  
$
(5
)
  
$
2
    
$
1
      
(6
)
Prices based on significant unobservable inputs
    
(1
)
                            
(1
)
Fair value of contracts outstanding at the end of the period
  
$
(4
)
  
$
(5
)
  
$
2
    
$
1
    
$
(6
)

VaR Models

PPL Energy Supply utilizes a VaR model to measure commodity price risk in domestic gross energy margins for its non-trading and trading portfolios.  VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.  PPL Energy Supply calculates VaR using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's conservative hedging program, PPL's non-trading VAR exposure is expected to be limited in the short term.  At December 31, 2009 and December 31, 2008, the VaR for PPL Energy Supply's portfolios using end-of-quarter results for the period was as follows.

   
Trading VaR
  
Non-Trading VaR
   
2009
  
2008
  
2009
  
2008
                                 
95% Confidence Level, Five-Day Holding Period
                                
Period End
  
$
3
    
$
3
    
$
8
    
$
10
  
Average for the Period
    
4
      
10
      
9
      
14
  
High
    
8
      
22
      
11
      
20
  
Low
    
1
      
3
      
8
      
9
  

The trading portfolio includes all speculative positions, regardless of the delivery period.  All positions not considered speculative are considered non-trading.  PPL Energy Supply's non-trading portfolio includes PPL Energy Supply's entire portfolio, including generation, with delivery periods through the next 12 months.  Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets.  The fair value of the FTR positions at December 31, 2009 was an unrealized loss of $3 million and consisted of the following.

   
2010
  
2011
                 
Trading (a)
                
Non-trading
  
$
(2
)
  
$
(1
)
Total
  
$
(2
)
  
$
(1
)

(a)
  
The amount of trading FTR positions was less than $1 million at December 31, 2009.

Interest Rate Risk

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

At December 31, 2009, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant, compared with $2 million at December 31, 2008.

PPL Energy Supply is also exposed to changes in the fair value of its domestic and international debt portfolios.  PPL Energy Supply estimated that a 10% decrease in interest rates at December 31, 2009 would increase the fair value of its debt portfolio by $187 million, compared with $234 million at December 31, 2008.

At December 31, PPL Energy Supply had the following interest rate hedges outstanding.

   
2009
  
2008
   
Exposure
Hedged
  
Fair Value, Net - Asset (Liability) (a)
  
Effect of a 10%
Adverse Movement
in Rates (b)
  
Exposure
Hedged
  
Fair Value, Net - Asset (Liability) (a)
  
Effect of a 10%
Adverse Movement
in Rates (b)
Cash flow hedges
                                                
Interest rate swaps (c)
                          
 
 
    
 
 
          
Cross-currency swaps (d)
  
$
302
    
$
8
    
$
(41
)
   $ 
302
     $
54
    
$
(8
)
Fair value hedges
                                                
Interest rate swaps (e)
                             50         3          

(a)
  
Includes accrued interest, if applicable.
(b)
  
Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(c)
  
PPL and PPL Energy Supply utilize various risk management instruments to reduce PPL Energy Supply's exposure to the expected future cash flow variability of PPL Energy Supply's debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL Energy Supply is exposed to changes in the fair value of these instruments, any changes in the fair value of these instruments are recorded in equity and then reclassified into earnings in the same period during which the item being hedged affects earnings.
(d)
  
WPDH Limited uses cross-currency swaps to hedge the interest payments and principal of its U.S. dollar-denominated senior notes with maturity dates ranging from December 2017 to December 2028.  While PPL Energy Supply is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.  Sensitivities represent a 10% adverse movement in both interest rates and foreign currency exchange rates.
(e)
  
PPL and PPL Energy Supply utilize various risk management instruments to adjust the mix of fixed and floating interest rates in PPL Energy Supply's debt portfolio.  The change in fair value of these instruments, as well as the offsetting change in the value of the hedged exposure of the debt, is reflected in earnings.  Sensitivity represents a 10% adverse movement in interest rates.

Foreign Currency Risk

PPL Energy Supply is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL Energy Supply's domestic operations may make purchases of equipment in currencies other than U.S. dollars.  See Note 1 to the Financial Statements for additional information regarding foreign currency translation.

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

At December 31, PPL Energy Supply had the following foreign currency hedges outstanding.

   
2009
  
2008
   
Exposure
Hedged
  
Fair Value, Net - Asset (Liability)
  
Effect of a 10%
Adverse Movement
in Foreign Currency Exchange Rates (a)
  
Exposure
Hedged
  
Fair Value, Net - Asset (Liability)
  
Effect of a 10%
Adverse Movement
in Foreign Currency Exchange Rates (a)
                                                 
Net investment hedges (b)
  
£
40
    
$
13
    
$
(6
)
  
£
68
    
$
34
    
$
(10
)
Economic hedges (c)
    
48
      
2
      
(4
)
                        

(a)
  
Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(b)
  
To protect the value of a portion of PPL Energy Supply's net investment in WPD, PPL executed forward contracts to sell British pounds sterling.  The settlement dates of these contracts range from March 2010 through June 2011.
(c)
  
To economically hedge the translation of 2010 expected income denominated in British pounds sterling to U.S. dollars, PPL entered into a combination of average rate forwards and average rate options to sell British pounds sterling.  The forwards and options have termination dates ranging from January 2010 through June 2010.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the Susquehanna nuclear station.  At December 31, 2009, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on PPL Energy Supply's Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At December 31, 2009, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $40 million reduction in the fair value of the trust assets, compared with $27 million at December 31, 2008.  See Notes 17 and 21 to the Financial Statements for additional information regarding the NDT funds.

Defined Benefit Plans - Securities Price Risk

See "Application of Critical Accounting Policies - Defined Benefits" for additional information regarding the effect of securities price risk on plan assets.

Credit Risk

Credit risk is the risk that PPL Energy Supply would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL Energy Supply maintains credit policies and procedures with respect to counterparty credit (including requirements that counterparties maintain specified credit ratings) and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk.  However, PPL Energy Supply has concentrations of suppliers and customers among electric utilities, financial institutions and other energy marketing and trading companies.  These concentrations may impact PPL Energy Supply's overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.

PPL Energy Supply includes the effect of credit risk on its fair value measurements to reflect the probability that a counterparty will default when contracts are out of the money (from the counterparty's standpoint).  In this case, PPL Energy Supply would have to sell into a lower-priced market or purchase from a higher-priced market.  When necessary, PPL Energy Supply records an allowance for doubtful accounts to reflect the probability that a counterparty will not pay for deliveries PPL Energy Supply has made but not yet billed, which are reflected in "Unbilled revenues" on the Balance Sheets.  PPL Energy Supply also has established a reserve with respect to certain sales to the California ISO for which PPL Energy Supply has not yet been paid, which is reflected in accounts receivable on the Balance Sheets.  See Note 14 to the Financial Statements for additional information.

See "Overview" in this Item 7 and Notes 15, 17 and 18 to the Financial Statements for additional information on credit concentration and credit risk.

Related Party Transactions

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

For additional information on related party transactions, see Note 15 to the Financial Statements.

Acquisitions, Development and Divestitures

PPL Energy Supply is currently planning incremental capacity increases of 239 MW, primarily at its existing generating facilities.  See "Item 2.Properties - Supply Segment" for additional information.

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

See Notes 8 and 9 to the Financial Statements for additional information on the more significant activities.

Environmental Matters

See "Item 1. Business - Environmental Matters" and Note 14 to the Financial Statements for a discussion of environmental matters.

Competition

See "Item 1. Business - Competition" under the Supply and International Delivery segments and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL Energy Supply.

New Accounting Guidance

See Notes 1 and 22 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

PPL Energy Supply's financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations of PPL Energy Supply, and require estimates or other judgments of matters inherently uncertain.  Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements).  PPL's senior management has reviewed these critical accounting policies and the estimates and assumptions regarding them with its Audit Committee. In addition, PPL's senior management has reviewed the following disclosures regarding the application of these critical accounting policies with the Audit Committee.

Effective January 1, 2009, PPL Energy Supply fully applied accounting guidance that provides a framework for measuring fair value.  The fair value measurement concepts provided by this guidance are used within its financial statements where applicable.  See Notes 1 and 17 to the Financial Statements for additional information regarding fair value measurements.

1)    Price Risk Management

See "Risk Management - Energy Marketing & Trading and Other" above and Note 18 to the Financial Statements.

2)    Defined Benefits

PPL Energy Supply subsidiaries sponsor various defined benefit pension and other postretirement plans and participate in and are allocated a significant portion of the liability and net periodic defined benefit costs of plans sponsored by PPL Services based on participation in those plans.  PPL Energy Supply subsidiaries record an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to OCI.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.  See Note 12 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

PPL and PPL Energy Supply make certain assumptions regarding the valuation of benefit obligations and the performance of plan assets.  When accounting for defined benefits, delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle.  Annual net periodic defined benefit costs are recorded in current earnings based on estimated results.  Any differences between actual and estimated results are recorded in OCI.  These amounts in AOCI are amortized to income over future periods.  The delayed recognition allows for a smoothed recognition of costs over the working lives of the employees who benefit under the plans.  The primary assumptions are:

·
Discount Rate - The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future.  The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due.
   
·
Expected Return on Plan Assets - Management projects the long-term rates of return on plan assets based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  These projected returns reduce the net benefit costs PPL Energy Supply records currently.
   
·
Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.
   
·
Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.

In selecting a discount rate for its U.S. defined benefit plans, PPL and PPL Energy Supply start with an analysis of the expected benefit payment stream for its plans.  This information is first matched against a spot-rate yield curve.  A portfolio of 526 Aa-graded non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $541 billion, serves as the base from which those with the lowest and highest yields are eliminated to develop the ultimate yield curve.  The results of this analysis are considered together with other economic data and movements in various bond indices to determine the discount rate assumption.  At December 31, 2009, PPL and PPL Energy Supply decreased the discount rate for their U.S. pension plans from 6.50% to 6.00% as a result of this assessment.  PPL decreased the discount rate for its other postretirement benefit plans from 6.45% to 5.81% and PPL Energy Supply decreased the discount rate for its other postretirement benefit plans from 6.37% to 5.55%.

A similar process is used to select the discount rate for the U.K. pension plans, which uses an iBoxx British pounds sterling denominated corporate bond index as its base.  At December 31, 2009, PPL and PPL Energy Supply decreased the discount rate for the U.K. pension plans from 7.47% to 5.55% as a result of this assessment.

The expected long-term rates of return for PPL and PPL Energy Supply's U.S. defined benefit pension and other postretirement benefit plans have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  PPL management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.

At December 31, 2009, PPL's expected return on plan assets remained at 8.00% for its U.S. pension plans and remained at 7.00% for PPL's other postretirement benefit plans.  PPL Energy Supply's expected return on plan assets increased from 7.78% to 8.00% as a result of the settlement of the PA Mines, LLC Retirement plan, which historically earned a lower rate of return.  The expected long-term rates of return for PPL and PPL Energy Supply's U.K. pension plans have been developed by WPD management with assistance from an independent actuary using a best-estimate of expected returns, volatilities and correlations for each asset class.  For the U.K. plans, PPL and PPL Energy Supply's expected return on plan assets remained at 7.90% at December 31, 2009.

In selecting a rate of compensation increase, PPL Energy Supply considers past experience in light of movements in inflation rates.  At December 31, 2009, PPL and PPL Energy Supply's rate of compensation increase remained at 4.75% for their U.S. plans.  For the U.K. plans, PPL and PPL Energy Supply's rate of compensation increase remained at 4.00% at December 31, 2009.

In selecting health care cost trend rates, PPL and PPL Energy Supply consider past performance and forecasts of health care costs.  At December 31, 2009, PPL and PPL Energy Supply's health care cost trend rates were 8.00% for 2010, gradually declining to 5.50% for 2016.

A variance in the assumptions listed above could have a significant impact on accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI.  While the charts below reflect either an increase or decrease in each assumption, the inverse of this change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI by a similar amount in the opposite direction.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

At December 31, 2009, PPL Energy Supply had recorded the following defined benefit plan liabilities:

Pension liabilities
  
$
884
  
Other postretirement benefit liabilities
    
91
  

The following chart reflects the sensitivities in the December 31, 2009 Balance Sheet associated with a change in certain assumptions based on PPL's and PPL Energy Supply's primary defined benefit plans.

   
Increase (Decrease)
Actuarial assumption
  
Change in assumption
  
Impact on defined benefit liabilities
  
Impact on OCI
                           
Discount Rate
    
(0.25)%
    
$
146
    
$
(146
)
  
Rate of Compensation Increase
    
0.25%
      
18
      
(18
)
  
Health Care Cost Trend Rate (a)
    
1.0%
      
5
      
(5
)
  

(a)
  
Only impacts other postretirement benefits.

In 2009, PPL Energy Supply was allocated and recognized net periodic defined benefit costs charged to operating expense of $23 million.  This amount represents a $1 million increase from 2008.

The following chart reflects the sensitivities in the 2009 Statement of Income (excluding income tax effects) associated with a change in certain assumptions based on PPL's and PPL Energy Supply's primary defined benefit plans.

Actuarial assumption
  
Change in assumption
  
Impact on defined benefit costs
                   
Discount Rate
    
(0.25)%
    
$
6
    
Expected Return on Plan Assets
    
(0.25)%
      
9
    
Rate of Compensation Increase
    
0.25%
      
2
    
Health Care Cost Trend Rate (a)
    
1.0%
      
1
    

(a)
  
Only impacts other postretirement benefits.

3)     Asset Impairment

PPL Energy Supply performs impairment analyses for long-lived assets that are subject to depreciation or amortization whenever events or changes in circumstances indicate that a long-lived asset's carrying value may not be recoverable.  For these long-lived assets to be held and used, such events or changes in circumstances are:

·
a significant decrease in the market price of an asset;
·
a significant adverse change in the manner in which an asset is being used or in its physical condition;
·
a significant adverse change in legal factors or in the business climate;
·
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
·
a current-period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
·
a current expectation that, more likely than not, an asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

For a long-lived asset to be held and used, an impairment is recognized when the carrying amount of the asset is not recoverable and exceeds its fair value.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying value to its estimated fair value.  Management must make significant judgments to estimate future cash flows including the useful lives of long-lived assets, the fair value of the assets and management's intent to use the assets.  PPL Energy Supply considers alternate courses of action to recover the carrying value of a long-lived asset, and uses estimated cash flows from the "most likely" alternative to assess impairment whenever one alternative is clearly the most likely outcome.  If no alternative is clearly the most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternatives.  For assets tested for impairment as of the balance sheet date, the estimates of future cash flows used in that test consider the likelihood of possible outcomes that existed at the balance sheet date, including the assessment of the likelihood of a future sale of the assets.  That assessment is not revised based on events that occur after the balance sheet date.  Changes in assumptions and estimates could result in significantly different results than those identified and recorded in the financial statements.

For a long-lived asset held for sale, an impairment exists when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If the asset (disposal group) is impaired, an impairment loss is recorded to adjust its carrying amount to its fair value less cost to sell.  A gain is recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative impairment previously recognized.

For determining fair value, quoted market prices in active markets are the best evidence of fair value.  However, when market prices are unavailable, PPL Energy Supply considers all valuation techniques appropriate in the circumstances and for which market participant inputs can be obtained.  PPL Energy Supply has generally used discounted cash flows to estimate fair value, which incorporates market participant inputs when available.  Discounted cash flows are calculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.

In 2009, PPL Energy Supply recorded impairments of certain long-lived assets.  See Note 17 to the Financial Statements for a discussion of impairments related to certain sulfur dioxide emission allowances and the Long Island generation business.

PPL Energy Supply tests goodwill for impairment at the reporting unit level.  PPL Energy Supply has determined its reporting units to be at or one level below its operating segments.  PPL Energy Supply performs a goodwill impairment test annually or more frequently if events or changes in circumstances indicate that the carrying value of the reporting unit may be greater than the unit's fair value.  Additionally, goodwill is tested for impairment after a portion of goodwill has been allocated to a business to be disposed of.

Goodwill is tested for impairment using a two-step approach.  The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying amount, including goodwill.  If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired.  If the carrying amount exceeds the estimated fair value of the reporting unit, the second step is performed to measure the amount of impairment loss, if any.

The second step requires a calculation of the implied fair value of goodwill.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill in a business combination.  That is, the estimated fair value of a reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the price paid to acquire the reporting unit.  The excess of the estimated fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  The implied fair value of the reporting unit's goodwill is then compared with the carrying amount of that goodwill.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of the reporting unit's goodwill.

In 2009, PPL Energy Supply was not required to impair any goodwill.  Management primarily used discounted cash flows, which required significant assumptions, to estimate the fair value of each reporting unit.  A decrease in the forecasted cash flows of 10%, or an increase of the discount rate by 25 basis points, would not have resulted in an impairment of goodwill.

Additionally, in 2009, PPL Energy Supply wrote off $3 million of goodwill allocated to discontinued operations.

4)    Loss Accruals

PPL Energy Supply accrues losses for the estimated impacts of various conditions, situations or circumstances involving uncertain or contingent future outcomes.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that a loss has been incurred, given the likelihood of the uncertain future events, and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur."  PPL Energy Supply does not record the accrual of contingencies that might result in gains, unless recovery is assured.  PPL Energy Supply continuously assesses potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.

The accounting aspects of estimated loss accruals include (1) the initial identification and recording of the loss, (2) the determination of triggering events for reducing a recorded loss accrual, and (3) the ongoing assessment as to whether a recorded loss accrual is sufficient.  All three of these aspects require significant judgment by PPL Energy Supply's management.  PPL Energy Supply uses its internal expertise and outside experts (such as lawyers and engineers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

No new significant loss accruals were recorded in 2009.  In 2008, significant judgment was required by PPL Energy Supply's management to perform an assessment of the contingency related to the Montana hydroelectric litigation.

In June 2008, PPL's management assessed the loss exposure related to the Montana hydroelectric litigation, given the June 2008 decision by the Montana First Judicial District Court (District Court).  The District Court awarded compensation of approximately $34 million for the years 2000 through 2006, and approximately $6 million for 2007 as rent for the use of the State of Montana's streambeds by PPL Montana's hydroelectric facilities.  The District Court also deferred the determination of compensation for 2008 and subsequent years to the Montana State Land Board (Land Board).  In October 2008, PPL Montana filed an appeal of the decision to the Montana Supreme Court and a stay of judgment, including a stay of the Land Board's authority to assess compensation against PPL Montana for 2008 and future periods.  Oral agreement of the case was held before the Montana Supreme Court in September 2009.

As part of the preparation of its 2009 financial statements, PPL Energy Supply's management reassessed the loss exposure for the Montana hydroelectric litigation.  PPL's management concluded, based on its assessment and after consultations with its trial counsel, that it has meritorious arguments on appeal for the years 2000 through 2006.  PPL assessed the likelihood of a loss for these years as reasonably possible.  However, PPL Montana has not recorded a loss accrual for these years, as the likelihood of a loss was not deemed probable.

For 2007 and subsequent years, PPL's management believes that while it also has meritorious arguments, it is probable that its hydroelectric projects will be subject to annual estimated compensation ranging from $3 million to $6 million.  Given that there was no single amount within that range more likely than any other, PPL Montana accrued $3 million for each of the years 2007 through 2009 for a total of $9 million.  See Note 14 to the Financial Statements for additional information on this contingency.

PPL Energy Supply has identified certain other events that could give rise to a loss, but that do not meet the conditions for accrual.  Such events are disclosed, but not recorded, when it is "reasonably possible" that a loss has been incurred.  See Note 14 to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual.

When an estimated loss is accrued, PPL Energy Supply identifies, where applicable, the triggering events for subsequently reducing the loss accrual.  The triggering events generally occur when the contingency has been resolved and the actual loss is incurred, or when the risk of loss has diminished or been eliminated.  The following are some of the triggering events that provide for the reduction of certain recorded loss accruals:

·
Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected.
   
·
Environmental and other litigation contingencies are reduced when the contingency is resolved and PPL Energy Supply makes actual payments, a better estimate of the loss is determined or the loss is no longer considered probable.

PPL Energy Supply reviews its loss accruals on a regular basis to assure that the recorded potential loss exposures are appropriate.  This involves ongoing communication and analyses with internal and external legal counsel, engineers, operation management and other parties.

5)    Asset Retirement Obligations

PPL Energy Supply is required to recognize a liability for legal obligations associated with the retirement of long-lived assets.  The initial obligation should be measured at its estimated fair value.  An equivalent amount should be recorded as an increase in the value of the capitalized asset and allocated to expense over the useful life of the asset.  Until the obligation is settled, the liability should be increased, through the recognition of accretion expense in the income statement, for changes in the obligation due to the passage of time.  A conditional ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.

In determining AROs, management must make significant judgments and estimates to calculate fair value.  Fair value is developed using an expected present value technique based on assumptions of market participants that considers estimated retirement costs in current period dollars that are inflated to the anticipated retirement date and then discounted back to the date the ARO was incurred.  Changes in assumptions and estimates included within the calculations of the fair value of AROs could result in significantly different results than those identified and recorded in the financial statements.  Estimated ARO costs and settlement dates, which affect the carrying value of various AROs and the related assets, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the obligations.

At December 31, 2009, PPL Energy Supply had AROs totaling $426 million recorded on the Balance Sheet, of which $10 million is included in "Other current liabilities."  Of the total amount, $348 million, or 82%, relates to PPL Energy Supply's nuclear decommissioning ARO.  The most significant assumptions surrounding AROs are the forecasted retirement costs, the discount rates and the inflation rates.  A variance in the forecasted retirement costs, the discount rates or the inflation rates could have a significant impact on the ARO liabilities.

The following chart reflects the sensitivities related to PPL Energy Supply's nuclear decommissioning ARO liability as of December 31, 2009, associated with a change in these assumptions at the time of initial recognition.  There is no significant change to the annual depreciation expense of the ARO asset or the annual accretion expense of the ARO liability as a result of changing the assumptions.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption.

   
Change in Assumption
  
Impact on ARO Liability
         
Retirement Cost
  
10%/(10)%
  
$32/$(32)
Discount Rate
  
0.25%/(0.25)%
  
$(31)/$34
Inflation Rate
  
0.25%/(0.25)%
  
$41/$(37)

6)    Income Tax Uncertainties

Significant management judgment is required in developing PPL Energy Supply's provision for income taxes primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position.  PPL Energy Supply evaluates its tax positions following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  PPL Energy Supply's management considers a number of factors in assessing the benefit to be recognized, including negotiation of a settlement.

On a quarterly basis, PPL Energy Supply reassesses its uncertain tax positions by considering information known at the reporting date.  Based on management's assessment of new information, PPL Energy Supply may subsequently recognize a tax benefit for a previously unrecognized tax position, de-recognize a previously recognized tax position, or re-measure the benefit of a previously recognized tax position.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact PPL Energy Supply's financial statements in the future.

The balance sheet classification of unrecognized tax benefits and the need for valuation allowances to reduce deferred tax assets also require significant management judgment.  PPL Energy Supply classifies unrecognized tax benefits as current, to the extent management expects to settle an uncertain tax position, by payment or receipt of cash, within one year of the reporting date.  Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset.  Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies.  Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized by PPL Energy Supply to account for an uncertain tax positions.  See Note 5 to the Financial Statements for the required disclosures.

At December 31, 2009, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $11 million or decrease by up to $123 million for PPL Energy Supply.  This change could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positions related to the creditability of foreign taxes, the timing and utilization of foreign tax credits and the related impact on alternative minimum tax and other credits, the timing and/or valuation of certain deductions, intercompany transactions and unitary filing groups.  The events that could cause these changes are direct settlements with taxing authorities, litigation, legal or administrative guidance by relevant taxing authorities and the lapse of an applicable statute of limitation.


Other Information

PPL's Audit Committee has approved the independent auditor to provide audit and audit-related services and other services permitted by Sarbanes-Oxley and SEC rules.  The audit and audit-related services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews.  See "Item 14. Principal Accounting Fees and Services" for more information.
PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

PPL Electric is an electricity delivery service provider in eastern and central Pennsylvania with headquarters in Allentown, Pennsylvania.  Refer to "Item 1. Business - Background" for a description of its business.  PPL Electric's strategy and principal challenge is to own and operate its electricity delivery business at the most efficient cost while maintaining high quality customer service and reliability.

PPL Electric's electricity delivery business is rate-regulated.  Accordingly, this business is subject to regulatory risk with respect to costs that may be recovered and investment returns that may be collected through customer rates.  See "Customer Choice - End of Transition Period" below for information on additional risks PPL Electric may face.

In order to manage financing costs and access to credit markets, a key objective for PPL Electric's business as a whole is to maintain a strong credit profile.  PPL Electric continually focuses on maintaining an appropriate capital structure and liquidity position.

See "Item 1A. Risk Factors" for more information concerning these and other material risks PPL Electric faces in its business.

The purpose of "Management's Discussion and Analysis of Financial Condition and Results of Operations" is to provide information concerning PPL Electric's performance in implementing the strategies and managing the risks and challenges mentioned above.  Specifically:

·
"Results of Operations" provides an overview of PPL Electric's operating results in 2009, 2008 and 2007, including a review of earnings.  It also provides a brief outlook for 2010.
   
·
"Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Electric's liquidity position and credit profile, including its sources of cash (including bank credit facilities and sources of operating cash flow) and uses of cash (including contractual obligations and capital expenditure requirements) and the key risks and uncertainties that impact PPL Electric's past and future liquidity position and financial condition.  This subsection also includes a listing and discussion of PPL Electric's current credit ratings.
   
·
"Financial Condition - Risk Management" provides an explanation of PPL Electric's risk management programs relating to market risk and credit risk.
   
·
"Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of PPL Electric and that require its management to make significant estimates, assumptions and other judgments.

The information provided in this Item 7 should be read in conjunction with PPL Electric's Consolidated Financial Statements and the accompanying Notes.

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

Customer Choice – End of Transition Period

In 1996, the Customer Choice Act was enacted to restructure Pennsylvania's electric utility industry in order to create retail access to a competitive market for generation of electricity.  The Customer Choice Act required each Pennsylvania electric utility, including PPL Electric, to file a restructuring plan to "unbundle" its rates into separate generation, transmission and distribution components and to permit its customers to directly access alternate suppliers of electricity.  Under the Customer Choice Act, PPL Electric was required to act as a PLR.  As part of a settlement approved by the PUC and in connection with the restructuring plan PPL Electric filed under the Customer Choice Act, PPL Electric agreed to provide electricity as a PLR at predetermined "capped" rates through 2009.  In addition, the PUC authorized recovery of approximately $2.97 billion of competitive transition or "stranded" costs (generation-related costs that might not otherwise be recovered in a competitive market) from customers during an 11-year transition period.  For PPL Electric, this transition period ended on December 31, 2009.

As a result of the PUC settlement order and the PLR obligation, PPL Electric, through 2009, generally bore the risk that it would not be able to obtain adequate energy supply at the "capped" rates it could charge to its customers who did not select an alternate electricity supplier.  To mitigate this risk, PPL Electric entered into full requirements energy supply agreements with PPL EnergyPlus, a PPL Electric affiliate.  Under these agreements, through 2009, PPL EnergyPlus supplied PPL Electric's entire PLR load at predetermined prices equal to the capped generation rates that PPL Electric was authorized to charge its customers.

Related to PPL Electric's transition period, the following has occurred or will occur:

·
In August 1999, CTC of $2.4 billion were converted to intangible transition costs when they were securitized by the issuance of transition bonds.  The intangible transition costs were amortized over the life of the transition bonds, through December 2008, in accordance with an amortization schedule filed with the PUC.  These transition bonds matured in tranches, with the final tranche being repaid in December 2008.
   
·
During the transition period, PPL Electric was authorized by the PUC to bill its customers $130 million for a portion of the costs associated with decommissioning of PPL's Susquehanna nuclear plant.  Under the power supply agreements between PPL Electric and PPL EnergyPlus, these revenues were passed on to PPL EnergyPlus.  Similarly, these revenues were passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna and invested in the NDT funds.  Effective January 1, 2010, these ratepayer billings have ceased.
   
·
In December 2009, PPL Electric filed with the PUC a final reconciliation of CTC and ITC recoveries during the transition period.  At December 31, 2009, PPL Electric has recorded a net regulatory liability of $33 million related to these recoveries.  The net overcollection will be reflected in customer rates in 2010.
   
·
At December 31, 2009, PPL Electric's long-term power purchase agreements with PPL EnergyPlus (effective since 2000 and 2002) expired.
   
·
To mitigate 2010 rate increases, PPL Electric implemented two programs in 2008 and 2009 that allowed customers to make prepayments toward their 2010 and 2011 electric bills or to defer any 2010 electric bill increases exceeding 25%.  Any deferred amounts are to be repaid by 2012.  At December 31, 2009, PPL Electric has recorded a liability of $36 million for these programs.
   
·
Effective January 1, 2010, PPL Electric's rates for generation supply as a PLR are no longer capped and the cost of electric generation is based on a competitive solicitation process.  During 2007 through 2009, PPL Electric procured through PUC-approved solicitation procedures, the electric generation supply it will need in 2010 for customers who do not choose an alternative supplier.  The prices in these contracts will result in an average residential customer paying approximately 30% higher rates, as compared to the previously-capped rates on delivered electricity.  PPL Electric is currently procuring the PLR supply it will need for the January 2011 through May 2013 period.  The results of all procurements continue to require the approval of the PUC.
   
·
For those customers who choose to procure generation supply from alternative providers, PPL Electric will provide services for these alternative generation suppliers to bill usage charges, among other duties.  As required by a PUC-approved plan, PPL Electric will be purchasing certain receivables from alternative suppliers at a discount.

In October 2008, Act 129 became effective.  This law created requirements for energy efficiency and conservation programs and for the use of smart metering technology, imposed new PLR electricity supply procurement rules, provided remedies for market misconduct, and made changes to the existing Alternative Energy Portfolio Standard.

Prior to the expiration of the generation rate caps, customers' interest in purchasing generation supply from other providers was limited because in recent years, the long-term supply agreement between PPL Electric and PPL EnergyPlus provided a below-market cost of generation supply for these customers.  As a result, a limited amount of "shopping" occurred.  In 2010, several alternative suppliers have offered to provide generation supply in PPL Electric's service territory.  When its customers purchase supply from these alternative suppliers or from PPL Electric as PLR, the purchase of such supply has no significant impact on the operating results of PPL Electric.  The cost to purchase PLR supply is passed directly by PPL Electric to its customers without markup.  For those customers who receive their supply from an alternative supplier, PPL Electric may act as billing agent or the alternative supplier may bill for their supply directly, and in either case, PPL Electric does not record revenues or expenses related to this supply.  PPL Electric remains the distribution provider for all the customers in its service territory and charges a regulated rate for the service of delivering that electricity.

Lower demand for electric power due to increased prices, the economic downturn or the conservation provisions of Act 129 that require PPL Electric to reduce its customers' electricity usage in future periods, could impact future revenues.  The reduction in volume could be offset by changes in customer rates for this service, subject to PUC approval, depending on PPL Electric's cost structure.  Act 129 includes one-time penalties of up to $20 million for not attaining the required reductions by 2011 and 2013.  At this time, PPL Electric expects to meet these targeted reductions.  The costs of complying with the other provisions of Act 129 would, subject to PUC approval, be recoverable through an automatic adjustment clause.  None of the above changes are expected to have a significant impact on PPL Electric's 2010 financial condition, operating results or cash flows.

The final expiration of generation rate caps in Pennsylvania, applicable to three other large regulated utilities, is scheduled to occur at the end of 2010.  Discussions concerning generation rate caps and rate increase mitigation are continuing.  The final result of those discussions and the future impact on the financial condition and future cash flows of PPL Electric cannot be predicted at this time.

See Note 14 to the Financial Statements for additional information on Pennsylvania legislative and other regulatory activities.

Market Events

In 2008, conditions in the financial markets became disruptive to the processes of managing credit risk, responding to liquidity needs, measuring financial instruments at fair value, and managing market price risk.  Bank credit capacity was reduced and the cost of renewing or establishing new credit facilities increased, thereby introducing uncertainties as to PPL Electric's ability to reliably estimate the longer-term cost and availability of credit.  In general, bank credit capacity has increased from the significantly constrained levels of 2008 and early 2009.  In addition, the cost of renewing or establishing new credit facilities has improved when compared with the 2008 and early 2009 periods.

Credit Risk

Credit risk is the risk that PPL Electric would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL Electric maintains credit policies and procedures to limit counterparty credit risk.  Conditions in the financial and commodity markets have generally increased PPL Electric's exposure to credit risk.  See Notes 15, 17 and 18 to the Financial Statements, and "Risk Management - Credit Risk" for more information on credit risk.

Liquidity Risk

PPL Electric expects to continue to have access to adequate sources of liquidity through operating cash flows, cash and cash equivalents, credit facilities and, from time to time, the issuance of capital market securities.  PPL Electric's ability to access capital markets may be impacted by conditions in the overall financial and capital markets, as well as conditions specific to the utility sector.  See "Financial Condition - Liquidity and Capital Resources" for an expanded discussion of PPL Electric's liquidity position and a discussion of its forecasted sources of cash.

Securities Price Risk

PPL Electric participates in and is allocated costs from defined benefit plans sponsored by PPL.  Declines in the market price of debt and equity securities result in unrealized losses that reduce the asset values of PPL's defined benefit plans.  PPL's defined benefit plans earned positive returns in the second half of 2009, thereby recovering a portion of the negative returns incurred in 2008 and the first quarter of 2009.

Determination of the funded status of defined benefit plans, contribution requirements and net periodic defined benefit costs for future years are subject to changes in various assumptions, in addition to the actual performance of the assets in the plans.  See "Application of Critical Accounting Policies - Defined Benefits" for a discussion of the assumptions and sensitivities regarding those assumptions.

The Economic Stimulus Package

The Economic Stimulus Package was intended to stimulate the U.S. economy through federal tax relief, expansion of unemployment benefits and other social stimulus provisions, domestic spending for education, health care and infrastructure, including the energy sector.  A portion of the benefits included in the Economic Stimulus Package are offered in the form of loan fee reductions, expanded loan guarantees and secondary market incentives.

Funds from the Economic Stimulus Package have been allocated to various federal agencies, such as the DOE, and provided to state agencies through block grants.  The DOE has made awards of the funds for smart grid and efficiency-related programs.  In addition, in July 2009, PPL Electric proposed to the DOE that the agency provide funding for one-half of a $38 million smart grid project.  The project would use smart grid technology to strengthen reliability, save energy and improve electric service for 60,000 Harrisburg, Pennsylvania area customers.  It would also provide benefits beyond the Harrisburg region, helping to speed power restoration across PPL Electric's 29-county service territory.  In October 2009, PPL Electric received notification that its grant proposal had been selected by the DOE for award negotiations.  PPL Electric cannot predict the outcome of these award negotiations.

Results of Operations

Earnings

Income available to PPL was:

   
2009
    
2008
    
2007
  
                   
   
$
124
    
$
158
    
$
145
  

The changes in income available to PPL from year to year were, in part, attributable to several special items that management considers significant.  Details of these special items are provided below.

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

   
2009 vs. 2008
  
2008 vs. 2007
             
Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges)
  
$
(16
)
  
$
32
  
Other operation and maintenance
    
3
      
(8
)
Other income - net (a)
    
(2
)
    
(10
)
Interest expense
    
(12
)
    
1
  
Other
    
2
      
(3
)
Special items
    
(9
)
    
1
  
   
$
(34
)
  
$
13
  

(a)
  
Includes interest income from affiliate.

·
Delivery revenues decreased in 2009 compared with 2008, primarily due to unfavorable economic conditions, including industrial customers scaling back on production and the unfavorable impact of weather on sales volumes.  See "Revenue Recognition" in Note 1 to the Financial Statements for information on a true-up of FERC formula-based transmission revenues.
 
Delivery revenues increased in 2008 compared with 2007, primarily due to a base rate increase effective January 1, 2008 and normal load growth.
   
·
Other operation and maintenance expenses increased in 2008 compared with 2007, primarily due to insurance recovery of storm costs in 2007, higher vegetation management costs and higher regulatory asset amortization.
   
·
Other income - net decreased in 2008 compared with 2007, primarily due to a decrease in interest income from affiliate resulting from a decrease in the average balance outstanding on a note receivable from an affiliate and a lower average floating interest rate.
   
·
Interest expense increased in 2009 compared with 2008, primarily due to $400 million of debt issuances in October 2008 that prefunded a portion of August 2009 debt maturities.

The following after-tax amounts, which management considers special items, also impacted earnings.

   
2009
  
2008
  
2007
                         
Impairments
  
$
(1
)
                
Workforce reduction (a)
    
(5
)
          
$
(1
)
Other
                        
Change in tax accounting method related to repairs (Note 5)
    
(3
)
                
Total
  
$
(9
)
          
$
(1
)

(a)
  
See Note 12 to the Financial Statements for additional information related to the 2009 workforce reduction.

PPL Electric's earnings beyond 2009 are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1A. Risk Factors," the rest of this Item 7 and Note 14 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact PPL Electric's future earnings.

2010 Outlook

Excluding special items, PPL Electric projects lower earnings in 2010 compared with 2009, as a net result of lower distribution revenues, primarily due to continued slow economic growth and weak customer demand; higher operation and maintenance expenses; offset by lower financing costs.

In late March 2010, PPL Electric expects to file a request with the PUC seeking an increase in its distribution rates beginning in January 2011.
 
See Note 14 to the Financial Statements for a discussion of items that could impact future earnings, including Pennsylvania legislative and other regulatory activities.

Statement of Income Analysis --

Operating Revenues

Retail Electric

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

   
2009 vs. 2008
  
2008 vs. 2007
             
Delivery
  
$
(60
)
  
$
17
  
PLR
    
(20
)
    
19
  
Other
    
9
      
3
  
   
$
(71
)
  
$
39
  

The decrease in retail electric revenues for 2009 compared with 2008 was attributable to unfavorable economic conditions, including industrial customers scaling back on production.  In addition, weather had an unfavorable impact on sales volumes.  These decreases were partially offset by favorable price increases.  See "Revenue Recognition" in Note 1 to the Financial Statements for information on a true-up of FERC formula-based transmission revenues.

The increase in PLR revenue for 2008 compared with 2007 was attributable to normal load growth, as well as a favorable price increase.  The increase in delivery revenue for the same period was primarily due to a base rate increase effective January 1, 2008, and normal load growth.  These increases were partially offset by the unfavorable impact of weather on residential and commercial sales in 2008.

Wholesale Electric to Affiliate

PPL Electric has a contract to sell to PPL EnergyPlus the electricity that PPL Electric purchases under contracts with NUGs.  The decrease of $38 million in wholesale electric to affiliate in 2009 compared with 2008 was primarily due to the expiration of NUG contracts in 2008 and 2009.  The final NUG contract will expire in 2014.

The decrease of $48 million in wholesale electric to affiliate in 2008 compared with 2007 was primarily due to the expiration of a NUG contract at the end of 2007 and the expiration of two NUG contracts during 2008.  The decrease was partially offset by higher prices on certain NUG contracts.

Energy Purchases

Energy purchases decreased by $49 million for 2009 compared with 2008, primarily due to the expiration of NUG contracts in 2008 and 2009, as well as lower ancillary charges, which are primarily the result of lower pricing.  The final NUG contract will expire in 2014.

Energy purchases decreased by $43 million for 2008 compared with 2007, primarily due to the expiration of a NUG contract at the end of 2007 and two NUG contracts in 2008, partially offset by higher prices on certain NUG contracts.

Energy Purchases from Affiliate

Energy purchases from affiliate decreased by $20 million in 2009 compared with 2008.  The decrease was attributable to unfavorable weather and the impact of economic conditions, primarily on industrial customers' load, partially offset by higher prices for energy purchased under the power supply contracts with PPL EnergyPlus that support the PLR load.

Energy purchases from affiliate increased by $16 million in 2008 compared with 2007.  The increase was primarily due to higher prices for energy purchased under the power supply contracts with PPL EnergyPlus that support the PLR load, as well as higher PLR load.

Other Operation and Maintenance

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

   
2009 vs. 2008
  
2008 vs. 2007
                 
Workforce reduction (Note 12)
  
$
9
          
Uncollectible accounts
    
7
    
$
1
  
Employee benefits
    
5
      
(6
)
Insurance recovery of storm costs
    
3
      
5
  
Payroll-related costs
    
3
      
(3
)
Regulatory asset amortization
            
4
  
PUC-reportable storm costs
    
(11
)
    
(4
)
Vegetation management costs
    
(5
)
    
5
  
Contractor-related expenses
    
(2
)
    
1
  
Customer education programs
    
(2
)
        
Other
            
5
  
   
$
7
    
$
8
  

Amortization of Recoverable Transition Costs

Amortization of recoverable transition costs increased by $11 million in 2009 compared with 2008 and decreased by $17 million in 2008 compared with 2007.  The amortization of recoverable transition costs was based on a PUC amortization schedule, adjusted for ITC and CTC recoveries in customer rates and related expenses.  Since the amortization substantially matches the revenue recorded based on recovery in customer rates, there is minimal impact on earnings.  At the end of 2009, PPL Electric's recoverable transition costs have been fully amortized.

Taxes, Other Than Income

Taxes, other than income decreased by $9 million in 2009 compared with 2008.  The decrease was primarily due to a $12 million decrease in Pennsylvania gross receipts tax expense, which reflects a decrease in the tax rate in 2009.  Gross receipts tax is passed through to customers.

Taxes, other than income increased by $3 million in 2008 compared with 2007.  The increase was primarily due to a $6 million increase in Pennsylvania gross receipts tax expense, which reflects an increase in the tax rate in 2008.

Other Income - net

See Note 16 to the Financial Statements for details of other income.

Interest Income from Affiliate

Interest income from affiliate decreased by $5 million in 2009 compared with 2008, and decreased by $10 million in 2008 compared with 2007.  These decreases were the result of a reduced average balance outstanding on a note receivable from an affiliate and a lower average rate on this note due to the floating interest rate.

Interest Expense

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

   
2009 vs. 2008
  
2008 vs. 2007
             
Long-term debt interest expense (a)
  
$
24
    
$
7
  
Repayment of transition bonds
    
(13
)
    
(22
)
Interest on PLR contract collateral (Note 15)
    
(8
)
    
(7
)
Other
    
4
      
(2
)
   
$
7
    
$
(24
)

(a)
  
The increases were primarily due to $400 million of debt issuances in October 2008 that prefunded a portion of August 2009 debt maturities.

Income Taxes

The changes in income taxes were due to:

   
2009 vs. 2008
  
2008 vs. 2007
                 
Higher (lower) pre-tax book income
  
$
(19
)
  
$
16
  
Tax return adjustments (a)
    
(2
)
    
7
  
Tax reserve adjustments
    
(2
)
    
(1
)
Other
            
(3
)
   
$
(23
)
  
$
19
  

(a)
  
During 2009, PPL Electric received consent from the IRS to change its method of accounting for certain expenditures for tax purposes.  PPL deducted the resulting IRC Sec. 481 adjustment on its 2008 tax return and recorded a $3 million adjustment to federal and state income tax expense which results from the reversal of prior years' state income tax benefits related to regulated depreciation.

See Note 5 to the Financial Statements for additional information on income taxes.

Financial Condition

Liquidity and Capital Resources

PPL Electric continues to focus on maintaining a strong credit profile and liquidity position.  PPL Electric expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents and its credit facilities.  PPL Electric currently does not plan to access commercial paper markets or debt and equity capital markets in 2010.

PPL Electric's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including, but not limited to:

·
unusual or extreme weather that may damage PPL Electric's transmission and distribution facilities or affect energy sales to customers;
·
the ability to recover and the timeliness and adequacy of recovery of costs associated with regulated utility businesses;
·
any adverse outcome of legal proceedings and investigations with respect to PPL Electric's current and past business activities;
·
deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly; and
·
a downgrade in PPL Electric's credit ratings that could adversely affect its ability to access capital and increase the cost of credit facilities and any new debt.

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affecting PPL Electric's cash flows.

At December 31, PPL Electric had the following:

   
2009
  
2008
  
2007
                         
Cash and cash equivalents
  
$
485
    
$
483
    
$
33
  
Short-term debt
          
$
95
    
$
41
  

The changes in PPL Electric's cash and cash equivalents position resulted from:

   
2009
  
2008
  
2007
                         
Net Cash Provided by Operating Activities
  
$
294
    
$
648
    
$
568
  
Net Cash Provided by (Used in) Investing Activities
    
6
      
(226
)
    
(239
)
Net Cash Provided by (Used in) Financing Activities
    
(298
)
    
28
      
(446
)
Net Increase (Decrease) in Cash and Cash Equivalents
  
$
2
    
$
450
    
$
(117
)

Operating Activities

Net cash provided by operating activities decreased by 55%, or $354 million, in 2009 compared with 2008, primarily as a result of the repayment by PPL Electric of $300 million in cash collateral related to the long-term PLR energy supply agreements with PPL Energy Supply, which expired at the end of 2009.  The decrease also reflects the impact of lower delivery revenues and higher payments of interest and income taxes.

Net cash provided by operating activities increased by 14%, or $80 million, in 2008 compared with 2007, primarily as a result of increased revenues, which was due primarily to a base rate increase effective January 1, 2008 and normal load growth, as well as less interest incurred on long-term debt, as a result of the repayment of transition bonds during 2007 and 2008.  The increases to cash provided by operating activities resulting from these items were partially offset by increased energy purchases, primarily as a result of higher prices for energy purchased from PPL EnergyPlus under the PLR contracts and higher PLR load, as well as an insurance recovery of storm costs in 2007.

PPL Electric expects be able to achieve relatively stable cash flows from operations through the support of (i) contracts it has entered into to procure the 2010 and a portion of 2011 PLR electricity supply it expects to need for residential, small commercial and small industrial customers who do not choose an alternative supplier and (ii) purchasing receivables from alternative suppliers for those customers who purchase generation from other suppliers.  See Note 14 to the Financial Statements for information on the energy purchase contracts and "Customer Choice - End of Transition Period" in "Overview" in this Item 7 for a discussion of the ability of customers to purchase generation supply from other providers and PPL Electric's purchase of the related receivables.

Investing Activities

The primary use of cash in investing activities is capital expenditures.  See "Forecasted Uses of Cash" for detail regarding capital expenditures in 2009 and projected expenditures for the years 2010 through 2012.

Net cash provided by investing activities was $6 million in 2009 compared with cash used in investing activities of $226 million in 2008.  The change from 2008 to 2009 primarily reflects the receipt of $300 million from an affiliate as repayment of a demand loan.

Net cash used in investing activities remained relatively stable in 2008 compared with 2007, but there were significant changes in certain components.  In 2008, there was a net decrease of $69 million in restricted cash and cash equivalents compared to a net increase of $8 million in 2007.  Capital expenditures decreased $18 million in 2008 compared with 2007.  In 2008, PPL Electric loaned $23 million to an affiliate compared with receiving $23 million in 2007 from an affiliate as partial repayment of a demand loan.  Additionally, PPL Electric received net proceeds of $25 million from purchases and sales of investments in 2007 compared with none in 2008.

Financing Activities

Net cash used in financing activities was $298 million in 2009 compared with net cash provided by financing activities of $28 million in 2008.  The change from 2008 to 2009 primarily reflects less issuances and increased retirements of long-term debt, contributions received from PPL, increased common stock dividends to PPL and the repayment of short-term borrowings in 2009.  PPL Electric had net debt retirements of $392 million in 2009 compared with net debt issuances of $148 million in 2008, received $400 million of contributions from PPL in 2009 and paid $176 million more of common stock dividends to PPL in 2009 compared to 2008.

Net cash provided by financing activities was $28 million in 2008 compared with net cash used in financing activities of $446 million in 2007.  The change from 2007 to 2008 primarily reflects increased issuances and less retirements of long-term debt, less common stock dividends to PPL and increased short-term borrowings in 2008.  PPL Electric had net debt issuances of $148 million in 2008 compared to net debt retirements of $306 million in 2007, and it paid $21 million less of common stock dividends to PPL in 2008 compared to 2007.

See "Forecasted Sources of Cash" for a discussion of PPL Electric's plans to issue debt and equity securities, as well as a discussion of credit facility capacity available to PPL Electric.  Also see "Forecasted Uses of Cash" for a discussion of PPL Electric's plans to pay dividends on its common and preferred securities, as well as maturities of PPL Electric's long-term debt.

PPL Electric's debt financing activity in 2009 was:

   
Issuance
  
Retirements
                 
Senior Secured Bonds (a)
  
$
298
    
$
(586
)
Variable Rate Pollution Control Facilities Note
            
(9
)
Short-term debt
            
(95
)
Total
  
$
298
    
$
(690
)
Net decrease
          
$
(392
)

(a)
  
Issuance is net of pricing discount.  Retirements exclude a $9 million premium paid in connection with the December 2009 redemption of PPL Electric's 4.30% Senior Secured Bonds due 2013.

See Note 7 to the Financial Statements for more detailed information regarding PPL Electric's financing activities in 2009.

Forecasted Sources of Cash

PPL Electric expects to continue to have significant sources of cash available in the near term, including various credit facilities and a commercial paper program.  PPL Electric currently does not plan to access commercial paper markets or debt and equity capital markets in 2010, but may decide to do so, subject to market conditions, to enhance its liquidity.

Credit Facilities

At December 31, 2009, PPL Electric's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

   
Committed Capacity
  
Borrowed
  
Letters of Credit Issued (d)
  
Unused Capacity
                                 
5-year Syndicated Credit Facility (a)
  
$
190
            
$
6
    
$
184
  
Asset-backed Credit Facility (b)
    
150
                      
150
  
Total PPL Electric Credit Facilities (c)
  
$
340
            
$
6
    
$
334
  

(a)
  
The commitments under this credit facility are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 18% of the total committed capacity.
     
   
Borrowings under this credit facility generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.  PPL Electric also has the capability to request the lenders to issue up to $190 million of letters of credit under this facility, which issuances reduce available borrowing capacity.  Under certain conditions, PPL Electric may request that the facility's capacity be increased by up to $100 million.
     
   
This credit facility contains a financial covenant requiring debt to total capitalization to not exceed 70%.  At December 31, 2009 and 2008, PPL Electric's consolidated debt to total capitalization percentages, as calculated in accordance with its credit facility, were 44% and 53%.  This credit facility also contains standard representations and warranties that must be made for PPL Electric to borrow under it.
     
(b)
  
This credit facility relates to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenues to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $150 million from a commercial paper conduit sponsored by a financial institution.  At December 31, 2009, based on accounts receivable and unbilled revenue pledged, $150 million was available for borrowing.
     
(c)
  
The committed capacity expires as follows:  $150 million in 2010 and $190 million in 2012.  PPL Electric intends to renew its existing $150 million asset-backed credit facility in 2010 in order to maintain its current total committed capacity level.
     
(d)
  
PPL Electric has a reimbursement obligation to the extent any letters of credit are drawn upon.

In addition to the financial covenant noted in the table above, the credit agreements governing the credit facilities contain various other covenants.  Failure to comply with the covenants after applicable grace periods could result in acceleration of repayment of borrowings and/or termination of the agreements.  PPL Electric monitors compliance with the covenants on a regular basis.  At December 31, 2009, PPL Electric was in material compliance with these covenants.  At this time, PPL Electric believes that these covenants and other borrowing conditions will not limit access to these funding sources.

See Note 7 to the Financial Statements for further discussion of PPL Electric's credit facilities.

Commercial Paper

PPL Electric maintains a commercial paper program for up to $200 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Electric's five-year syndicated credit facility based on available capacity.

As noted below under "Credit Ratings," commercial paper for PPL Electric is rated P-2, A-2 and F2 by Moody's, S&P and Fitch.  Market conditions to issue commercial paper with these ratings have strengthened significantly since 2008, when the downturn in the financial markets created extremely limited liquidity resulting in high borrowing rates.  PPL Electric did not issue any commercial paper during 2009.  Based on its current cash position and anticipated cash flows, PPL Electric currently does not plan to issue any commercial paper during 2010, but it may do so from time to time, subject to market conditions, to facilitate short-term cash flow needs.

Contributions from PPL

From time to time PPL may make capital contributions to PPL Electric.  PPL Electric may use these contributions for general corporate purposes.

Long-Term Debt and Equity Securities

PPL Electric currently does not plan to issue any debt or equity securities in 2010.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, and taxes, PPL Electric currently expects to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common and preferred securities and possibly the purchase or redemption of a portion of its debt securities.

Capital Expenditures

The table below shows PPL Electric's actual spending for the year 2009 and current capital expenditure projections for the years 2010 through 2012.

   
Actual
  
Projected
   
2009
  
2010
  
2011
  
2012
Construction expenditures (a) (b)
                        
Transmission and distribution facilities
  
$
264
  
$
542
  
$
739
  
$
605
Other
    
34
    
47
    
38
    
39
Total Capital Expenditures
  
$
298
  
$
589
  
$
777
  
$
644

(a)
  
Construction expenditures include AFUDC, which is expected to be approximately $34 million for the years 2010 through 2012.
(b)
  
Includes expenditures for intangible assets.

PPL Electric's capital expenditure projections for the years 2010 through 2012 total approximately $2.0 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  The table includes projected costs for the asset optimization program focused on the replacement of aging transmission and distribution assets, and the PJM-approved regional transmission line expansion project.  See Note 8 to the Financial Statements for additional information.

PPL Electric plans to fund its capital expenditures in 2010 with cash on hand and cash from operations.

Contractual Obligations

PPL Electric has assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2009, the estimated contractual cash obligations of PPL Electric were:

   
Total
  
Less Than 1 Year
  
1-3 Years
  
4-5 Years
  
After 5 Years
                               
Long-term Debt (a)
  
$
1,474
                    
$
410
    
$
1,064
  
Interest on Long-term Debt (b)
    
1,454
    
$
89
    
$
173
      
147
      
1,045
  
Purchase Obligations (c)
    
3,142
      
2,599
      
537
      
6
          
Other Long-term Liabilities Reflected on the Balance Sheets under GAAP (d)
                                        
Total Contractual Cash Obligations
  
$
6,070
    
$
2,688
    
$
710
    
$
563
    
$
2,109
  

(a)
  
Reflects principal maturities only based on legal maturity dates.  See Note 7 to the Financial Statements for a discussion of variable-rate remarketable bonds issued by the PEDFA on behalf of PPL Electric.  PPL Electric does not have any capital or operating lease obligations.
(b)
  
Assumes interest payments through maturity.  The payments herein are subject to change, as payments for variable-rate debt have been estimated.
(c)
  
The payments reflected herein are subject to change, as the purchase obligation reflected is an estimate based on projected obligated quantities and projected pricing under the contract.  Purchase orders made in the ordinary course of business are excluded from the amounts presented.
(d)
  
At December 31, 2009, total unrecognized tax benefits of $74 million were excluded from this table as PPL Electric cannot reasonably estimate the amount and period of future payments.  See Note 5 to the Financial Statements for additional information.

Dividends

From time to time, as determined by its Board of Directors, PPL Electric pays dividends on its common stock to its parent, PPL.

As discussed in Note 7 to the Financial Statements, PPL Electric may not pay dividends on its common stock, except in certain circumstances, unless full dividends have been paid on the 6.25% Series Preference Stock for the then-current dividend period.  PPL Electric does not, at this time, expect that such limitation would significantly impact its ability to declare dividends.

PPL Electric expects to continue to pay quarterly dividends on its outstanding preferred securities, if and as declared by its Board of Directors.

Purchase or Redemption of Debt Securities

PPL Electric will continue to evaluate purchasing or redeeming outstanding debt securities and may decide to take action depending upon prevailing market conditions and available cash.

Credit Ratings

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

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

The following table summarizes the credit ratings of PPL Electric at December 31, 2009:

   
Moody's
  
S&P
  
Fitch (a)
PPL Electric (b)
            
Senior Unsecured/Issuer Rating
  
Baa1
  
A-
  
BBB
First Mortgage Bonds/Senior Secured Bonds
  
A3
  
A-
  
A-
Commercial Paper
  
P-2
  
A-2
  
F2
Preferred Stock
  
Baa3
  
BBB
  
BBB
Preference Stock
  
Baa3
  
BBB
  
BBB
Outlook
  
Negative
  
Negative
  
STABLE

(a)
  
Issuer Rating for Fitch is an "Issuer Default Rating."
(b)
  
Excludes Pollution Control Revenue Bonds issued by the LCIDA and the PEDFA on behalf of PPL Electric, of which the LCIDA bonds are insured and may be rated on the basis of relevant factors, including the insurer's ratings.

In January 2009, S&P completed a review of PPL Electric, upon which it revised its outlook to negative from stable and affirmed the A- issuer rating of PPL Electric.  S&P stated in its press release that the revision in its outlook reflects the linkage with PPL, whose outlook was also revised to negative from stable, along with their expectation that PPL Electric's financial metrics could weaken beginning in 2010.

In May 2009, Moody's completed a review of PPL Electric.  As a result of that review, Moody's revised its outlook for PPL Electric to negative from stable.  Moody's stated in its press release that the revision in the outlook for PPL Electric reflects Moody's expectation that PPL Electric's financial metrics will deteriorate beyond 2009 and considers the potential for additional pressure on cash flows.

In October 2009, Fitch completed a review of PPL Electric, upon which it affirmed all ratings of PPL Electric.  
 
In January 2010, as a result of implementing its recently revised guidelines for rating preferred stock and hybrid securities, Fitch lowered the ratings of PPL Electric's preferred stock and preference stock to BBB- from BBB.  Fitch stated in its press release that the new guidelines, which apply to instruments issued by companies in all sectors, typically resulted in downgrades of one notch for many instruments that provide for the ability to defer interest or dividend payments.  Fitch stated that it has no reason to believe that deferral will be activated.

Off-Balance Sheet Arrangements

PPL Electric has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party.  See Note 14 to the Financial Statements for a discussion of these agreements.

Risk Management

Market Risk

Commodity Price and Volumetric Risk - PLR Contracts

PPL Electric has an obligation to act as a PLR.  This role has the potential to expose PPL Electric to electric generation price and volumetric risk.  Through 2009, PPL Electric and PPL EnergyPlus had power supply agreements under which PPL EnergyPlus sold PPL Electric (under a predetermined pricing arrangement) energy and capacity to fulfill this PLR obligation.  As a result, PPL Electric had shifted these risks to PPL EnergyPlus.  For its 2010 PLR obligation, PPL Electric has entered into power purchase agreements with several counterparties, which include fixed prices that shift these risks to the counterparties.  PPL Electric is in the process of procuring such supply for the period January 2011 through May 2013.  In the event a supplier defaults on its obligation, PPL Electric would be required to seek replacement power in the market.  All incremental costs incurred by PPL Electric would be recoverable from customers in future rates.  See "Overview" in this Item 7 and Note 14 to the Financial Statements for information on the PUC-approved procurement plan and other ongoing Pennsylvania regulatory and legislative activities.

Interest Rate Risk

PPL Electric has issued debt to finance its operations, which exposes it to interest rate risk.  PPL Electric's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant at December 31, 2009 and 2008.  PPL Electric estimated that a 10% decrease in interest rates at December 31, 2009 would increase the fair value of its debt portfolio by $69 million, compared with $50 million at December 31, 2008.

Credit Risk

Credit risk is the risk that PPL Electric would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL Electric requires that counterparties maintain specified credit ratings and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk.  However, PPL Electric has concentrations of suppliers, financial institutions and customers.  These concentrations may impact PPL Electric's overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.

In 2007, the PUC approved PPL Electric's post-rate cap plan to procure default electricity supply for retail customers who do not choose an alternative competitive supplier in 2010.  From 2007 through 2009, PPL Electric conducted six competitive solicitations to purchase electricity generation supply for these customers.

In October 2009, PPL Electric purchased 2010 supply for fixed-price default service to large commercial and large industrial customers who elect to take that service.  In November 2009, PPL Electric purchased supply to provide hourly default service to large commercial and industrial customers in 2010.

In June 2009, the PUC approved PPL Electric's procurement plan for the period January 2011 through May 2013.  The first two of 14 planned competitive solicitations occurred in 2009.

Under the standard Supply Master Agreement (the Agreement) for the bid solicitation process, PPL Electric requires all suppliers to post collateral if their credit exposure exceeds an established credit limit.  In the event a supplier defaults on its obligation, PPL Electric would be required to seek replacement power in the market.  All incremental costs incurred by PPL Electric would be recoverable from customers in future rates.  At December 31, 2009, all of the successful bidders under all of the solicitations had an investment grade credit rating from S&P, and were not required to post collateral under the Agreement.  There is no instance under the Agreement in which PPL Electric is required to post collateral to its suppliers.

See "Overview" in this Item 7 and Notes 14, 15, 17 and 18 to the Financial Statements for additional information on the competitive solicitations, the Agreement and credit concentration and risk.

Related Party Transactions

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

For additional information on related party transactions, see Note 15 to the Financial Statements.

Environmental Matters

See "Item 1. Business - Environmental Matters" and Note 14 to the Financial Statements for a discussion of environmental matters.

Competition

See "Item 1. Business - Segment Information - Pennsylvania Delivery Segment - Competition" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL Electric.

New Accounting Guidance

See Notes 1 and 22 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

PPL Electric's financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations of PPL Electric, and require estimates or other judgments of matters inherently uncertain. Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements).  PPL's senior management has reviewed these critical accounting policies and the estimates and assumptions regarding them with its Audit Committee. In addition, PPL's senior management has reviewed the following disclosures regarding the application of these critical accounting policies with the Audit Committee.

Effective January 1, 2009, PPL Electric fully applied accounting guidance that provides a framework for measuring fair value.  The fair value measurement concepts provided by this guidance are used within its financial statements where applicable.  See Notes 1 and 17 to the Financial Statements for additional information regarding fair value measurements.

1)    Defined Benefits

PPL Electric participates in and is allocated a significant portion of the liability and net periodic defined benefit pension and other postretirement costs of plans sponsored by PPL Services based on participation in those plans.  PPL Electric records an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to regulatory assets.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.  See Note 12 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

PPL makes certain assumptions regarding the valuation of benefit obligations and the performance of plan assets.  When accounting for defined benefits, delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle.  Annual net periodic defined benefit costs are recorded in current earnings based on estimated results.  Any differences between actual and estimated results are recorded in regulatory assets.  The amount in regulatory assets is amortized to income over future periods.  The delayed recognition allows for a smoothed recognition of costs over the working lives of the employees who benefit under the plans.  The primary assumptions are:

·
Discount Rate - The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future. The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due.
   
·
Expected Return on Plan Assets - Management projects the long-term rates of return on plan assets based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  These projected returns reduce the net benefit costs PPL Electric records currently.
   
·
Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.
   
·
Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.

In selecting a discount rate for its U.S. defined benefit plans, PPL starts with an analysis of the expected benefit payment stream for its plans.  This information is first matched against a spot-rate yield curve.  A portfolio of 526 Aa-graded non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $541 billion, serves as the base from which those with the lowest and highest yields are eliminated to develop the ultimate yield curve.  The results of this analysis are considered together with other economic data and movements in various bond indices to determine the discount rate assumption.  At December 31, 2009, PPL decreased the discount rate for its U.S. pension plans from 6.50% to 6.00% as a result of this assessment and decreased the discount rate for its other postretirement benefit plans from 6.45% to 5.81%.

The expected long-term rates of return for PPL's U.S. defined benefit pension and other postretirement benefits have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  PPL management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.  At December 31, 2009, PPL's expected return on plan assets remained at 8.00% for its U.S. pension plans and remained at 7.00% for its other postretirement benefit plans.

In selecting a rate of compensation increase, PPL considers past experience in light of movements in inflation rates.  At December 31, 2009, PPL's rate of compensation increase remained at 4.75% for its U.S. plans.

In selecting health care cost trend rates for PPL's other postretirement benefit plans, PPL considers past performance and forecasts of health care costs.  At December 31, 2009, PPL's health care cost trend rates were 8.00% for 2010, gradually declining to 5.50% for 2016.

A variance in the assumptions listed above could have a significant impact on the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and the regulatory assets allocated to PPL Electric.  While the charts below reflect either an increase or decrease in each assumption, the inverse of this change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and regulatory assets by a similar amount in the opposite direction.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

At December 31, 2009, PPL Electric had recorded the following defined benefit plan liabilities:

Pension liabilities
  
$
245
  
Other postretirement benefit liabilities
    
73
  

The following chart reflects the sensitivities in the December 31, 2009 Balance Sheet associated with a change in certain assumptions based on PPL's primary defined benefit plans.

   
Increase (Decrease)
Actuarial assumption
  
Change in assumption
  
Impact on defined benefit liabilities
  
Impact on regulatory assets
                           
Discount Rate
    
(0.25)%
    
$
31
    
$
31
    
Rate of Compensation Increase
    
0.25%
      
5
      
5
    
Health Care Cost Trend Rate (a)
    
1.0%
      
5
      
5
    

(a)
  
Only impacts other postretirement benefits.

In 2009, PPL Electric was allocated net periodic defined benefit costs charged to operating expense of $24 million.  This amount represents a $6 million increase compared with the charge recognized during 2008.

The following chart reflects the sensitivities in the 2009 Statement of Income (excluding income tax effects) associated with a change in certain assumptions based on PPL's primary defined benefit plans.

Actuarial assumption
  
Change in assumption
  
Impact on defined benefit costs
                   
Discount Rate
    
(0.25)%
    
$
1
    
Expected Return on Plan Assets
    
(0.25)%
      
2
    
Rate of Compensation Increase
    
0.25%
      
1
    
Health Care Cost Trend Rate (a)
    
1.0%
      
1
    

(a)
  
Only impacts other postretirement benefits.


2)    Loss Accruals

PPL Electric accrues losses for the estimated impacts of various conditions, situations or circumstances involving uncertain or contingent future outcomes.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that a loss has been incurred, given the likelihood of the uncertain future events, and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur."  PPL Electric does not record the accrual of contingencies that might result in gains, unless recovery is assured.  PPL Electric continuously assesses potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.

The accounting aspects of estimated loss accruals include (1) the initial identification and recording of the loss, (2) the determination of triggering events for reducing a recorded loss accrual, and (3) the ongoing assessment as to whether a recorded loss accrual is sufficient.  All three of these aspects require significant judgment by PPL Electric's management.  PPL Electric uses its internal expertise and outside experts (such as lawyers and engineers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

No new significant loss accruals were recorded in 2009.

PPL Electric has identified certain other events that could give rise to a loss, but that do not meet the conditions for accrual.  Such events are disclosed, but not recorded, when it is "reasonably possible" that a loss has been incurred.  See Note 14 to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual.

When an estimated loss is accrued, PPL Electric identifies, where applicable, the triggering events for subsequently reducing the loss accrual.  The triggering events generally occur when the contingency has been resolved and the actual loss is incurred, or when the risk of loss has diminished or been eliminated.  The following are some of the triggering events that provide for the reduction of certain recorded loss accruals:

·
Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected.
   
·
Environmental and other litigation contingencies are reduced when the contingency is resolved and PPL Electric makes actual payments, a better estimate of the loss is determined or the loss is no longer considered probable.

PPL Electric reviews its loss accruals on a regular basis to assure that the recorded potential loss exposures are appropriate.  This involves ongoing communication and analyses with internal and external legal counsel, engineers, operation management and other parties.

3)    Income Tax Uncertainties

Significant management judgment is required in developing PPL Electric's provision for income taxes primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position.  PPL Electric evaluates its tax positions following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  PPL Electric's management considers a number of factors in assessing the benefit to be recognized, including negotiation of a settlement.

On a quarterly basis, PPL Electric reassesses its uncertain tax positions by considering information known at the reporting date.  Based on management's assessment of new information, PPL Electric may subsequently recognize a tax benefit for a previously unrecognized tax position, de-recognize a previously recognized tax position, or re-measure the benefit of a previously recognized tax position.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact PPL Electric's financial statements in the future.

The balance sheet classification of unrecognized tax benefits and the need for valuation allowances to reduce deferred tax assets also require significant management judgment.  PPL Electric classifies unrecognized tax benefits as current, to the extent management expects to settle an uncertain tax position, by payment or receipt of cash, within one year of the reporting date.  Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset.  Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies.  Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized by PPL Electric to account for an uncertain tax positions.  See Note 5 to the Financial Statements for the required disclosures.

At December 31, 2009, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $23 million or decrease by up to $22 million for PPL Electric.  This change could result from the timing and/or valuation of certain deductions, intercompany transactions and unitary filing groups.  The events that could cause these changes are direct settlements with taxing authorities, litigation, legal or administrative guidance by relevant taxing authorities and the lapse of an applicable statute of limitation.

4)    Regulatory Assets

PPL Electric's electricity delivery business is subject to cost-based rate-regulation.  As a result, PPL Electric is required to reflect the effects of regulatory actions in its financial statements.  PPL Electric records assets that result from the regulated ratemaking process that may not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in regulated customer rates.

Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders to other regulated entities, and the status of any pending or potential deregulation legislation.  Based on this continual assessment, management believes the existing regulatory assets are probable of recovery.  This assessment reflects the current political and regulatory climate at the state and federal levels, and is subject to change in the future.  If future recovery of costs ceases to be probable, then asset write-offs would be required to be recognized in operating income.  Additionally, the regulatory agencies can provide flexibility in the manner and timing of the depreciation of PP&E and amortization of regulatory assets.

At December 31, 2009 and 2008, PPL Electric had regulatory assets of $531 million and $763 million.  All of PPL Electric's regulatory assets are either currently being recovered under specific rate orders or represent amounts that will be recovered in future rates based upon established regulatory practices.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit and audit-related services and other services permitted by Sarbanes-Oxley and SEC rules.  The audit and audit-related services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PPL Corporation, PPL Energy Supply, LLC and PPL Electric Utilities Corporation

Reference is made to "Risk Management - Energy Marketing & Trading and Other" for PPL and PPL Energy Supply and "Risk Management" for PPL Electric in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowners of PPL Corporation

We have audited the accompanying consolidated balance sheets of PPL Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PPL Corporation and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PPL Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion thereon.


    /s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 2010
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowners of PPL Corporation

We have audited PPL Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).  PPL Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management's Report on Internal Control over Financial Reporting at Item 9A.  Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, PPL Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PPL Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009 and our report dated February 25, 2010 expressed an unqualified opinion thereon.


    /s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 2010

Report of Independent Registered Public Accounting Firm

To the Board of Managers and Sole Member of PPL Energy Supply, LLC

We have audited the accompanying consolidated balance sheets of PPL Energy Supply, LLC and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company's internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PPL Energy Supply, LLC and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.


    /s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 2010

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowner of PPL Electric Utilities Corporation

We have audited the accompanying consolidated balance sheets of PPL Electric Utilities Corporation and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 2009.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company's internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PPL Electric Utilities Corporation and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.


    /s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 2010
INDEX TO ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
 
Page
FINANCIAL STATEMENTS
    
 
PPL Corporation
    
   
94
  
   
95
  
   
96
  
   
98
  
   
99
  
 
PPL Energy Supply, LLC
    
   
100
  
   
101
  
   
102
  
   
104
  
   
105
  
 
PPL Electric Utilities Corporation
    
   
106
  
   
107
  
   
108
  
   
110
  
       
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
 
111
  
 
123
  
 
125
  
 
125
  
 
126
  
 
131
  
 
132
  
 
138
  
 
139
  
 
142
  
 
143
  
 
146
  
 
156
  
 
156
  
 
170
  
 
171
  
 
172
  
 
177
  
 
185
  
 
187
  
 
188
  
 
190
  
         
SUPPLEMENTARY DATA
    
 
192
  
 
193
  
 
194
  
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, except share data)
   
2009
  
2008
  
2007
Operating Revenues
                  
Utility
  
$
3,902
    
$
4,114
    
$
4,114
  
Unregulated retail electric and gas
    
152
      
151
      
102
  
Wholesale energy marketing
                        
Realized
    
3,291
      
2,288
      
1,581
  
Unrealized economic activity (Note 18)
    
(229
)
    
1,056
      
(145
)
Net energy trading margins
    
17
      
(121
)
    
41
  
Energy-related businesses
    
423
      
519
      
769
  
Total Operating Revenues
    
7,556
      
8,007
      
6,462
  
                         
Operating Expenses
                        
Operation
                        
Fuel
    
931
      
1,084
      
890
  
Energy purchases
                        
Realized
    
2,636
      
1,634
      
918
  
Unrealized economic activity (Note 18)
    
155
      
553
      
(182
)
Other operation and maintenance
    
1,424
      
1,423
      
1,365
  
Amortization of recoverable transition costs
    
304
      
293
      
310
  
Depreciation (Note 1)
    
469
      
458
      
442
  
Taxes, other than income (Note 5)
    
280
      
288
      
298
  
Energy-related businesses (Note 8)
    
396
      
481
      
762
  
Total Operating Expenses
    
6,595
      
6,214
      
4,803
  
                         
Operating Income
    
961
      
1,793
      
1,659
  
                         
Other Income - net (Note 16)
    
49
      
55
      
97
  
                         
Other-Than-Temporary Impairments
    
18
      
36
      
3
  
                         
Interest Expense
    
396
      
455
      
472
  
                         
Income from Continuing Operations Before Income Taxes
    
596
      
1,357
      
1,281
  
                         
Income Taxes (Note 5)
    
130
      
430
      
259
  
                         
Income from Continuing Operations After Income Taxes
    
466
      
927
      
1,022
  
                         
Income (Loss) from Discontinued Operations (net of income taxes) (Note 9)
    
(40
)
    
23
      
293
  
                         
Net Income
    
426
      
950
      
1,315
  
                         
Net Income Attributable to Noncontrolling Interests
    
19
      
20
      
27
  
                         
Net Income Attributable to PPL Corporation
  
$
407
    
$
930
    
$
1,288
  
                         
Amounts Attributable to PPL Corporation:
                        
Income from Continuing Operations After Income Taxes
  
$
447
    
$
907
    
$
1,001
  
Income (Loss) from Discontinued Operations (net of income taxes)
    
(40
)
    
23
      
287
  
Net Income
  
$
407
    
$
930
    
$
1,288
  
                         
Earnings Per Share of Common Stock:
                        
Income from Continuing Operations After Income Taxes Available to PPL Corporation Common Shareowners:
                        
Basic
  
$
1.18
    
$
2.42
    
$
2.62
  
Diluted
  
$
1.18
    
$
2.41
    
$
2.60
  
Net Income Available to PPL Corporation Common Shareowners:
                        
Basic
  
$
1.08
    
$
2.48
    
$
3.37
  
Diluted
  
$
1.08
    
$
2.47
    
$
3.34
  
                         
Dividends Declared Per Share of Common Stock
  
$
1.38
    
$
1.34
    
$
1.22
  
                         
Weighted-Average Shares of Common Stock Outstanding (in thousands)
                        
Basic
    
376,082
      
373,626
      
380,563
  
Diluted
    
376,406
      
374,901
      
383,492
  

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
   
2009
  
2008
  
2007
Cash Flows from Operating Activities
                  
Net income
  
$
426
    
$
950
    
$
1,315
  
Adjustments to reconcile net income to net cash provided by operating activities
                        
Pre-tax gain from the sale of the Latin American businesses
                    
(400
)
Pre-tax gain from the sale of the majority of Maine hydroelectric generation business
    
(38
)
                
Depreciation
    
471
      
461
      
458
  
Amortization of recoverable transition costs and other
    
389
      
383
      
433
  
Defined benefits
    
(115
)
    
(100
)
    
(39
)
Impairment of assets
    
127
      
105
      
124
  
Gain on the sale of emission allowances
    
(2
)
    
(6
)
    
(109
)
Deferred income taxes and investment tax credits
    
104
      
43
      
42
  
Unrealized (gains) losses on derivatives, and other hedging activities
    
329
      
(279
)
    
(22
)
Other
    
23
      
71
      
38
  
Change in current assets and current liabilities
                        
Accounts receivable
    
76
      
118
      
(186
)
Accounts payable
    
(150
)
    
85
      
119
  
Unbilled revenues
    
2
      
(85
)
    
(99
)
Fuel, materials and supplies
    
(21
)
    
(35
)
    
25
  
Counterparty collateral
    
334
      
1
      
12
  
Price risk management assets and liabilities
    
(231
)
    
(77
)
    
(45
)
Other
    
96
      
(16
)
     (4 ) 
Other operating activities
                        
Other assets
    
12
      
21
      
(12
)
Other liabilities
    
20
      
(51
)
    
(79
)
                         
Net cash provided by operating activities
    
1,852
      
1,589
      
1,571
  
                         
Cash Flows from Investing Activities
                        
Expenditures for property, plant and equipment
    
(1,225
)
    
(1,418
)
    
(1,657
)
Proceeds from the sale of the majority of Maine hydroelectric generation business
    
81
                  
Proceeds from the sale of the gas and propane businesses
            
303
          
Proceeds from the sale of the Latin American businesses
                    
851
  
Proceeds from the sale of the telecommunication operations
                    
47
  
Expenditures for intangible assets
    
(88
)
    
(332
)
    
(65
)
Proceeds from the sale of intangible assets
    
16
      
19
      
111
  
Purchases of nuclear plant decommissioning trust investments
    
(227
)
    
(224
)
    
(190
)
Proceeds from the sale of nuclear plant decommissioning trust investments
    
201
      
197
      
175
  
Purchases of other investments
            
(290
)
    
(601
)
Proceeds from the sale of other investments
    
154
      
195
      
860
  
Net (increase) decrease in restricted cash and cash equivalents
    
218
      
(71
)
    
(125
)
Other investing activities
    
(10
)
    
(6
)
    
(20
)
                         
Net cash used in investing activities
    
(880
)
    
(1,627
)
    
(614
)
                         
Cash Flows from Financing Activities
                        
Issuance of long-term debt
    
298
      
1,338
      
985
  
Retirement of long-term debt
    
(1,016
)
    
(671
)
    
(1,216
)
Repurchase of common stock
            
(38
)
    
(712
)
Issuance of common stock
    
60
      
19
      
32
  
Payment of common stock dividends
    
(517
)
    
(491
)
    
(459
)
Net increase (decrease) in short-term debt
    
(52
)
    
588
      
61
  
Other financing activities
    
(44
)
    
(24
)
    
(17
)
                         
Net cash provided by (used in) financing activities
    
(1,271
)
    
721
      
(1,326
)
                         
Effect of Exchange Rates on Cash and Cash Equivalents
            
(13
)
    
5
  
                         
Net Increase (Decrease) in Cash and Cash Equivalents
    
(299
)
    
670
      
(364
)
Cash and Cash Equivalents at Beginning of Period
    
1,100
      
430
      
794
  
Cash and Cash Equivalents at End of Period
  
$
801
    
$
1,100
    
$
430
  
                         
Supplemental Disclosures of Cash Flow Information
                        
Cash paid during the period for:
                        
Interest - net of amount capitalized
  
$
460
    
$
423
    
$
389
  
Income taxes - net
  
$
16
    
$
300
    
$
376
  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
   
2009
  
2008
Assets
                
                 
Current Assets
                
Cash and cash equivalents
  
$
801
    
$
1,100
  
Short-term investments
            
150
  
Restricted cash and cash equivalents
    
105
      
320
  
Accounts receivable (less reserve:  2009, $37; 2008, $36)
                
Customer
    
409
      
456
  
Other
    
59
      
77
  
Unbilled revenues
    
600
      
599
  
Fuel, materials and supplies (Note 1)
    
357
      
337
  
Prepayments
    
102
      
84
  
Price risk management assets (Notes 17 and 18)
    
2,157
      
1,224
  
Other intangibles (Note 19)
    
25
      
17
  
Assets held for sale (Note 9)
    
127
          
Other current assets
    
10
      
19
  
Total Current Assets
    
4,752
      
4,383
  
                 
Investments
                
Nuclear plant decommissioning trust funds (Notes 17 and 21)
    
548
      
446
  
Other investments
    
65
      
76
  
Total Investments
    
613
      
522
  
                 
Property, Plant and Equipment (Note 1)
                
Electric plant
                
Transmission and distribution
    
8,686
      
8,046
  
Generation
    
10,493
      
9,588
  
General
    
899
      
840
  
Electric plant in service
    
20,078
      
18,474
  
Construction work in progress
    
567
      
1,131
  
Nuclear fuel
    
506
      
428
  
Electric plant
    
21,151
      
20,033
  
Gas and oil plant
    
68
      
68
  
Other property
    
166
      
156
  
Property, plant and equipment, gross
    
21,385
      
20,257
  
Less:  accumulated depreciation
    
8,211
      
7,882
  
Property, Plant and Equipment, net
    
13,174
      
12,375
  
                 
Regulatory and Other Noncurrent Assets
                
Regulatory assets (Note 1)
    
531
      
763
  
Goodwill (Note 19)
    
806
      
763
  
Other intangibles (Note 19)
    
615
      
637
  
Price risk management assets (Notes 17 and 18)
    
1,274
      
1,392
  
Other noncurrent assets
    
400
      
570
  
Total Regulatory and Other Noncurrent Assets
    
3,626
      
4,125
  
                 
Total Assets
  
$
22,165
    
$
21,405
  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
   
2009
  
2008
Liabilities and Equity
                
                 
Current Liabilities
                
Short-term debt (Note 7)
  
$
639
    
$
679
  
Long-term debt
            
696
  
Accounts payable
    
619
      
766
  
Taxes
    
92
      
77
  
Interest
    
113
      
130
  
Dividends
    
135
      
131
  
Price risk management liabilities (Notes 17 and 18)
    
1,502
      
1,324
  
Counterparty collateral
    
356
      
22
  
Other current liabilities
    
726
      
499
  
Total Current Liabilities
    
4,182
      
4,324
  
                 
Long-term Debt (Note 7)
    
7,143
      
7,142
  
                 
Deferred Credits and Other Noncurrent Liabilities
                
Deferred income taxes and investment tax credits (Note 5)
    
2,153
      
1,761
  
Price risk management liabilities (Notes 17 and 18)
    
582
      
836
  
Accrued pension obligations (Note 12)
    
1,283
      
899
  
Asset retirement obligations (Note 20)
    
416
      
370
  
Other deferred credits and noncurrent liabilities
    
591
      
677
  
Total Deferred Credits and Other Noncurrent Liabilities
    
5,025
      
4,543
  
                 
Commitments and Contingent Liabilities (Note 14)
                
                 
Equity
                
PPL Corporation Shareowners' Common Equity
                
Common stock - $0.01 par value (a)
    
4
      
4
  
Capital in excess of par value
    
2,280
      
2,196
  
Earnings reinvested
    
3,749
      
3,862
  
Accumulated other comprehensive loss (Note 1)
    
(537
)
    
(985
)
Total PPL Corporation Shareowners' Common Equity
    
5,496
      
5,077
  
Noncontrolling Interests (Notes 3 and 6)
    
319
      
319
  
Total Equity
    
5,815
      
5,396
  
                 
Total Liabilities and Equity
  
$
22,165
    
$
21,405
  

(a)
  
780,000 shares authorized; 377,183 shares and 374,581 shares issued and outstanding at December 31, 2009 and 2008.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(Millions of Dollars)
   
PPL Corporation Shareowners
        
   
Common stock shares outstanding (a)
  
Common stock
  
Capital in excess of par value
  
Earnings reinvested
  
Accumulated other comprehensive loss
  
Non-controlling interests
  
Total
                                                       
December 31, 2006 (b)
  
385,039
    
$
4
    
$
2,823
    
$
2,613
    
$
(318
)
  
$
361
    
$
5,483
  
Common stock issued (c)
  
3,177
              
48
                              
48
  
Common stock repurchased (d)
  
(14,945
)
            
(712
)
                            
(712
)
Stock-based compensation
                  
26
                              
26
  
Net income
                          
1,288
              
27
      
1,315
  
Dividends, dividend equivalents and distributions (e)
                          
(466
)
            
(25
)
    
(491
)
Divestitures
                                          
(35
)
    
(35
)
Acquisitions
                                          
(8
)
    
(8
)
Other comprehensive income
                                  
250
              
250
  
December 31, 2007
  
373,271
    
$
4
    
$
2,185
    
$
3,435
    
$
(68
)
  
$
320
    
$
5,876
  
                                                       
Common stock issued (c)
  
2,158
            
$
29
                            
$
29
  
Common stock repurchased (d)
  
(848
)
            
(38
)
                            
(38
)
Stock-based compensation
                  
20
                              
20
  
Net income
                        
$
930
            
$
20
      
950
  
Dividends, dividend equivalents and distributions (e)
                          
(503
)
            
(20
)
    
(523
)
Divestitures
                                          
(1
)
    
(1
)
Other comprehensive income
                                
$
(917
)
            
(917
)
December 31, 2008 (f)
  
374,581
    
$
4
    
$
2,196
    
$
3,862
    
$
(985
)
  
$
319
    
$
5,396
  
                                                       
Common stock issued (c)
  
2,649
            
$
83
                            
$
83
  
Common stock repurchased
  
(47
)
            
(1
)
                            
(1
)
Stock-based compensation
                  
2
                              
2
  
Net income
                        
$
407
            
$
19
      
426
  
Dividends, dividend equivalents and distributions (e)
                          
(521
)
            
(19
)
    
(540
)
Other comprehensive income
                                
$
449
              
449
  
Cumulative effect adjustment (g)
                          
1
      
(1
)
                
December 31, 2009 (f)
  
377,183
    
$
4
    
$
2,280
    
$
3,749
    
$
(537
)
  
$
319
    
$
5,815
  

(a)
  
Shares in thousands.  Each share entitles the holder to one vote on any question presented to any shareowners' meeting.
(b)
  
"Capital in excess of par value" and "Earnings reinvested" have been adjusted by $13 million to reflect the adoption of new accounting guidance.  See "New Accounting Guidance Adopted - Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" in Note 1 for additional information.
(c)
  
2009 includes common stock shares issued through the ICP, ICPKE, DRIP, ESOP and DDCP.  2008 and 2007 include common stock shares issued through the ICP, ICPKE, DDCP and the 2-5/8% Convertible Senior Notes, net of forfeitures.  "Capital in excess of par value" for 2009 includes $7 million for a company contribution to the ESOP.
(d)
  
In 2007, PPL's Board of Directors authorized the repurchase by PPL of up to $750 million of its common stock.  During 2007, PPL repurchased 14,929,892 shares of PPL common stock for $712 million.  During 2008, PPL repurchased 802,816 shares of PPL common stock for $38 million.
(e)
  
"Earnings reinvested" includes dividends and dividend equivalents on PPL Corporation common stock and restricted stock units.  "Noncontrolling interests" includes dividends and distributions to noncontrolling interests.
(f)
  
See "General - Comprehensive Income" in Note 1 for disclosure of balances of each component of AOCI.
(g)
  
See "New Accounting Guidance Adopted - Recognition and Presentation of Other-Than-Temporary Impairments" in Note 1 regarding this cumulative effect adjustment.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
   
2009
  
2008
  
2007
                         
Net income
  
$
426
    
$
950
    
$
1,315
  
Other comprehensive income (loss):
                        
Amounts arising during the period - gains (losses), net of tax (expense) benefit:
                        
Foreign currency translation adjustments, net of tax of $4, $(11), $7
    
101
      
(500
)
    
29
  
Available-for-sale securities, net of tax of $(44), $55, $(8)
    
41
      
(50
)
    
11
  
Qualifying derivatives, net of tax of $(356), $(120), $131
    
492
      
240
      
(190
)
Equity investee's other comprehensive income (loss)
    
1
      
(3
)
        
Defined benefit plans:
                        
Prior service costs, net of tax of $(1), $0
    
1
              
2
  
Net actuarial gain (loss), net of tax of $147, $294, $(104)
    
(340
)
    
(577
)
    
233
  
Reclassifications to net income - (gains) losses, net of tax expense (benefit):
                        
Foreign currency translation adjustments, net of tax of $(8)
                    
64
  
Available-for-sale securities, net of tax of $(3), $(2), $2
    
4
      
2
      
(3
)
Qualifying derivatives, net of tax of $(92), $17, $(26)
    
131
      
(69
)
    
49
  
Defined benefit plans:
                        
Prior service costs, net of tax of $(8), $(9), $6
    
13
      
18
      
14
  
Net actuarial loss, net of tax of $(4), $(11), $(19)
    
4
      
20
      
40
  
Transition obligation, net of tax of $(1), $(1), $(1)
    
1
      
2
      
1
  
Total other comprehensive income (loss) attributable to PPL Corporation
    
449
      
(917
)
    
250
  
Comprehensive income
    
875
      
33
      
1,565
  
Comprehensive income attributable to noncontrolling interests
    
19
      
20
      
27
  
Comprehensive income attributable to PPL Corporation
  
$
856
    
$
13
    
$
1,538
  

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
2009
  
2008
  
2007
Operating Revenues
                        
Wholesale energy marketing
                        
Realized
  
$
3,291
    
$
2,288
    
$
1,581
  
Unrealized economic activity (Note 18)
    
(229
)
    
1,056
      
(145
)
Wholesale energy marketing to affiliate (Note 15)
    
1,806
      
1,826
      
1,810
  
Utility
    
684
      
824
      
863
  
Unregulated retail electric and gas
    
152
      
151
      
102
  
Net energy trading margins
    
17
      
(121
)
    
41
  
Energy-related businesses
    
411
      
511
      
760
  
Total Operating Revenues
    
6,132
      
6,535
      
5,012
  
                         
Operating Expenses
                        
Operation
                        
Fuel
    
931
      
1,084
      
890
  
Energy purchases
                        
Realized
    
2,523
      
1,470
      
711
  
Unrealized economic activity (Note 18)
    
155
      
553
      
(182
)
Energy purchases from affiliate (Note 15)
    
70
      
108
      
156
  
Other operation and maintenance
    
1,067
      
1,070
      
1,005
  
Depreciation (Note 1)
    
325
      
314
      
299
  
Taxes, other than income (Note 5)
    
86
      
86
      
98
  
Energy-related businesses (Note 8)
    
388
      
478
      
757
  
Total Operating Expenses
    
5,545
      
5,163
      
3,734
  
                         
Operating Income
    
587
      
1,372
      
1,278
  
                         
Other Income - net (Note 16)
    
35
      
48
      
80
  
                         
Other-Than-Temporary Impairments
    
18
      
36
      
3
  
                         
Interest Income from Affiliates (Note 15)
    
2
      
14
      
29
  
                         
Interest Expense
    
272
      
313
      
289
  
                         
Income from Continuing Operations Before Income Taxes
    
334
      
1,085
      
1,095
  
                         
Income Taxes (Note 5)
    
47
      
335
      
206
  
                         
Income from Continuing Operations After Income Taxes
    
287
      
750
      
889
  
                         
Income (Loss) from Discontinued Operations (net of income taxes) (Note 9)
    
(40
)
    
20
      
325
  
                         
Net Income
    
247
      
770
      
1,214
  
                         
Net Income Attributable to Noncontrolling Interests
    
1
      
2
      
9
  
                         
Net Income Attributable to PPL Energy Supply
  
$
246
    
$
768
    
$
1,205
  
                         
Amounts Attributable to PPL Energy Supply:
                        
Income from Continuing Operations After Income Taxes
  
$
286
    
$
748
    
$
886
  
Income (Loss) from Discontinued Operations (net of income taxes)
    
(40
)
    
20
      
319
  
Net Income
  
$
246
    
$
768
    
$
1,205
  
                         
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
2009
  
2008
  
2007
Cash Flows from Operating Activities
                        
Net income
  
$
247
    
$
770
    
$
1,214
  
Adjustments to reconcile net income to net cash provided by operating activities
                        
Pre-tax gain from the sale of the Latin American businesses
                    
(400
)
Pre-tax gain from the sale of the majority of Maine hydroelectric generation business
    
(38
)
                
Depreciation
    
327
      
317
      
309
  
Amortization of energy commitments and other
    
75
      
66
      
104
  
Defined benefits
    
(113
)
    
(97
)
    
(34
)
Impairment of assets
    
123
      
93
      
102
  
Gain on the sale of emission allowances
    
(2
)
    
(6
)
    
(109
)
Deferred income taxes and investment tax credits
    
141
      
165
      
112
  
Unrealized (gains) losses on derivatives, and other hedging activities
    
330
      
(285
)
    
(27
)
Other
    
24
      
69
      
39
  
Change in current assets and current liabilities
                        
Accounts receivable
    
77
      
141
      
(217
)
Accounts payable
    
(178
)
    
72
      
104
  
Collateral on PLR energy supply from affiliate
    
300
                  
Unbilled revenues
    
9
      
(89
)
    
(69
)
Fuels, materials and supplies
    
(25
)
    
(26
)
    
29
  
Counterparty collateral
    
334
      
1
         12  
Price risk management assets and liabilities
    
(223
)
    
(88
)
    
(50
)
Other
    
16
      
(21
)
    
67
  
Other operating activities
                        
Other assets
    
15
      
15
      
(6
)
Other liabilities
    
(26
)
    
(58
)
    
(86
)
                         
Net cash provided by operating activities
    
1,413
      
1,039
      
1,094
  
                         
Cash Flows from Investing Activities
                        
Expenditures for property, plant and equipment
    
(907
)
    
(1,114
)
    
(1,331
)
Proceeds from the sale of the majority of Maine hydroelectric generation business
    
81
                  
Proceeds from the sale of the Latin American businesses
                    
851
  
Proceeds from the sale of the telecommunication operations
                    
47
  
Expenditures for intangible assets
    
(78
)
    
(325
)
    
(65
)
Proceeds from the sale of intangible assets
    
16
      
19
      
111
  
Purchases of nuclear plant decommissioning trust investments
    
(227
)
    
(224
)
    
(190
)
Proceeds from the sale of nuclear plant decommissioning trust investments
    
201
      
197
      
175
  
Purchases of other investments
            
(197
)
    
(561
)
Proceeds from the sale of other investments
    
154
      
102
      
795
  
Net (increase) decrease in restricted cash and cash equivalents
    
219
      
(152
)
    
(110
)
Other investing activities
    
(10
)
    
(2
)
    
(27
)
                         
Net cash used in investing activities
    
(551
)
    
(1,696
)
    
(305
)
                         
Cash Flows from Financing Activities
                        
Issuance of long-term debt
            
849
      
136
  
Retirement of long-term debt
    
(220
)
    
(266
)
    
(378
)
Contributions from Member
    
50
      
421
      
700
  
Distributions to Member
    
(943
)
    
(750
)
    
(1,471
)
Net increase in short-term debt
    
43
      
534
      
62
  
Other financing activities
    
(11
)
    
(9
)
    
(12
)
                         
Net cash provided by (used in) financing activities
    
(1,081
)
    
779
      
(963
)
                         
Effect of Exchange Rates on Cash and Cash Equivalents
            
(13
)
    
5
  
                         
Net Increase (Decrease) in Cash and Cash Equivalents
    
(219
)
    
109
      
(169
)
Cash and Cash Equivalents at Beginning of Period
    
464
      
355
      
524
  
Cash and Cash Equivalents at End of Period
  
$
245
    
$
464
    
$
355
  
                         
Supplemental Disclosures of Cash Flow Information
                        
Cash paid (received) during the period for:
                        
Interest - net of amount capitalized
  
$
274
    
$
271
    
$
228
  
Income taxes - net
  
$
(91
)
  
$
149
    
$
196
  
                         
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
2009
  
2008
Assets
                
                 
Current Assets
                
Cash and cash equivalents
  
$
245
    
$
464
  
Short-term investments
            
150
  
Restricted cash and cash equivalents
    
99
      
315
  
Accounts receivable (less reserve:  2009, $21; 2008, $21)
                
Customer
    
168
      
220
  
Other
    
31
      
66
  
Unbilled revenues
    
402
      
408
  
Accounts receivable from affiliates
    
165
      
159
  
Collateral on PLR energy supply to affiliate (Note 15)
            
300
  
Fuel, materials and supplies (Note 1)
    
325
      
301
  
Prepayments
    
56
      
71
  
Price risk management assets (Notes 17 and 18)
    
2,147
      
1,221
  
Other intangibles (Note 19)
    
25
      
17
  
Assets held for sale (Note 9)
    
127
          
Other current assets
    
1
      
6
  
Total Current Assets
    
3,791
      
3,698
  
                 
Investments
                
Nuclear plant decommissioning trust funds (Notes 17 and 21)
    
548
      
446
  
Other investments
    
58
      
68
  
Total Investments
    
606
      
514
  
                 
Property, Plant and Equipment (Note 1)
                
Electric plant
                
Transmission and distribution
    
4,024
      
3,540
  
Generation
    
10,493
      
9,588
  
General
    
285
      
286
  
Electric plant in service
    
14,802
      
13,414
  
Construction work in progress
    
422
      
1,031
  
Nuclear fuel
    
506
      
428
  
Electric plant
    
15,730
      
14,873
  
Gas and oil plant
    
68
      
68
  
Other property
    
164
      
154
  
Property, plant and equipment, gross
    
15,962
      
15,095
  
Less:  accumulated depreciation
    
6,169
      
5,935
  
Property, Plant and Equipment, net
    
9,793
      
9,160
  
                 
Other Noncurrent Assets
                
Goodwill (Note 19)
    
806
      
763
  
Other intangibles (Note 19)
    
477
      
507
  
Price risk management assets (Notes 17 and 18)
    
1,234
      
1,346
  
Other noncurrent assets
    
317
      
481
  
Total Other Noncurrent Assets
    
2,834
      
3,097
  
                 
Total Assets
  
$
17,024
    
$
16,469
  
                 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
2009
  
2008
Liabilities and Equity
                
                 
Current Liabilities
                
Short-term debt (Note 7)
  
$
639
    
$
584
  
Accounts payable
    
537
      
684
  
Accounts payable to affiliates
    
51
      
62
  
Taxes
    
33
      
31
  
Interest
    
86
      
88
  
Deferred revenue on PLR energy supply to affiliate
            
12
  
Price risk management liabilities (Notes 17 and 18)
    
1,502
      
1,313
  
Counterparty collateral
    
356
      
22
  
Other current liabilities
    
481
      
371
  
Total Current Liabilities
    
3,685
      
3,167
  
                 
Long-term Debt (Note 7)
    
5,031
      
5,196
  
                 
Deferred Credits and Other Noncurrent Liabilities
                
Deferred income taxes and investment tax credits (Note 5)
    
1,511
      
1,118
  
Price risk management liabilities (Notes 17 and 18)
    
582
      
836
  
Accrued pension obligations (Note 12)
    
883
      
556
  
Asset retirement obligations (Note 20)
    
416
      
370
  
Other deferred credits and noncurrent liabilities
    
330
      
414
  
Total Deferred Credits and Other Noncurrent Liabilities
    
3,722
      
3,294
  
                 
Commitments and Contingent Liabilities (Note 14)
                
                 
Equity
                
Member's equity
    
4,568
      
4,794
  
Noncontrolling interests
    
18
      
18
  
Total Equity
    
4,586
      
4,812
  
                 
Total Liabilities and Equity
  
$
17,024
    
$
16,469
  
                 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
Member's equity
  
Non-controlling interests
  
Total
                         
December 31, 2006
  
$
4,534
    
$
60
    
$
4,594
  
Net income
    
1,205
      
9
      
1,214
  
Other comprehensive income
    
240
              
240
  
Cumulative effect adjustment (a)
    
(1
)
            
(1
)
Contributions from member
    
700
              
700
  
Distributions
    
(1,471
)
    
(7
)
    
(1,478
)
Divestitures
            
(35
)
    
(35
)
Acquisitions
            
(8
)
    
(8
)
Other
    
(2
)
            
(2
)
December 31, 2007
  
$
5,205
    
$
19
    
$
5,224
  
                         
Net income
  
$
768
    
$
2
    
$
770
  
Other comprehensive loss
    
(850
)
            
(850
)
Contributions from member
    
421
              
421
  
Distributions
    
(750
)
    
(2
)
    
(752
)
Divestitures
            
(1
)
    
(1
)
December 31, 2008 (b)
  
$
4,794
    
$
18
    
$
4,812
  
                         
Net income
  
$
246
    
$
1
    
$
247
  
Other comprehensive income
    
421
              
421
  
Contributions from member
    
50
              
50
  
Distributions
    
(943
)
    
(1
)
    
(944
)
December 31, 2009 (b)
  
$
4,568
    
$
18
    
$
4,586
  

(a)
  
Relates to the adoption of accounting guidance regarding uncertain tax positions.
(b)
  
See "General - Comprehensive Income" in Note 1 for disclosure of balances of each component of AOCI.

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
2009
  
2008
  
2007
                         
Net income
  
$
247
    
$
770
    
$
1,214
  
Other comprehensive income (loss):
                        
Amounts arising during the period - gains (losses), net of tax (expense) benefit:
                        
Foreign currency translation adjustments, net of tax of $4, $(11), $7
    
101
      
(500
)
    
29
  
Available-for-sale securities, net of tax of $(44), $55, $(8)
    
41
      
(50
)
    
11
  
Qualifying derivatives, net of tax of $(330), $(125), $124
    
454
      
249
      
(182
)
Equity investee's other comprehensive income (loss)
    
1
      
(3
)
        
Defined benefit plans:
                        
Prior service costs
    
1
      
(1
)
    
2
  
Net actuarial gain (loss), net of tax of $136, 243, $(98)
    
(326
)
    
(500
)
    
222
  
Reclassifications to net income - (gains) losses, net of tax expense (benefit):
                        
Foreign currency translation adjustments, net of tax of $(8)
                    
64
  
Available-for-sale securities, net of tax of $(3), $(2), $2
    
4
      
2
      
(3
)
Qualifying derivatives, net of tax of $(91), $19, $(22)
    
131
      
(73
)
    
46
  
Defined benefit plans:
                        
Prior service costs, net of tax of $(6), $(5), $3
    
9
      
12
      
10
  
Net actuarial loss, net of tax of $(3), $(5), $(18)
    
4
      
12
      
40
  
Transition obligation, net of tax of $(1), $(1), $(1)
    
1
      
2
      
1
  
Total other comprehensive income (loss) attributable to PPL Energy Supply
    
421
      
(850
)
    
240
  
Comprehensive income (loss)
    
668
      
(80
)
    
1,454
  
Comprehensive income attributable to noncontrolling interests
    
1
      
2
      
9
  
Comprehensive income (loss) attributable to PPL Energy Supply
  
$
667
    
$
(82
)
  
$
1,445
  

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
   
2009
  
2008
  
2007
Operating Revenues
                        
Retail electric
  
$
3,222
    
$
3,293
    
$
3,254
  
Wholesale electric to affiliate (Note 15)
    
70
      
108
      
156
  
Total Operating Revenues
    
3,292
      
3,401
      
3,410
  
                         
Operating Expenses
                        
Operation
                        
Energy purchases
    
114
      
163
      
206
  
Energy purchases from affiliate (Note 15)
    
1,806
      
1,826
      
1,810
  
Other operation and maintenance
    
417
      
410
      
402
  
Amortization of recoverable transition costs
    
304
      
293
      
310
  
Depreciation (Note 1)
    
128
      
131
      
132
  
Taxes, other than income (Note 5)
    
194
      
203
      
200
  
Total Operating Expenses
    
2,963
      
3,026
      
3,060
  
                         
Operating Income
    
329
      
375
      
350
  
                         
Other Income - net (Note 16)
    
6
      
5
      
12
  
                         
Interest Income from Affiliate (Note 15)
    
4
      
9
      
19
  
                         
Interest Expense
    
116
      
101
      
118
  
                         
Interest Expense with Affiliate (Note 15)
    
2
      
10
      
17
  
                         
Income Before Income Taxes
    
221
      
278
      
246
  
                         
Income Taxes (Note 5)
    
79
      
102
      
83
  
                         
Net Income
    
142
      
176
      
163
  
                         
Dividends on Preferred Securities (Notes 6 and 7)
    
18
      
18
      
18
  
                         
Income Available to PPL
  
$
124
    
$
158
    
$
145
  
                         
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
   
2009
  
2008
  
2007
Cash Flows from Operating Activities
                        
Net income
  
$
142
    
$
176
    
$
163
  
Adjustments to reconcile net income to net cash provided by operating activities
                        
Depreciation
    
128
      
131
      
132
  
Amortization of recoverable transition costs and other
    
324
      
313
      
326
  
Deferred income taxes and investment tax credits
    
(22
)
    
1
      
17
  
Other
    
(4
)
    
3
      
5
  
Change in current assets and current liabilities
                        
Accounts receivable
    
1
      
(22
)
    
(5
)
Accounts payable
    
(9
)
    
(1
)
    
26
  
Prepayments
    
(17
)
    
9
      
(13
)
Collateral on PLR energy supply from affiliate
    
(300
)
                
Other
    
50
      
27
      
(84
)
Other operating activities
                        
Other assets
    
(3
)
    
23
      
19
  
Other liabilities
    
4
      
(12
)
    
(18
)
Net cash provided by operating activities
    
294
      
648
      
568
  
                         
Cash Flows from Investing Activities
                        
Expenditures for property, plant and equipment
    
(288
)
    
(268
)
    
(286
)
Expenditures for intangible assets
    
(10
)
    
(7
)
        
Purchases of investments
            
(90
)
    
(32
)
Proceeds from the sale of investments
            
90
      
57
  
Net (increase) decrease in notes receivable from affiliate
    
300
      
(23
)
    
23
  
Net (increase) decrease in restricted cash and cash equivalents
    
1
      
69
      
(8
)
Other investing activities
    
3
      
3
      
7
  
Net cash provided by (used in) investing activities
    
6
      
(226
)
    
(239
)
                         
Cash Flows from Financing Activities
                        
Issuance of long-term debt
    
298
      
489
      
250
  
Retirement of long-term debt
    
(595
)
    
(395
)
    
(555
)
Contribution from PPL
    
400
                  
Payment of common stock dividends to PPL
    
(274
)
    
(98
)
    
(119
)
Payment of dividends on preferred securities
    
(18
)
    
(18
)
    
(18
)
Net increase (decrease) in short-term debt
    
(95
)
    
54
      
(1
)
Other financing activities
    
(14
)
    
(4
)
    
(3
)
Net cash provided by (used in) financing activities
    
(298
)
    
28
      
(446
)
                         
Net Increase (Decrease) in Cash and Cash Equivalents
    
2
      
450
      
(117
)
Cash and Cash Equivalents at Beginning of Period
    
483
      
33
      
150
  
Cash and Cash Equivalents at End of Period
  
$
485
    
$
483
    
$
33
  
                         
Supplemental Disclosures of Cash Flow Information
                        
Cash paid during the period for:
                        
Interest - net of amount capitalized
  
$
116
    
$
88
    
$
110
  
Income taxes - net
  
$
106
    
$
59
    
$
87
  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
   
2009
  
2008
Assets
                
                 
Current Assets
                
Cash and cash equivalents
  
$
485
    
$
483
  
Restricted cash and cash equivalents
    
1
      
1
  
Accounts receivable (less reserve:  2009, $16; 2008, $14)
                
Customer
    
240
      
233
  
Other
    
19
      
11
  
Unbilled revenues
    
198
      
190
  
Materials and supplies
    
33
      
37
  
Accounts receivable from affiliates
    
7
      
8
  
Note receivable from affiliate (Note 15)
            
300
  
Prepayments
    
24
      
7
  
Prepayment on PLR energy supply from affiliate
            
12
  
Other current assets
    
29
      
13
  
Total Current Assets
    
1,036
      
1,295
  
                 
Property, Plant and Equipment (Note 1)
                
Electric plant
                
Transmission and distribution
    
4,662
      
4,506
  
General
    
535
      
489
  
Electric plant in service
    
5,197
      
4,995
  
Construction work in progress
    
118
      
79
  
Electric plant
    
5,315
      
5,074
  
Other property
    
2
      
2
  
Property, plant and equipment, gross
    
5,317
      
5,076
  
Less:  accumulated depreciation
    
2,008
      
1,924
  
Property, Plant and Equipment, net
    
3,309
      
3,152
  
                 
Regulatory and Other Noncurrent Assets
                
Recoverable transition costs (Note 1)
            
281
  
Intangibles (Note 19)
    
139
      
130
  
Taxes recoverable through future rates (Note 1)
    
253
      
250
  
Recoverable costs of defined benefit plans (Note 1)
    
229
      
192
  
Other regulatory and noncurrent assets
    
126
      
116
  
Total Regulatory and Other Noncurrent Assets
    
747
      
969
  
                 
Total Assets
  
$
5,092
    
$
5,416
  
                 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
   
2009
  
2008
Liabilities and Equity
                
                 
Current Liabilities
                
Short-term debt (Note 7)
          
$
95
  
Long-term debt
            
495
  
Accounts payable
  
$
53
      
57
  
Accounts payable to affiliates
    
186
      
186
  
Taxes
    
61
      
65
  
Collateral on PLR energy supply from affiliate (Note 15)
            
300
  
Overcollected transmission costs
    
39
          
Customer rate mitigation prepayments
    
36
      
5
  
Overcollected transition costs
    
33
          
Other current liabilities
    
110
      
119
  
Total Current Liabilities
    
518
      
1,322
  
                 
Long-term Debt (Note 7)
    
1,472
      
1,274
  
                 
Deferred Credits and Other Noncurrent Liabilities
                
Deferred income taxes and investment tax credits (Note 5)
    
769
      
767
  
Accrued pension obligations (Note 12)
    
245
      
209
  
Other deferred credits and noncurrent liabilities
    
192
      
198
  
Total Deferred Credits and Other Noncurrent Liabilities
    
1,206
      
1,174
  
                 
Commitments and Contingent Liabilities (Note 14)
                
                 
Shareowners' Equity
                
Preferred securities (Note 6)
    
301
      
301
  
Common stock - no par value (a)
    
364
      
364
  
Additional paid-in capital
    
824
      
424
  
Earnings reinvested
    
407
      
557
  
Total Shareowners' Equity
    
1,896
      
1,646
  
                 
Total Liabilities and Equity
  
$
5,092
    
$
5,416
  

(a)
  
170,000 shares authorized; 66,368 shares issued and outstanding at December 31, 2009 and 2008.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
   
Common stock shares outstanding (a)
  
Preferred securities
  
Common stock
  
Additional paid-in capital
  
Earnings reinvested
  
Total
                                               
December 31, 2006
  
66,368
    
$
301
    
$
364
    
$
424
    
$
470
    
$
1,559
  
Net income (b)
                                  
163
      
163
  
Cumulative effect adjustment (c)
                                  
1
      
1
  
Cash dividends declared on preferred securities
                                  
(18
)
    
(18
)
Cash dividends declared on common stock
                                  
(119
)
    
(119
)
December 31, 2007
  
66,368
    
$
301
    
$
364
    
$
424
    
$
497
    
$
1,586
  
                                               
Net income (b)
                                
$
176
    
$
176
  
Cash dividends declared on preferred securities
                                  
(18
)
    
(18
)
Cash dividends declared on common stock
                                  
(98
)
    
(98
)
December 31, 2008
  
66,368
    
$
301
    
$
364
    
$
424
    
$
557
    
$
1,646
  
                                               
Net income (b)
                                
$
142
    
$
142
  
Capital contribution from PPL
                        
$
400
              
400
  
Cash dividends declared on preferred securities
                                  
(18
)
    
(18
)
Cash dividends declared on common stock
                                  
(274
)
    
(274
)
December 31, 2009
  
66,368
    
$
301
    
$
364
    
$
824
    
$
407
    
$
1,896
  
 
(a)
  
All common shares of PPL Electric stock are owned by PPL.
(b)
  
PPL Electric's net income approximates comprehensive income.
(c)
  
Relates to the adoption of accounting guidance regarding uncertain tax positions.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  
Summary of Significant Accounting Policies

General

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

Business and Consolidation

(PPL)

PPL is an energy and utility holding company that, through its subsidiaries, is primarily engaged in the generation and marketing of electricity in the northeastern and western U.S. and in the delivery of electricity in Pennsylvania and the U.K.  Headquartered in Allentown, PA, PPL's principal direct subsidiaries are PPL Energy Funding, PPL Electric, PPL Services and PPL Capital Funding.

(PPL and PPL Energy Supply)

PPL Energy Funding is the parent of PPL Energy Supply, which serves as the holding company for PPL's principal unregulated subsidiaries.  PPL Energy Supply is the parent of PPL Generation, PPL EnergyPlus and PPL Global.

PPL Generation owns and operates a portfolio of domestic power generating assets.  These power plants are primarily located in Pennsylvania, Montana, Illinois, Connecticut and New York and use well-diversified fuel sources including coal, uranium, natural gas, oil and water.  PPL EnergyPlus sells electricity produced by PPL Generation subsidiaries, participates in wholesale market load-following auctions, and markets various energy commodities such as:  capacity, transmission, FTRs, coal, natural gas, oil, uranium, emission allowances, RECs and other commodities in competitive wholesale and deregulated retail markets, primarily in the northeastern and western U.S.

In May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and related tolling agreements.  In the fourth quarter of 2009, PPL Maine completed the sales of the majority of its hydroelectric generation business and its 8.33% ownership interest in Wyman Unit 4.

See Note 9 for additional information on both the anticipated and completed sales.

PPL Global owns and operates WPD's electricity delivery businesses in the U.K.  In 2007, PPL Global completed the sale of its Latin American businesses.

It is the policy of PPL and PPL Energy Supply to consolidate foreign subsidiaries on a one-month lag.  Material intervening events, such as debt issuances and retirements, acquisitions or divestitures that occur in the lag period are recognized in the current Financial Statements.  Events that are significant but not material are disclosed.

The consolidated financial statements of PPL and PPL Energy Supply include their share of undivided interests in jointly owned facilities, as well as their share of the related operating costs of those facilities.  See Note 13 for additional information.

(PPL and PPL Electric)

PPL Electric is a rate-regulated subsidiary of PPL.  PPL Electric's principal business is 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.

(PPL, PPL Energy Supply and PPL Electric)

The consolidated financial statements of PPL, PPL Energy Supply and PPL Electric include each company's own accounts as well as the accounts of all entities in which the company has a controlling financial interest.  Consolidation generally has been applied to subsidiaries in which PPL, PPL Energy Supply and PPL Electric have a majority voting interest.  However, the voting interest approach is not effective in identifying controlling financial interests in entities that are not controllable through voting interests or in which the equity investors do not bear the residual economic risks.  These types of entities are referred to as variable interest entities.  PPL, PPL Energy Supply and PPL Electric consolidate a variable interest entity when they are determined to be the primary beneficiary of the entity.  The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entity's expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests.  See Note 3 for additional information regarding variable interest entities.  Investments in entities in which a company has the ability to exercise significant influence but does not have a controlling financial interest are accounted for under the equity method.  All other investments are carried at cost or fair value.  All significant intercompany transactions have been eliminated.  Any noncontrolling interests are reflected in the consolidated financial statements.

Regulation

(PPL and PPL Electric)

The cost-based rate-regulated utility operations of PPL and PPL Electric reflect the effects of regulatory actions in their financial statements.  The regulatory assets below are included in "Regulatory and Other Noncurrent Assets" on the Balance Sheets of PPL and PPL Electric at December 31 and are probable of future recovery in regulated customer rates.

   
2009
  
2008
                 
Recoverable transition costs (a)
          
$
281
  
Taxes recoverable through future rates
  
$
253
      
250
  
Recoverable costs of defined benefit plans
    
229
      
192
  
Unamortized loss on reacquired debt
    
33
      
26
  
Costs associated with severe ice storms - January 2005
    
9
      
11
  
Other
    
7
      
3
  
   
$
531
    
$
763
  

(a)
  
A return on these assets is included in regulated rates.

The recoverable transition costs are the result of the PUC Final Order, which allowed PPL Electric to begin amortizing its competitive transition (or stranded) costs of $2.97 billion, over an 11-year transition period effective January 1, 1999.  In August 1999, competitive transition costs of $2.4 billion were converted to intangible transition costs when they were securitized by the issuance of transition bonds.  The intangible transition costs were amortized over the life of the transition bonds, through December 2008, in accordance with an amortization schedule filed with the PUC.  The assets of PPL Transition Bond Company, including the intangible transition property, were not available to creditors of PPL or PPL Electric.  The remaining competitive transition costs were also amortized based on an amortization schedule previously filed with the PUC, adjusted for those competitive transition costs that were converted to intangible transition costs.  These costs were fully amortized in 2009.

Taxes recoverable through future rates represent the portion of future income taxes that will be recovered through future rates based upon established regulatory practices.  Accordingly, this regulatory asset is recognized when the offsetting deferred tax liability is recognized.  For general-purpose financial reporting, this regulatory asset and the deferred tax liability are not offset; rather, each is displayed separately.  Because this regulatory asset does not represent cash tax expenditures already incurred by PPL, this regulatory asset is not earning a current return.  This regulatory asset is expected to be recovered over the period that the underlying book-tax timing differences reverse and the actual cash taxes are incurred.

Recoverable costs of defined benefit plans represent the portion of unrecognized transition obligation, prior service cost, and net actuarial loss that will be recovered through future rates based upon established regulatory practices.  These regulatory assets are adjusted at least annually or whenever the funded status of PPL's defined benefit plans is remeasured.  These regulatory assets for PPL and PPL Electric do not represent cash expenditures already incurred; consequently, these assets are not earning a current return.

   
2009
  
2008
                 
Transition obligation
  
$
10
    
$
10
  
Prior service cost
    
55
      
69
  
Net actuarial loss
    
164
      
113
  
Recoverable costs of defined benefit plans
  
$
229
    
$
192
  

Of these costs, $15 million for PPL and PPL Electric are expected to be amortized into net periodic defined benefit costs in 2010.  All costs will be amortized over the average service lives of plan participants.

Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed that have been deferred and will be amortized and recovered through 2029.

In December 2007, the PUC approved recovery of $12 million of costs associated with severe ice storms that occurred in January 2005.  Monthly amortization began in January 2008 and will continue through August 2015.

The remainder of the regulatory assets included in "Other" will be recovered through 2013.

PPL and PPL Electric had the following regulatory liabilities at December 31, 2009.  No significant regulatory liabilities existed at December 31, 2008.

   
2009
         
Overcollected transition costs
  
$
33
  
PURTA tax refund
    
10
  
   
$
43
  

The overcollected transition costs will be refunded to customers in 2010 and are reflected on the Balance Sheet in "Other current liabilities" for PPL and in "Overcollected transition costs" for PPL Electric.

In December 2009, PPL Electric reached a settlement with the Pennsylvania Department of Revenue related to the appeal of its 1997 PURTA tax assessments that resulted in a $10 million reduction in PURTA tax.  The $10 million is expected to be refunded to customers in 2011 and is reflected in "Other deferred credits and noncurrent liabilities" on PPL's and PPL Electric's Balance Sheet.

(PPL and PPL Energy Supply)

WPD operates under distribution licenses granted and price controls set by Ofgem.  The price control formula that governs WPD's allowed revenue is normally determined every five years. Ofgem completed a review in December 2009.

WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.

Accounting Records (PPL and PPL Electric)

The system of accounts for PPL Electric is maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the PUC.

Use of Estimates (PPL, PPL Energy Supply and PPL Electric)

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Loss Accruals (PPL, PPL Energy Supply and PPL Electric)

Potential losses are accrued when (1) information is available that indicates it is "probable" that a loss has been incurred, given the likelihood of the uncertain future events and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur."  PPL and its subsidiaries continuously assess potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.  PPL and its subsidiaries discount loss accruals for environmental remediation when appropriate.

PPL and its subsidiaries do not record the accrual of contingencies that might result in gains, unless recovery is assured.

Changes in Classification (PPL, PPL Energy Supply and PPL Electric)

The classification of certain amounts in the 2008 and 2007 financial statements have been changed to conform to the current presentation.  The changes in classification did not affect "Net Income Attributable to PPL Corporation" or "PPL Corporation Shareowners' Common Equity," "Net Income Attributable to PPL Energy Supply" or PPL Energy Supply's "Member's equity" or "Income Available to PPL" or PPL Electric's "Shareowners' Equity".

The classification on the Statements of Cash Flows has not been changed for the classification of amounts to Discontinued Operations.

Comprehensive Income (PPL and PPL Energy Supply)

Comprehensive income, which includes net income and OCI, consists of changes in equity from transactions not related to shareowners.  Comprehensive income is shown on PPL's and PPL Energy Supply's Statements of Comprehensive Income.

AOCI, which is presented on the Balance Sheets of PPL and included in Member's Equity on the Balance Sheets of PPL Energy Supply, consisted of these after-tax amounts at December 31.

   
2009
    
2008
  
PPL
                
Foreign currency translation adjustments
  
$
(136
)
  
$
(237
)
Unrealized gains on available-for-sale securities
    
62
      
18
  
Net unrealized gains (losses) on qualifying derivatives
    
602
      
(21
)
Equity investee's AOCI
    
(2
)
    
(3
)
Defined benefit plans:
                
Prior service cost
    
(61
)
    
(75
)
Actuarial loss
    
(993
)
    
(657
)
Transition obligation
    
(9
)
    
(10
)
   
$
(537
)
  
$
(985
)
PPL Energy Supply
                
Foreign currency translation adjustments
  
$
(136
)
  
$
(237
)
Unrealized gains on available-for-sale securities
    
62
      
18
  
Net unrealized gains (losses) on qualifying derivatives
    
573
      
(12
)
Equity investee's AOCI
    
(2
)
    
(3
)
Defined benefit plans:
                
Prior service cost
    
(44
)
    
(54
)
Actuarial loss
    
(930
)
    
(608
)
Transition obligation
    
(7
)
    
(8
)
   
$
(484
)
  
$
(904
)

Earnings Per Share (PPL)

EPS is computed using the two-class method, which is an earnings allocation method for computing EPS that treats a participating security as having rights to earnings that would otherwise have been available to common shareowners.  Share-based payment awards that provide recipients a non-forfeitable right to dividends or dividend equivalents are considered participating securities.

Basic EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding during the period.  Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of shares outstanding that are increased for additional shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares.  In 2009, these securities consisted of stock options and performance units granted under the incentive compensation plans.  In 2008, these securities consisted of stock options, performance units and PPL Energy Supply's 2-5/8% Convertible Senior Notes.  In 2007, these securities consisted of stock options and PPL Energy Supply's 2-5/8% Convertible Senior Notes.

Price Risk Management

(PPL and PPL Energy Supply)

PPL and PPL Energy Supply enter into energy and energy-related contracts to hedge the variability of expected cash flows associated with their generating units and marketing activities, as well as for trading purposes.  PPL and PPL Energy Supply enter into interest rate derivative contracts to hedge their exposure to changes in the fair value of their debt instruments and to hedge their exposure to variability in expected cash flows associated with existing debt instruments or forecasted issuances of debt.  PPL and PPL Energy Supply also enter into foreign currency derivative contracts to hedge foreign currency exposures related to firm commitments, recognized assets or liabilities, forecasted transactions, net investments and foreign earnings translation.

PPL and PPL Energy Supply have contracts that meet the definition of a derivative.  Certain derivative energy contracts have been excluded from the requirements of derivative accounting treatment because they meet the definition of a NPNS.  These contracts are accounted for using accrual accounting.  All contracts that have been classified as derivative contracts are reflected on the balance sheet at their fair value.  These contracts are recorded as "Price risk management assets" and "Price risk management liabilities" on the Balance Sheets.  Short-term derivative positions are included in "Current Assets" and "Current Liabilities."  PPL records long-term derivative positions in "Regulatory and Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities" and PPL Energy Supply records long-term derivative positions in "Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities."  On the date the derivative contract is executed, PPL may designate 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") or a hedge of a net investment in a foreign operation ("net investment hedge").  Changes in the fair value of derivatives are recorded in either OCI or in current-period earnings.  Cash inflows and outflows related to derivative instruments are included as a component of operating, investing or financing activities on the Statements of Cash Flows, depending on the underlying nature of the hedged items.

See Note 18 for additional information on derivatives.

(PPL and PPL Electric)

To meet its obligation as a PLR to its customers, PPL Electric has entered into contracts that meet the definition of a derivative.  These contracts have been excluded from the requirements of derivative accounting treatment because they meet the definition of a NPNS and are accounted for using accrual accounting.  See Notes 17 and 18 for additional information.

Revenue

Utility Revenue

(PPL)

The Statements of Income "Utility" line item contains revenues from domestic and U.K. rate-regulated delivery operations.

(PPL Energy Supply)

The Statements of Income "Utility" line item contains revenues from the U.K. rate-regulated delivery operations.

(PPL Electric)

Since most of PPL Electric's operations are regulated, it is not meaningful to use a "Utility" caption.  Therefore, the revenues of PPL Electric are presented according to specific types of revenue.

Revenue Recognition

(PPL, PPL Energy Supply and PPL Electric)

Operating revenues, except for "Energy-related businesses," are recorded based on energy deliveries through the end of the calendar month.  Unbilled retail revenues result because customers' meters are read and bills are rendered throughout the month, rather than all being read at the end of the month.  Unbilled revenues for a month are calculated by multiplying an estimate of unbilled kWh by the estimated average cents per kWh.  Unbilled wholesale energy revenues are recorded at month-end to reflect estimated amounts until actual dollars and MWhs are confirmed and invoiced.  At that time, unbilled revenue is reversed and actual revenue is recorded.

PPL Energy Supply records energy marketing activity in the period when the energy is delivered.  Generally, the wholesale sales and purchases that qualify as derivative instruments held for non-trading purposes are reported gross on the Statements of Income within "Wholesale energy marketing" and "Energy purchases."  Additionally, the bilateral sales and purchases that are designated as speculative trading activities and qualify as derivative instruments for accounting purposes are reported net on the Statements of Income within "Net energy trading margins."  Spot market activity that balances PPL Energy Supply's physical trading positions is included on the Statements of Income in "Net energy trading margins."

Certain PPL subsidiaries participate in RTOs, primarily in PJM, but also in the surrounding regions of New York (NYISO), New England (ISO-NE) and the Midwest (MISO).  In PJM, PPL EnergyPlus is a marketer, a load-serving entity to its customers who have selected it as a supplier and a seller for PPL's generation subsidiaries.  PPL Electric is a transmission owner and PLR in PJM.  In ISO-NE, PPL EnergyPlus is a marketer, a load-serving entity, and a seller for PPL's New England generating assets.  In the NYISO and MISO regions, PPL EnergyPlus acts as a marketer.  PPL Electric does not participate in ISO-NE, NYISO or MISO.  A function of interchange accounting is to match participants' MWh entitlements (generation plus scheduled bilateral purchases) against their MWh obligations (load plus scheduled bilateral sales) during every hour of every day.  If the net result during any given hour is an entitlement, the participant is credited with a spot-market sale to the ISO at the respective market price for that hour; if the net result is an obligation, the participant is charged with a spot-market purchase from the ISO at the respective market price for that hour.  ISO purchases and sales are not allocated to individual customers.  PPL records the hourly net sales and purchases in its financial statements as wholesale energy marketing and energy purchases.

"Energy-related businesses" revenue includes revenues from the mechanical contracting and engineering subsidiaries, as well as, WPD's telecommunications and property subsidiaries.  The mechanical contracting and engineering subsidiaries record revenues from construction contracts on the percentage-of-completion method of accounting, measured by the actual cost incurred to date as a percentage of the estimated total cost for each contract.  Accordingly, costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a current asset on the Balance Sheets, and billings in excess of costs and estimated earnings on uncompleted contracts are recorded as a current liability on the Balance Sheets.  The amount of costs in excess of billings was $5 million and $10 million at December 31, 2009 and 2008, and the amount of billings in excess of costs was $69 million and $80 million at December 31, 2009 and 2008.

(PPL and PPL Energy Supply)

During 2007, PPL recognized $55 million of revenue related to a settlement agreement for cost-based payments based upon the RMR status of units at its Wallingford, Connecticut generating facility.

(PPL and PPL Electric)

Beginning November 1, 2008, PPL Electric's transmission revenues were billed in accordance with a FERC tariff that utilizes a formula-based rate recovery mechanism.  The tariff allows for recovery of actual transmission costs incurred, a return on transmission plant placed in service and an incentive return, including a return on construction work in progress, on the Susquehanna-Roseland transmission line project.  The tariff utilizes estimated costs for the current year billing to customers and requires a true-up to adjust for actual costs in the subsequent year's rate.  In August 2009, the FERC approved this formula-based rate recovery mechanism.  As a result, the annual update of the rate is now implemented automatically without requiring specific approval by the FERC before going into effect.  PPL Electric accrues or defers revenues applicable to any estimated true-up of this formula-based rate.  At December 31, 2009 a net asset of $5 million was accrued, which will be reflected in future billings.

In 2009, PPL Electric recorded a $3 million pre-tax true-up ($2 million after-tax) related to the 2008 portion of the FERC formula-based transmission revenues.  The true-up, reflected in the Pennsylvania Delivery segment for PPL, is not considered by management as material to the financial statements of PPL and PPL Electric for the years 2009 and 2008.

PPL Electric is charged transmission related costs by PJM applicable to PLR customers.  PPL Electric passes these costs on to customers through an estimated transmission service charge and records a true-up to adjust for actual cost.  Any over- or undercollections from customers are refunded or collected through a transmission service charge adjustment.  At December 31, 2009, a liability of $39 million was accrued on the Balance Sheet in "Other current liabilities" for PPL and as "Overcollected transmission costs" for PPL Electric.

Allowance for Doubtful Accounts

(PPL, PPL Energy Supply and PPL Electric)

Accounts receivable are reported in the Balance Sheets at the gross outstanding amount adjusted for an allowance for doubtful accounts.

Accounts receivable collectability is evaluated using a combination of factors, including past due status based on contractual terms.  Reserve balances are analyzed to assess the reasonableness of the balances in comparison to the actual accounts receivable balances and write-offs.  Adjustments are made to reserve balances based on the results of analysis, the aging of receivables, and historical and industry trends.

Additional specific reserves for uncollectible accounts receivable, such as bankruptcies, are recorded on a case-by-case basis after having been researched and reviewed by management.  The nature of the item, trends in write-offs, the age of the receivable, counterparty creditworthiness and economic conditions are considered as a basis for determining the adequacy of the reserve for uncollectible account balances.

Accounts receivable are charged-off in the period in which the receivable is deemed uncollectible.  Recoveries of accounts receivable previously charged-off are recorded when it is known they will be received.

The changes in the allowance for doubtful accounts, including unbilled revenues, were:

       
Additions
        
   
Balance at Beginning of Period
  
Charged to Income
  
Charged to Other Accounts
  
Deductions (a)
  
Balance at End of Period
PPL
2009
  
$
40
    
$
30
            
$
33
    
$
37
  
2008
    
40
      
29
              
29
      
40
  
2007
    
52
      
31
              
43
      
40
  
                                         
PPL Energy Supply
2009
  
$
26
    
$
1
            
$
6
    
$
21
  
2008
    
22
      
5
              
1
      
26
  
2007
    
31
                      
9
      
22
  
                                         
PPL Electric
2009
  
$
14
    
$
29
            
$
27
    
$
16
  
2008
    
18
      
24
              
28
      
14
  
2007
    
19
      
29
              
30
      
18
  

(a)
  
Primarily related to uncollectible accounts written off.


(PPL and PPL Energy Supply)

The California ISO reserves of $17 million accounted for 46% and 47% of the total allowance for doubtful accounts of PPL and 81% of the total allowance of PPL Energy Supply at December 31, 2009 and 2008.  See Note 14 for additional information.

Cash (PPL, PPL Energy Supply and PPL Electric)

Cash Equivalents

All highly liquid debt instruments purchased with original maturities of three months or less are considered to be cash equivalents.

Restricted Cash and Cash Equivalents

Bank deposits and other cash equivalents that are restricted by agreement or that have been clearly designated for a specific purpose are classified as restricted cash and cash equivalents.  The change in restricted cash and cash equivalents is reported as an investing activity on the Statements of Cash Flows.  On the Balance Sheets, the current portion of restricted cash and cash equivalents is shown as "Restricted cash and cash equivalents" while the noncurrent portion is included in "Other noncurrent assets" for PPL and PPL Energy Supply and in "Other regulatory and noncurrent assets" for PPL Electric.  For PPL and PPL Energy Supply, the December 31, 2009 balance of restricted cash and cash equivalents consisted primarily of margin deposits posted by counterparties to PPL Energy Supply in connection with trading activities and the December 31, 2008 balance consisted primarily of margin deposits posted by PPL Energy Supply to counterparties in connection with trading activities.  For PPL Electric, the December 31, 2009 and 2008 balances of restricted cash and cash equivalents, including the noncurrent portion, consisted primarily of funds deposited with a trustee to defease the First Mortgage Bonds.  See Note 17 for the amounts recorded at December 31, 2009 and 2008.

Fair Value Measurements (PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiaries value certain financial and nonfinancial assets and liabilities at fair value.  Generally, the most significant fair value measurements relate to price risk management assets and liabilities, investments in securities including investments in the NDT funds and defined benefit plans, and cash and cash equivalents.  PPL and its subsidiaries use, as appropriate, a market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) to measure the fair value of an asset or liability.  These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability.  These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk.

PPL and its subsidiaries prioritize fair value measurements for disclosure by grouping them into one of three levels in the fair value hierarchy.  The highest priority is given to measurements using Level 1 inputs.  The appropriate level assigned to a fair value measurement is based on the lowest level input that is significant to the fair value measurement in its entirety.  The three levels of the fair value hierarchy are as follows:

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

Assessing the significance of a particular input requires judgment that considers factors specific to the asset or liability.  As such, PPL and its subsidiaries' assessment of the significance of a particular input may affect how the assets and liabilities are classified within the fair value hierarchy.  See Notes 17 and 18 for additional information on fair value measurements.

Investments (PPL, PPL Energy Supply and PPL Electric)

Generally, the original maturity date of an investment and management's ability to sell an investment prior to its original maturity determine the classification of investments as either short-term or long-term.  Investments that would otherwise be classified as short-term, but are restricted as to withdrawal or use for other than current operations or are clearly designated for expenditure in the acquisition or construction of noncurrent assets or for the liquidation of long-term debts, are classified as long-term.

Short-term Investments

Short-term investments generally include certain deposits as well as securities that are considered highly liquid or provide for periodic reset of interest rates.  Short-term investments have original maturities greater than three months and are included in "Short-term investments" on the Balance Sheets of PPL and PPL Energy Supply and in "Current Assets-Other" on the Balance Sheets of PPL Electric.

Investments in Debt and Equity Securities

Investments in debt securities are classified as held-to-maturity and measured at amortized cost when there is an intent and ability to hold the securities to maturity.  Debt and equity securities that are acquired and held principally for the purpose of selling them in the near-term are classified as trading.  Trading securities are generally held to capitalize on fluctuations in their value.  All other investments in debt and equity securities are classified as available-for-sale.  Both trading and available-for-sale securities are carried at fair value.  The specific identification method is used to calculate realized gains and losses on debt and equity securities.  Any unrealized gains and losses on trading securities are included in earnings.  Through March 31, 2009, unrealized gains and losses on all available-for-sale securities were reported, net of tax, in OCI or recognized in earnings when the decline in fair value below amortized cost was determined to be an other-than-temporary impairment.

As described in "Recognition and Presentation of Other-Than-Temporary Impairments" within "New Accounting Guidance Adopted," new accounting guidance has modified the criteria for determining whether a decline in fair value of a debt security is other than temporary and whether the other-than-temporary impairment is recognized in earnings or reported in OCI.  Beginning April 1, 2009, when a debt security is in an unrealized loss position:

·
if there is an intent to sell the security or a requirement to sell the security before recovery, the other-than-temporary impairment is recognized currently in earnings; or
·
if there is no intent to sell the security or requirement to sell the security before recovery, the portion of the other-than-temporary impairment that is considered a credit loss is recognized currently in earnings and the remainder of the other-than-temporary impairment is reported in OCI, net of tax; or
·
if there is no intent to sell the security or requirement to sell the security before recovery and there is no credit loss, the unrealized loss is reported in OCI, net of tax.

Equity securities were not impacted by this new accounting guidance; therefore, unrealized gains and losses on available-for-sale equity securities continue to be reported, net of tax, in OCI.  Earnings continue to be charged when an equity security's decline in fair value below amortized cost is determined to be an other-than-temporary impairment.  See Notes 17 and 21 for additional information on investments in debt and equity securities.

Long-Lived and Intangible Assets

Property, Plant and Equipment

(PPL, PPL Energy Supply and PPL Electric)

PP&E is recorded at original cost, unless impaired.  If impaired, the asset is written down to fair value at that time, which becomes the new cost basis of the asset.  Original cost includes material, labor, contractor costs, certain overheads and financing costs, where applicable.  The cost of repairs and minor replacements are charged to expense as incurred.  PPL records costs associated with planned major maintenance projects in the period in which the costs are incurred.  No costs are accrued in advance of the period in which the work is performed.

(PPL and PPL Electric)

AFUDC is capitalized as part of the construction costs for regulated projects.  The debt component of AFUDC is credited to "Interest Expense" and the equity component is credited to "Other Income - net" on the Statements of Income.

(PPL and PPL Energy Supply)

Nuclear fuel-related costs, including fuel, conversion, enrichment, fabrication and assemblies are capitalized as PP&E.  Such costs are amortized over the period the fuel is spent using the unit-of-production method and included in "Fuel" on the Statements of Income.

PPL's unregulated entities and PPL Energy Supply capitalize interest costs as part of construction costs for non-regulated projects.

The following capitalized interest was excluded from "Interest Expense" on the Statements of Income.

   
PPL
  
PPL Energy Supply
                 
2009
  
$
44
    
$
45
  
2008
    
57
      
56
  
2007
    
54
      
54
  

(PPL, PPL Energy Supply and PPL Electric)

Included in PP&E on the balance sheet are capitalized costs of software projects that were developed or obtained for internal use.  These capitalized costs are amortized ratably over the expected lives of the projects when they become operational, generally not to exceed five years.  Following are capitalized software costs and the accumulated amortization.

   
December 31, 2009
    
December 31, 2008
  
   
Carrying Amount
    
Accumulated Amortization
    
Carrying Amount
    
Accumulated Amortization
  
                                 
PPL
  
$
97
    
$
52
    
$
62
    
$
39
  
PPL Energy Supply
    
24
      
19
      
24
      
18
  
PPL Electric
    
37
      
15
      
17
      
10
  

Amortization expense of capitalized software costs was as follows:

   
PPL
  
PPL Energy Supply
  
PPL Electric
  
               
2009
  
$
13
  
$
2
  
$
5
  
2008
    
8
    
2
    
3
  
2007
    
10
    
2
    
4
  

The amortization of capitalized software is included in "Depreciation" on the Statements of Income.

Depreciation (PPL, PPL Energy Supply and PPL Electric)

Depreciation is computed over the estimated useful lives of property using various methods including the straight-line, composite and group methods.  When a component of PP&E is retired that was depreciated under the composite or group method, the original cost is charged to accumulated depreciation.  When all or a significant portion of an operating unit that was depreciated under the composite or group method is retired or sold, the property and the related accumulated depreciation account is reduced and any gain or loss is included in income, unless otherwise required by regulators.

In 2007, WPD reviewed the useful lives of its distribution network assets.  Effective April 1, 2007, after considering information from Ofgem and other internal and external surveys, the weighted average useful lives were extended to 54 years from 40 years.  The effect of this change in useful lives for 2007 was to increase income from continuing operations after income taxes attributable to PPL/PPL Energy Supply and net income attributable to PPL/PPL Energy Supply, as a result of lower depreciation, by $13 million (or $0.03 per share, basic and diluted, for PPL).

Following are the weighted-average rates of depreciation at December 31.

   
2009
  
   
PPL
    
PPL Energy Supply
    
PPL Electric
  
                         
Generation
    
2.48%
      
2.48%
          
Transmission and distribution
    
2.17%
      
2.33%
      
2.04%
  
General
    
7.32%
      
10.19%
      
4.00%
  


   
2008
  
   
PPL
    
PPL Energy Supply
    
PPL Electric
  
                         
Generation
    
2.39%
      
2.39%
          
Transmission and distribution
    
2.58%
      
3.07%
      
2.20%
  
General
    
8.09%
      
11.6%
      
4.33%
  

The annual provisions for depreciation have been computed principally in accordance with the following ranges, in years, of assets lives.

   
PPL
    
PPL Energy Supply
    
PPL Electric
  
                         
Generation
    
40-50
      
40-50
          
Transmission and distribution
    
5-70
      
5-60
      
15-70
  
General
    
3-60
      
3-60
      
5-55
  

Goodwill and Other Intangible Assets (PPL, PPL Energy Supply and PPL Electric)

Goodwill represents the excess of the purchase price paid over the estimated fair value of the assets acquired and liabilities assumed in the acquisition of a business.  PPL's reporting units are significant businesses that have discrete financial information and the operating results are regularly reviewed by segment management.

Other acquired intangible assets are initially measured based on their fair value.  Intangibles that have finite useful lives are amortized over their useful lives based upon the pattern in which the economic benefits of the intangible assets are consumed or otherwise used.  Costs incurred to renew or extend terms of licenses are capitalized as intangible assets.

When determining the useful life of an intangible asset, including intangible assets that are renewed or extended, PPL and its subsidiaries consider:  the expected use of the asset; the expected useful life of other assets to which the useful life of the intangible asset may relate; legal, regulatory, or contractual provisions that may limit the useful life; the company's historical experience as evidence of its ability to support renewal or extension; the effects of obsolescence, demand, competition, and other economic factors; and the level of maintenance expenditures required to obtain the expected future cash flows from the asset.

PPL and its subsidiaries account for emission allowances as intangible assets.  Since the economic benefits of emission allowances are not diminished until they are consumed, emission allowances are not amortized; rather they are expensed when consumed.  Such expense is included in "Fuel" on the Statements of Income.  Gains and losses on the sale of emission allowances are included in "Other operation and maintenance" on the Statements of Income.  In addition, "vintage year" swaps are accounted for as nonmonetary transactions that are required to be measured at fair value.  Certain emission allowances are expected to be sold rather than consumed.  These emission allowances are tested for impairment when events or changes in circumstances, such as a decline in market prices, indicate that their carrying value might be impaired.

PPL and its subsidiaries also account for RECs as intangible assets and the associated costs are not expensed until the credits are consumed.  Such expense is included in "Energy purchases" on the Statements of Income.  Gains and losses on the sale of RECs are included in "Other operating and maintenance" on the Statements of Income.

See Note 19 for additional information on goodwill and other intangible assets.

Asset Impairment (PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiaries review long-lived assets that are subject to depreciation or amortization, including finite-lived intangibles, for impairment when events or circumstances indicate carrying amounts may not be recoverable.

For a long-lived asset to be held and used, an impairment exists when the carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying amount to its fair value.  See Notes 8 and 17 for a discussion of impairment charges recorded associated with long-lived assets to be held and used.

For a long-lived asset held for sale, an impairment exists when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If the asset (disposal group) is impaired, an impairment loss is recorded to adjust the carrying amount of the asset (disposal group) to its fair value less cost to sell.  See Notes 9 and 17 for a discussion of impairment charges recorded associated with long-lived assets held for sale.

Goodwill is reviewed for impairment, at the reporting unit level, annually or more frequently when events or circumstances indicate that the carrying amount of a reporting unit may be greater than the unit's fair value.  Additionally, goodwill must be tested for impairment after a portion of goodwill has been allocated to a business to be disposed of.  PPL's reporting units are at or one level below its operating segments.  If the carrying amount of the reporting unit, including goodwill, exceeds its fair value, the implied fair value of goodwill must be calculated.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill in a business combination.  That is, the fair value of a reporting unit is allocated to all assets and liabilities of that unit as if the reporting unit had been acquired in a business combination.  The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  If the implied fair value of goodwill is less than the carrying amount, an impairment loss is recognized for an amount equal to that difference.

Asset Retirement Obligations (PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiaries recognize various legal obligations associated with the retirement of long-lived assets as liabilities in the financial statements.  Initially this obligation is measured at fair value.  An equivalent amount is recorded as an increase in the value of the capitalized asset and allocated to expense over the useful life of the asset.  Until the obligation is settled, the liability is increased, through the recognition of accretion expense in the income statement, for changes in the obligation due to the passage of time.  Estimated ARO costs and settlement dates, which affect the carrying value of various AROs and the related assets, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the obligations.

See Note 20 for a discussion of accounting for AROs.

Compensation and Benefits

Defined Benefits (PPL, PPL Energy Supply and PPL Electric)

PPL and certain of its subsidiaries sponsor various defined benefit pension and other postretirement plans.  An asset or liability is recorded to recognize the funded status of all defined benefit plans with an offsetting entry to OCI or regulatory assets for PPL Electric.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.

The expected return on plan assets is determined based on a market-related value of plan assets, which is calculated by rolling forward the prior year market-related value with contributions, disbursements and long-term expected return on investments.  One-fifth of the difference between the actual value and the expected value is added (or subtracted if negative) to the expected value to determine the new market-related value.

PPL uses an accelerated amortization method for the recognition of gains and losses for its pension plans.  Under the accelerated method, gains and losses in excess of 10% but less than 30% of the greater of the plan's projected benefit obligation or the market-related value of plan assets are amortized on a straight-line basis over the estimated average future service period of plan participants.  Gains and losses in excess of 30% of the plan's projected benefit obligation are amortized on a straight-line basis over a period equal to one-half of the average future service period of the plan participants.

See Note 12 for a discussion of defined benefits.

Stock-Based Compensation

(PPL, PPL Energy Supply and PPL Electric)

PPL grants stock options, restricted stock, restricted stock units and performance units to certain employees, and stock units and restricted stock units to directors, under several stock-based compensation plans.  PPL and its subsidiaries recognize compensation expense for stock-based awards based on the fair value method.  Stock options with graded vesting (i.e., that vest in installments) are valued as a single award.  PPL grants stock options with an exercise price that is not less than the fair value of PPL's common stock on the date of grant.  See Note 11 for a discussion of stock-based compensation.  Stock-based compensation is included in "Other operation and maintenance" expense on the Statements of Income.

(PPL Energy Supply and PPL Electric)

PPL Energy Supply's and PPL Electric's stock-based compensation expense includes an allocation of PPL Services' expense.

Other

Income Taxes

(PPL, PPL Energy Supply and PPL Electric)

PPL and its domestic subsidiaries file a consolidated U.S. federal income tax return.

Significant management judgment is required in developing PPL and its subsidiaries' provision for income taxes primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit to be recognized in relation to an uncertain tax position.  PPL and its subsidiaries evaluate tax positions following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements of PPL and its subsidiaries in the future.

Deferred income taxes reflect the net future tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their basis for income tax purposes, as well as the tax effects of net operating losses and tax credit carryforwards.

PPL and its subsidiaries record valuation allowances to reduce deferred tax assets to the amounts that are more likely than not to be realized.  PPL and its subsidiaries consider the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies in initially recording and subsequently reevaluating the need for valuation allowances.  If PPL and its subsidiaries determine that they are able to realize deferred tax assets in the future in excess of recorded net deferred tax assets, adjustments to the valuation allowances increase income by reducing tax expense in the period that such determination is made.  Likewise, if PPL and its subsidiaries determine that they are not able to realize all or part of net deferred tax assets in the future, adjustments to the valuation allowances would decrease income by increasing tax expense in the period that such determination is made.

PPL Energy Supply and PPL Electric defer investment tax credits when the credits are utilized and are amortizing the deferred amounts over the average lives of the related assets.

See Note 5 for additional discussion regarding income taxes.

(PPL Energy Supply and PPL Electric)

The income tax provision for PPL Energy Supply and PPL Electric is calculated in accordance with an intercompany tax sharing policy which provides that taxable income be calculated as if PPL Energy Supply, PPL Electric and any domestic subsidiaries each filed a separate consolidated return.  PPL Energy Supply's intercompany tax receivable was $21 million and $15 million at December 31, 2009 and 2008.  PPL Electric's intercompany tax receivable was $19 million and $15 million at December 31, 2009 and 2008.

(PPL and PPL Electric)

The provision for PPL Electric's deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the PUC and the FERC.  The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under GAAP is deferred and included on the Balance Sheet in taxes recoverable through future rates in "Regulatory assets" for PPL and in "Taxes recoverable through future rates" for PPL Electric.

Taxes, Other Than Income (PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiaries present sales taxes in "Accounts Payable" and value-added taxes in "Taxes" on their Balance Sheets.  These taxes are not reflected on the Statements of Income.  See Note 5 for details on taxes included in "Taxes, other than income" on the Statements of Income.

Leases

(PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiaries evaluate whether arrangements entered into contain leases for accounting purposes.

 
(PPL and PPL Energy Supply)
 
See Note 10 for a discussion of arrangements under which PPL and PPL Energy Supply are lessees for accounting purposes.
 
PPL EnergyPlus has entered into several arrangements whereby PPL EnergyPlus is considered the lessor for accounting purposes.  See Note 10 for additional information on these leases and Note 9 for information regarding the anticipated sale of the Long Island generation business, which includes certain of these leases.

Fuel, Materials and Supplies

(PPL, PPL Energy Supply and PPL Electric)

Fuel, materials and supplies are valued at the lower of cost or market using the average cost method.

(PPL and PPL Energy Supply)

Fuel, materials and supplies consisted of the following at December 31:

   
PPL
  
PPL Energy Supply
   
2009
  
2008
  
2009
  
2008
                                 
Fuel
  
$
151
    
$
140
    
$
151
    
$
140
  
Materials and supplies
    
206
      
197
      
174
      
161
  
   
$
357
    
$
337
    
$
325
    
$
301
  

Guarantees (PPL, PPL Energy Supply and PPL Electric)

Generally, the initial measurement of a guarantee liability is the fair value of the guarantee at its inception.  However, there are certain guarantees excluded from the scope of accounting guidance and other guarantees that are not subject to the initial recognition and measurement provisions of accounting guidance.  See Note 14 for further discussion of recorded and unrecorded guarantees.

Treasury Stock (PPL and PPL Electric)

PPL and PPL Electric restore all shares of common stock acquired to authorized but unissued shares of common stock upon acquisition.

Foreign Currency Translation and Transactions (PPL and PPL Energy Supply)

Assets and liabilities of international subsidiaries, where the local currency is the functional currency, are translated at the exchange rates on the date of consolidation and related revenues and expenses are translated at average exchange rates prevailing during the year.  See "Business and Consolidation" above for a discussion regarding the use of a lag period.  Adjustments resulting from translation are recorded in AOCI.  The effect of translation is removed from AOCI upon the sale or substantial liquidation of the international subsidiary that gave rise to the translation adjustment.  The local currency is the functional currency for PPL's U.K. operating company.

At December 31, 2009, the British pound sterling had strengthened in relation to the U.S. dollar as compared with the prior year end.  Changes in exchange rates resulted in a foreign currency translation gain of $106 million for 2009, which primarily reflected a $225 million increase in PP&E offset by an increase of $119 million to other net liabilities.  At December 31, 2008, the British pound sterling had weakened in relation to the U.S. dollar compared with the prior year end.  Changes in these exchange rates resulted in a foreign currency translation loss of $520 million for 2008, which primarily reflected a $1.1 billion reduction to PP&E offset by a reduction of $580 million to other net liabilities.  Changes in exchange rates resulted in a foreign currency translation gain of $65 million for 2007, which primarily reflected a $173 million increase in PP&E offset by an increase of $108 million to other net liabilities.

Gains or losses relating to foreign currency transactions are recognized currently in income.  The net transaction losses were insignificant in 2009 and 2007, and $2 million in 2008.

New Accounting Guidance Adopted (PPL, PPL Energy Supply and PPL Electric)

Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)

Effective January 1, 2009, PPL and its subsidiaries retrospectively adopted accounting guidance that requires an issuer to separately account for the liability and equity components of convertible debt instruments that may be settled in cash (or other assets) upon conversion in a manner that reflects the issuer's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  The discount that results from separating the liability and equity components will be amortized over the life of the debt and recognized as interest expense.

This guidance was applicable to PPL Energy Supply's 2-5/8% Convertible Senior Notes due 2023 (Convertible Senior Notes), which upon conversion required cash settlement of the principal amount and permitted settlement of any conversion premium in cash or PPL common stock.  During 2008, all of the Convertible Senior Notes were either converted at the election of the holders or redeemed at par as a result of PPL Energy Supply calling the notes for redemption.  This guidance required only retrospective application with regard to the Convertible Senior Notes, as none of these notes were outstanding at the effective date.  The retrospective application impacted PPL in periods prior to 2006.  As such, PPL reduced the opening balance of "Earnings reinvested" by $13 million with a corresponding increase to "Capital in excess of par value."

Business Combinations

Effective January 1, 2009, PPL and its subsidiaries prospectively adopted accounting guidance that changes the accounting and reporting for business combinations occurring after its adoption.  In addition, this guidance requires entities to recognize changes in unrecognized tax benefits acquired in a business combination, including business combinations that occurred prior to January 1, 2009, in income tax expense rather than in goodwill.  The January 1, 2009 adoption did not have a significant impact on PPL and its subsidiaries; however, the impact in future periods could be material.

In the first quarter of 2009, PPL and PPL Energy Supply recorded an income tax benefit of $14 million as a result of settling an income tax dispute.  Prior to the adoption of this guidance, $7 million of this income tax benefit would have been recorded as a reduction to goodwill.

Noncontrolling Interests in Consolidated Financial Statements

Effective January 1, 2009, PPL and its subsidiaries adopted accounting guidance that was issued to improve the relevancy, comparability, and transparency of the financial information an entity provides when it has a noncontrolling interest in a subsidiary and when it changes its ownership interest in a subsidiary.  This guidance:

·
requires ownership interests in subsidiaries held by parties other than the parent to be presented in the consolidated statement of financial position within equity, but separate from the parent's equity;
·
requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be presented on the face of the consolidated statement of income;
·
addresses the accounting for changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary and for the deconsolidation of a subsidiary; and
·
requires enhanced disclosures relating to noncontrolling interests.

PPL and its subsidiaries adopted this guidance prospectively except for the presentation and disclosure requirements, which required retrospective application.

At December 31, 2009 and 2008, PPL reflected PPL Electric's preferred securities of $301 million within "Noncontrolling Interests" on the Balance Sheets.  In addition, at December 31, 2009 and 2008, PPL and PPL Energy Supply reflected previously recorded minority interests of $18 million within "Noncontrolling Interests" on the Balance Sheets.

Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

Effective January 1, 2009, PPL and its subsidiaries retrospectively adopted accounting guidance that requires unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents to be considered participating securities and to be included in the computation of EPS under the two-class method.  The two-class method treats share-based payment awards that pay nonforfeitable dividends as a separate class of stock for purposes of computing EPS.

The adoption did not have a material impact on PPL and its subsidiaries.  As a result of its application, PPL's restricted stock, restricted stock units, and stock units granted to directors are now considered participating securities; therefore, PPL is required to compute EPS under the two-class method.  For the years ended December 31, 2008, the retrospective application caused PPL's basic EPS for income from continuing operations after income taxes available to PPL Corporation common shareholders to decrease by $0.01 and basic EPS for net income available to PPL Corporation common shareowners to decrease by $0.01.  For the year ended December 31, 2007, the retrospective application caused PPL's basic EPS for income from continuing operations after income taxes available to PPL Corporation common shareholders to decrease by $0.01 and basic EPS for net income available to PPL Corporation common shareowners to decrease by $0.02.  Additionally, PPL's diluted EPS for net income available to PPL Corporation common shareowners decreased by $0.01 for the year ended December 31, 2007.  See Note 4 for additional information.

Disclosures about Derivative Instruments and Hedging Activities

Effective January 1, 2009, PPL and its subsidiaries prospectively adopted accounting guidance that applies to all derivative instruments, including bifurcated derivative instruments and nonderivative instruments that are designated and qualify as hedging instruments, as well as related hedged items. This guidance requires an entity to expand disclosures to provide greater transparency about:

·
how and why it uses derivative instruments;
·
how derivative instruments and related hedged items are accounted for; and
·
how derivative instruments and related hedged items affect its financial position, results of operations and cash flows.

The guidance was issued to provide greater transparency by enhancing existing disclosures; therefore, the adoption did not have a material impact on PPL and its subsidiaries' financial statements.  The enhanced disclosures are presented in Note 18.

Fair Value Measurements

Effective January 1, 2008, PPL and its subsidiaries adopted accounting guidance that provides a framework for measuring fair value, but elected to defer, until 2009, applying this guidance to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis.  Effective January 1, 2009, PPL and its subsidiaries fully applied this guidance to fair value measurement concepts used within their financial statements where applicable.

Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement

Effective January 1, 2009, PPL and its subsidiaries prospectively adopted accounting guidance that applies to liabilities issued with an inseparable third-party credit enhancement when the liability is measured or disclosed at fair value on a recurring basis.  This guidance indicates that an issuer shall disclose the existence of a third-party credit enhancement, and the fair value measurement of the liability shall not include the effect of this third-party credit enhancement.

The initial adoption did not have a material impact on PPL and its subsidiaries' financial statements, as this guidance only impacts the fair value disclosure of certain credit-enhanced debt instruments.  See "Financial Instruments Not Recorded at Fair Value" within Note 17 for these disclosures.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

Effective April 1, 2009, PPL and its subsidiaries prospectively adopted accounting guidance that:

·
provides additional direction for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased;
·
includes guidance on identifying circumstances that indicate a transaction is not orderly; and
·
emphasizes that the objective of a fair value measurement remains the same; that is, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions.

Comparative disclosures are required only for periods ending after initial adoption.  The adoption did not have a material impact on PPL and its subsidiaries' financial statements.

Recognition and Presentation of Other-Than-Temporary Impairments

Effective April 1, 2009, PPL and its subsidiaries retrospectively adopted accounting guidance that modified the requirement that an entity have the intent and ability to hold an impaired debt security to recovery in order to conclude an impairment was temporary.  Under this guidance, an impairment of a debt security is other than temporary if (1) an entity has the intent to sell the security, (2) it is more likely than not that an entity will be required to sell the security before recovery, or (3) an entity does not expect to recover the entire amortized cost basis of the security, referred to as a credit loss.

In addition, this guidance changes the recording of an other-than-temporary impairment on a debt security if the reason for the other-than-temporary impairment is the recognition of a credit loss.  In this situation, the other-than-temporary impairment will be separated into the credit loss component, which is recognized in earnings, and the remainder of the other-than-temporary impairment, which is recorded in OCI.

For a debt security held at the beginning of the period of adoption for which an other-than-temporary impairment was previously recognized, if an entity does not intend to sell the debt security and it is not more likely than not that the entity will be required to sell the debt security before recovery of its amortized cost basis, the cumulative effect of applying this guidance was recognized as an adjustment to the opening balance of retained earnings with a corresponding adjustment to AOCI.

This guidance affects the accounting for PPL's and PPL Energy Supply's investments in debt securities in the NDT funds.  Prior to its application, PPL and PPL Energy Supply were unable to demonstrate the ability to hold an impaired debt security in the NDT funds until recovery; therefore, an unrealized loss on a debt security always represented an other-than-temporary impairment that required a current period charge to earnings.  Based on the application of this guidance, certain unrealized losses on investments in debt securities are no longer considered other-than-temporary impairments and will be recorded to OCI.

Related SEC guidance was also amended to no longer apply to debt securities.  As a result of the adoption, PPL and PPL Energy Supply recorded an immaterial cumulative effect adjustment to the opening balance of retained earnings with a corresponding reduction to AOCI.

The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles

Beginning with the period ended September 30, 2009, PPL and its subsidiaries adopted accounting guidance that establishes the FASB Accounting Standards CodificationTM (ASC) as the primary source of authoritative GAAP, other than guidance issued by the SEC.  This guidance eliminates the previous GAAP hierarchy of accounting and reporting guidance and replaces it with two levels of literature: authoritative and non-authoritative, and organizes GAAP pronouncements in a consistent manner by accounting topic.  The adoption did not impact PPL and its subsidiaries' results of operations, cash flows or financial positions since the ASC did not change existing GAAP.

Employers' Disclosures about Pensions and Other Postretirement Benefits

Effective December 31, 2009, PPL and its subsidiaries prospectively adopted accounting guidance that requires an employer to enhance its disclosures about plan assets of defined benefit plans to provide users of financial statements with an understanding of:

·
how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies;
·
the major classes of plan assets;
·
the inputs and valuation techniques used to measure the fair value of plan assets;
·
the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and
·
significant concentrations of risk within plan assets.

This guidance was issued to provide greater transparency within disclosures; therefore, the adoption did not have a material impact on PPL and its subsidiaries' financial statements.  The enhanced disclosures are presented in Note 12.

New Accounting Guidance Pending Adoption

See Note 22 for a discussion of new accounting guidance pending adoption.

2.  
Segment and Related Information

(PPL and PPL Energy Supply)

PPL's reportable segments are Supply, International Delivery and Pennsylvania Delivery.  The Supply segment primarily consists of the domestic energy marketing and trading activities, as well as the generation and development operations of PPL Energy Supply.  In 2009 and 2007, PPL Energy Supply sold or agreed to sell certain Supply segment businesses.  See Notes 8 and 9 for additional information.

The International Delivery segment consists primarily of the electricity distribution operations in the U.K. In 2007, PPL completed the sale of its Latin American businesses.  In 2008, the International Delivery segment recognized income tax benefits and miscellaneous expenses in Discontinued Operations in connection with the dissolution of certain Latin American holding companies.  In 2009, the International Delivery segment recognized $24 million of income tax expense in Discontinued Operations related to a correction of the calculation of tax bases of the Latin American businesses sold in 2007.  See Note 9 for additional information.

The Pennsylvania Delivery segment includes the regulated electric delivery operations of PPL Electric.  This segment also included the gas delivery operations of PPL Gas Utilities prior to its sale in October 2008.  See Note 9 for additional information.

The operating results of the Long Island generation business, the majority of the Maine hydroelectric generation business, the Latin American businesses and the natural gas distribution and propane businesses have been classified as Discontinued Operations on the Statements of Income.  Therefore, with the exception of net income attributable to PPL/PPL Energy Supply, the operating results from these businesses have been excluded from the income statement data tables below.

PPL Energy Supply's reportable segments are Supply and International Delivery.  The International Delivery segment at the PPL Energy Supply level is consistent with the International Delivery segment at the PPL level.  The Supply segment information reported at the PPL Energy Supply level will not agree with the Supply segment information reported at the PPL level because additional Supply segment functions exist at PPL that are outside of PPL Energy Supply.  Furthermore, certain income items, including PLR revenue and certain interest income, exist at the PPL Energy Supply level but are eliminated in consolidation at the PPL level.  Finally, certain expense items are fully allocated to the segments at the PPL level only.

Segments include direct charges, as well as an allocation of indirect corporate service costs, from PPL Services.  These service costs include functions such as financial, legal, human resources and information services.  See Note 15 for additional information.

Financial data for the segments are:

   
PPL
  
PPL Energy Supply
   
2009
  
2008
  
2007
  
2009
  
2008
  
2007
Income Statement Data
                                                
Revenues from external customers
                                                
Supply (a)
  
$
3,618
    
$
3,857
    
$
2,308
    
$
5,416
    
$
5,678
    
$
4,112
  
International Delivery
    
716
      
857
      
900
      
716
      
857
      
900
  
Pennsylvania Delivery
    
3,222
      
3,293
      
3,254
                          
     
7,556
      
8,007
      
6,462
      
6,132
      
6,535
      
5,012
  
Intersegment revenues (b)
                                                
Supply
    
1,806
      
1,826
      
1,810
                          
Pennsylvania Delivery
    
70
      
108
      
156
                          
                                                 
Depreciation
                                                
Supply
    
226
      
193
      
163
      
210
      
180
      
152
  
International Delivery
    
115
      
134
      
147
      
115
      
134
      
147
  
Pennsylvania Delivery
    
128
      
131