PPL CORP
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-K
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended December 31, 2009
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the transition period from _________ to
___________
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Commission
File
Number
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Registrant;
State of Incorporation;
Address and Telephone
Number
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IRS
Employer
Identification
No.
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1-11459
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PPL
Corporation
(Exact
name of Registrant as specified in its charter)
(Pennsylvania)
Two
North Ninth Street
Allentown,
PA 18101-1179
(610)
774-5151
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23-2758192
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1-32944
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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
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23-3074920
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1-905
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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
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23-0959590
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of each
class
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Name of each exchange
on which registered
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Common
Stock of PPL Corporation
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New
York Stock Exchange
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Senior
Notes of PPL Energy Supply, LLC
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7.0%
due 2046
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New
York Stock Exchange
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Preferred
Stock of PPL Electric Utilities Corporation
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4-1/2%
4.40%
Series
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New
York Stock Exchange
New
York Stock Exchange
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Junior
Subordinated Notes of PPL Capital Funding, Inc.
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2007
Series A due 2067
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New
York Stock Exchange
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Senior
Notes of PPL Capital Funding, Inc.
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6.85%
due 2047
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the
Act: None
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Indicate
by check mark whether the Registrants are well-known seasoned issuers, as
defined in Rule 405 of the Securities Act.
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PPL
Corporation
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Yes
X
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No
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PPL
Energy Supply, LLC
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Yes
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No
X
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PPL
Electric Utilities Corporation
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Yes
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No
X
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Indicate
by check mark if the Registrants are not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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PPL
Corporation
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Yes
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No
X
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PPL
Energy Supply, LLC
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Yes
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No
X
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PPL
Electric Utilities Corporation
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Yes
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No
X
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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.
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PPL
Corporation
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Yes
X
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No
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PPL
Energy Supply, LLC
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Yes
X
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No
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PPL
Electric Utilities Corporation
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Yes
X
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No
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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).
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PPL
Corporation
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Yes
X
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No
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PPL
Energy Supply, LLC
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Yes
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No
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PPL
Electric Utilities Corporation
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Yes
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No
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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.
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PPL
Corporation
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[ X
]
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PPL
Energy Supply, LLC
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[ X
]
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PPL
Electric Utilities Corporation
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[ X
]
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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):
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting
company
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PPL
Corporation
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[ X
]
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[ ]
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[ ]
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[ ]
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PPL
Energy Supply, LLC
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[ ]
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[ ]
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[ X
]
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[ ]
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PPL
Electric Utilities Corporation
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[ ]
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[ ]
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[ X
]
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[ ]
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Indicate
by check mark whether the Registrants are shell companies (as defined in Rule
12b-2 of the Act).
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PPL
Corporation
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Yes
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No
X
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PPL
Energy Supply, LLC
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Yes
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No
X
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PPL
Electric Utilities Corporation
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Yes
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No
X
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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.
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Item
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Page
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PART
I
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i
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v
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1.
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1
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1A.
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9
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1B.
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16
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2.
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17
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3.
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18
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4.
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18
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19
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PART
II
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5.
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21
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6.
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21
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7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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24
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51
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75
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7A.
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87
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89
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8.
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93
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9.
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195
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9A.
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195
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9A(T).
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195
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9B.
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196
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PART
III
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10.
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196
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11.
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197
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12.
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197
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13.
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198
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14.
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198
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PART
IV
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15.
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199
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200
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202
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205
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215
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218
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224
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230
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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
- t
he
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.
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;
|
|
·
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transmission
and distribution system conditions and operating costs;
|
|
·
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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;
|
|
·
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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;
|
|
·
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stock
price performance of PPL;
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the
fair value of debt and equity securities and the impact on defined benefit
costs and resultant cash funding requirements for defined benefit
plans;
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interest
rates and their effect on pension, retiree medical and nuclear
decommissioning liabilities;
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the
impact of the current financial and economic downturn;
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the
effect of electricity price deregulation beginning in 2010 in PPL
Electric's service territory;
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the
profitability and liquidity, including access to capital markets and
credit facilities, of PPL and its subsidiaries;
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new
accounting requirements or new interpretations or applications of existing
requirements;
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changes
in securities and credit ratings;
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foreign
currency exchange rates;
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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;
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political,
regulatory or economic conditions in states, regions or countries where
PPL or its subsidiaries conduct business;
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receipt
of necessary governmental permits, approvals and rate
relief;
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new
state, federal or foreign legislation, including new tax
legislation;
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state,
federal and foreign regulatory developments;
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the
outcome of any rate cases by PPL Electric at the PUC;
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the
impact of any state, federal or foreign investigations applicable to PPL
and its subsidiaries and the energy industry;
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the
effect of any business or industry restructuring;
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development
of new projects, markets and technologies;
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performance
of new ventures; and
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business
or asset acquisitions and
dispositions.
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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.
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.
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Supply Segment
-
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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.
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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.
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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.
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Competition
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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.
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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
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|
Montana
|
8,120
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|
Maine
|
261
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|
Connecticut
|
108
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|
New
York (a)
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|
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Illinois
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64
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Total
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54,572
|
|
(a)
|
72
million kWhs were excluded as tolling agreements were in place for 100% of
the output.
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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.
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Fuel
Supply
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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.
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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.
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·
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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.
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.
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.
PPL
Corporation, PPL Energy Supply, LLC and PPL Electric Utilities
Corporation
None.
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.
See Note
14 to the Financial Statements for information regarding legal, regulatory and
environmental proceedings and matters.
There
were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2009.
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
|
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.
PPL
Energy Supply, LLC
|
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.
|
|
|
||||||||||||||||||||
|
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.
|
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.
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.
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.
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."
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
|
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
|
||||
|
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.
|
|
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.
|
||||||||||||
|
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.
|
||
|
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.
|
||
|
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.
|
|
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.
|
||||||||||||
|
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.
|
||||||||||||
|
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.
|
||||||||
|
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.
|
|
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
|
|
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.
|
||||||||||||
|
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.
|
||||||||||||
|
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.
|
||
|
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.
|
||
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
Codification
TM
(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.
(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
|
132
|
|||||||||||||||||||||
|
469
|
458
|
442
|
325
|
314
|
299
|
|||||||||||||||||||
|
Amortization
- recoverable transition costs and other
|
||||||||||||||||||||||||
|
Supply
|
90
|
66
|
106
|
88
|
51
|
94
|
||||||||||||||||||
|
International
Delivery
|
(13
|
)
|
15
|
10
|
(13
|
)
|
15
|
10
|
||||||||||||||||
|
Pennsylvania
Delivery
|
312
|
302
|
317
|
|||||||||||||||||||||
|
389
|
383
|
433
|
75
|
66
|
104
|
|||||||||||||||||||
|
Unrealized
(gains) losses on derivatives and other hedging activities
|
||||||||||||||||||||||||
|
Supply
|
329
|
(279
|
)
|
(22
|
)
|
330
|
(285
|
)
|
(27
|
)
|
||||||||||||||
|
Interest
income (c)
|
||||||||||||||||||||||||
|
Supply
|
2
|
7
|
11
|
7
|
27
|
55
|
||||||||||||||||||
|
International
Delivery
|
1
|
10
|
22
|
1
|
10
|
22
|
||||||||||||||||||
|
Pennsylvania
Delivery
|
11
|
16
|
28
|
|||||||||||||||||||||
|
14
|
33
|
61
|
8
|
37
|
77
|
|||||||||||||||||||
|
Interest
Expense (d)
|
||||||||||||||||||||||||
|
Supply
|
191
|
200
|
154
|
185
|
169
|
106
|
||||||||||||||||||
|
International
Delivery
|
87
|
144
|
183
|
87
|
144
|
183
|
||||||||||||||||||
|
Pennsylvania
Delivery
|
118
|
111
|
135
|
|||||||||||||||||||||
|
396
|
455
|
472
|
272
|
313
|
289
|
|||||||||||||||||||
|
Income
from Continuing Operations Before Income Taxes
|
||||||||||||||||||||||||
|
Supply
|
85
|
749
|
780
|
44
|
755
|
835
|
||||||||||||||||||
|
International
Delivery
|
290
|
330
|
260
|
290
|
330
|
260
|
||||||||||||||||||
|
Pennsylvania
Delivery
|
221
|
278
|
241
|
|||||||||||||||||||||
|
596
|
1,357
|
1,281
|
334
|
1,085
|
1,095
|
|||||||||||||||||||
|
Income
Taxes
|
||||||||||||||||||||||||
|
Supply
|
31
|
283
|
221
|
27
|
290
|
249
|
||||||||||||||||||
|
International
Delivery
|
20
|
45
|
(43
|
)
|
20
|
45
|
(43
|
)
|
||||||||||||||||
|
Pennsylvania
Delivery
|
79
|
102
|
81
|
|||||||||||||||||||||
|
130
|
430
|
259
|
47
|
335
|
206
|
|||||||||||||||||||
|
Deferred
income taxes and investment tax credits
|
||||||||||||||||||||||||
|
Supply
|
138
|
112
|
6
|
152
|
193
|
120
|
||||||||||||||||||
|
International
Delivery
|
12
|
1
|
(38
|
)
|
12
|
1
|
(38
|
)
|
||||||||||||||||
|
Pennsylvania
Delivery
|
(23
|
)
|
1
|
18
|
||||||||||||||||||||
|
127
|
114
|
(14
|
)
|
164
|
194
|
82
|
||||||||||||||||||
|
Net
Income Attributable to PPL/PPL Energy Supply
|
||||||||||||||||||||||||
|
Supply
(a) (e)
|
40
|
479
|
568
|
3
|
478
|
595
|
||||||||||||||||||
|
International
Delivery (f)
|
243
|
290
|
610
|
243
|
290
|
610
|
||||||||||||||||||
|
Pennsylvania
Delivery (g)
|
124
|
161
|
110
|
|||||||||||||||||||||
|
$
|
407
|
$
|
930
|
$
|
1,288
|
$
|
246
|
$
|
768
|
$
|
1,205
|
|||||||||||||
|
Cash
Flow Data
|
||||||||||||||||||||||||
|
Expenditures
for long-lived assets
|
||||||||||||||||||||||||
|
Supply
|
$
|
723
|
$
|
1,142
|
$
|
1,043
|
$
|
694
|
$
|
1,117
|
$
|
1,019
|
||||||||||||
|
International
Delivery
|
240
|
267
|
340
|
240
|
267
|
340
|
||||||||||||||||||
|
Pennsylvania
Delivery
|
298
|
286
|
302
|
|||||||||||||||||||||
|
$
|
1,261
|
$
|
1,695
|
$
|
1,685
|
$
|
934
|
$
|
1,384
|
$
|
1,359
|
|
PPL
|
PPL
Energy Supply
|
|||||||||||||||
|
As
of December 31,
|
As
of December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Balance
Sheet Data
|
||||||||||||||||
|
Total
assets
|
||||||||||||||||
|
Supply
|
$
|
12,766
|
$
|
11,993
|
$
|
12,508
|
$
|
12,270
|
||||||||
|
International
Delivery
|
4,516
|
4,199
|
4,516
|
4,199
|
||||||||||||
|
Pennsylvania
Delivery
|
4,883
|
5,213
|
||||||||||||||
|
$
|
22,165
|
$
|
21,405
|
$
|
17,024
|
$
|
16,469
|
|||||||||
|
PPL
|
PPL
Energy Supply
|
|||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||
|
Geographic
Data
|
||||||||||||||||||||||||
|
Revenues
from external customers
|
||||||||||||||||||||||||
|
U.S.
|
$
|
6,840
|
$
|
7,150
|
$
|
5,562
|
$
|
5,416
|
$
|
5,678
|
$
|
4,112
|
||||||||||||
|
U.K.
|
716
|
857
|
900
|
716
|
857
|
900
|
||||||||||||||||||
|
$
|
7,556
|
$
|
8,007
|
$
|
6,462
|
$
|
6,132
|
$
|
6,535
|
$
|
5,012
|
|||||||||||||
|
PPL
|
PPL
Energy Supply
|
|||||||||||||||
|
As
of December 31,
|
As
of December 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Long-Lived
Assets
|
||||||||||||||||
|
U.S.
|
$
|
10,181
|
$
|
9,762
|
$
|
6,676
|
$
|
6,433
|
||||||||
|
U.K.
|
3,517
|
3,167
|
3,517
|
3,167
|
||||||||||||
|
$
|
13,698
|
$
|
12,929
|
$
|
10,193
|
$
|
9,600
|
|||||||||
|
(a)
|
Includes
unrealized gains and losses from economic activity. See Note 18
for additional information.
|
|
|
(b)
|
See
"PLR Contracts" and "NUG Purchases" in Note 15 for a discussion of the
basis of accounting between reportable segments.
|
|
|
(c)
|
Includes
interest income from affiliate(s).
|
|
|
(d)
|
Includes
interest expense with affiliate.
|
|
|
(e)
|
Includes
the results of Discontinued Operations of the Long Island generation
business and the majority of the Maine hydroelectric generation
business. Also includes the loss on the sale of PPL Energy
Supply's interest in Wyman Unit 4. See Note 9 for additional
information.
|
|
|
(f)
|
Includes
the results of Discontinued Operations of the Latin American
businesses. See Note 9 for additional
information.
|
|
|
(g)
|
Includes
the results of Discontinued Operations of the natural gas and propane
businesses. See Note 9 for additional
information.
|
(PPL
and PPL Energy Supply)
In
December 2001, a subsidiary of PPL Energy Supply entered into a $455 million
operating lease arrangement, as lessee, for the development, construction and
operation of a gas-fired combined-cycle generation facility located in Lower Mt.
Bethel Township, Northampton County, Pennsylvania. This generation
facility has a total capacity (winter rating) of 624 MW at December 31,
2009. The owner/lessor of this generation facility, LMB Funding, LP,
was created to own/lease the facility and incur the related financing
costs. The initial lease term commenced on the date of commercial
operation, which occurred in May 2004, and ends in December
2013. Under a residual value guarantee, if the generation facility is
sold at the end of the lease term and the cash proceeds from the sale are less
than the original acquisition cost, the subsidiary of PPL Energy Supply is
obligated to pay up to 70.52% of the original acquisition cost. This
residual value guarantee protects the other variable interest holders from
losses related to their investments. LMB Funding, LP cannot extend or
cancel the lease or sell the facility without the prior consent of the PPL
Energy Supply subsidiary. As a result, LMB Funding, LP was determined
to be a variable interest entity and the subsidiary of PPL Energy Supply was
considered the primary beneficiary that consolidates this variable interest
entity.
The lease
financing, which includes $437 million of "Long-term Debt" and $18 million of
"Noncontrolling Interests," at December 31, 2009, is secured by, among
other things, the generation facility. The debt matures at the end of
the lease. At December 31, 2009 and 2008, the facility, which
was included in "Property, Plant and Equipment" and "Other intangibles" on the
Balance Sheets, had a carrying value of $435 million and $441 million, net of
accumulated depreciation and amortization of $48 million and $51
million.
(PPL)
The basic
and diluted EPS computations and reconciliations of the amounts of income and
shares (in thousands) of common stock used in the calculations are:
|
2009
|
2008
|
2007
|
||||||||||
|
Income
(Numerator)
|
||||||||||||
|
Income
from continuing operations after income taxes attributable to
PPL
|
$
|
447
|
$
|
907
|
$
|
1,001
|
||||||
|
Less
amounts allocated to participating securities
|
2
|
5
|
5
|
|||||||||
|
Income
from continuing operations after income taxes available to PPL common
shareowners
|
$
|
445
|
$
|
902
|
$
|
996
|
||||||
|
Income
(loss) from discontinued operations (net of income taxes) attributable to
PPL
|
$
|
(40
|
)
|
$
|
23
|
$
|
287
|
|||||
|
Less
amounts allocated to participating securities
|
1
|
|||||||||||
|
Income
(loss) from discontinued operations (net of income taxes) available to PPL
common shareowners
|
$
|
(40
|
)
|
$
|
23
|
$
|
286
|
|||||
|
Net
income attributable to PPL
|
$
|
407
|
$
|
930
|
$
|
1,288
|
||||||
|
Less
amounts allocated to participating securities
|
2
|
5
|
6
|
|||||||||
|
Net
income available to PPL common shareowners
|
$
|
405
|
$
|
925
|
$
|
1,282
|
||||||
|
Shares
of Common Stock (Denominator)
|
||||||||||||
|
Weighted-average
shares - Basic EPS
|
376,082
|
373,626
|
380,563
|
|||||||||
|
Add incremental
non-participating securities:
|
||||||||||||
|
Stock
options and performance units
|
324
|
836
|
1,328
|
|||||||||
|
Convertible
Senior Notes
|
439
|
1,601
|
||||||||||
|
Weighted-average
shares - Diluted EPS
|
376,406
|
374,901
|
383,492
|
|||||||||
|
Basic
EPS
|
||||||||||||
|
Available
to PPL common shareowners:
|
||||||||||||
|
Income
from continuing operations after income taxes
|
$
|
1.18
|
$
|
2.42
|
$
|
2.62
|
||||||
|
Income
(loss) from discontinued operations (net of income taxes)
|
(0.10
|
)
|
0.06
|
0.75
|
||||||||
|
Net
Income
|
$
|
1.08
|
$
|
2.48
|
$
|
3.37
|
||||||
|
Diluted
EPS
|
||||||||||||
|
Available
to PPL common shareowners:
|
||||||||||||
|
Income
from continuing operations after income taxes
|
$
|
1.18
|
$
|
2.41
|
$
|
2.60
|
||||||
|
Income
(loss) from discontinued operations (net of income taxes)
|
(0.10
|
)
|
0.06
|
0.74
|
||||||||
|
Net
Income
|
$
|
1.08
|
$
|
2.47
|
$
|
3.34
|
||||||
While
they were outstanding, PPL Energy Supply's 2-5/8% Convertible Senior Notes due
2023 (Convertible Senior Notes), which were issued in May 2003, could be
converted into shares of PPL common stock under certain circumstances, including
if during a fiscal quarter the market price of PPL's common stock exceeded
$29.83 per share over a certain period during the preceding fiscal quarter or if
PPL Energy Supply called the debt.
During
2008, all then-outstanding Convertible Senior Notes were either converted at the
election of the holders or redeemed at par by PPL Energy Supply.
The terms
of the Convertible Senior Notes required cash settlement of the principal amount
and permitted settlement of any conversion premium in cash or PPL common
stock. Based upon the conversion rate of 40.2212 shares per $1,000
principal amount of notes (or $24.8625 per share), the Convertible Senior Notes
had a dilutive impact when the average market price of PPL common stock equaled
or exceeded $24.87.
During
2009, PPL issued 559,744 shares of common stock related to the exercise of stock
options, vesting of restricted stock and restricted stock units and conversion
of stock units granted to directors under its stock-based compensation
plans. In addition, PPL issued 235,013 and 1,854,559 shares of common
stock related to its ESOP and its DRIP. See Note 11 for a discussion
of PPL's stock-based compensation plans.
The
following stock options to purchase PPL common stock and performance units were
excluded in the periods' computations of diluted EPS because the effect would
have been antidilutive.
|
(Thousands
of Shares)
|
2009
|
2008
|
2007
|
||||||||
|
Stock
options and performance units
|
2,395
|
606
|
|||||||||
(PPL)
"Income
from Continuing Operations Before Income Taxes" included the following
components:
|
2009
|
2008
|
2007
|
|||||||||
|
Domestic
income
|
$
|
306
|
$
|
1,027
|
$
|
1,021
|
|||||
|
Foreign
income
|
290
|
330
|
260
|
||||||||
|
$
|
596
|
$
|
1,357
|
$
|
1,281
|
||||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for accounting purposes and their
basis for income tax purposes and the tax effects of net operating loss and tax
credit carryforwards.
Net
deferred tax assets have been recognized based on management's estimates of
future taxable income for U.S. and certain foreign jurisdictions in which PPL's
operations have historically been profitable.
Significant
components of PPL's deferred income tax assets and liabilities from continuing
operations were as follows:
|
2009
|
2008
|
|||||||
|
Deferred
Tax Assets
|
||||||||
|
Deferred
investment tax credits
|
$
|
16
|
$
|
20
|
||||
|
NUG
contracts and buybacks
|
6
|
22
|
||||||
|
Regulatory
liabilities
|
28
|
|||||||
|
Accrued
pension costs
|
265
|
241
|
||||||
|
State
loss carryforwards
|
184
|
159
|
||||||
|
Federal
tax credit carryforwards
|
23
|
23
|
||||||
|
Foreign
capital loss carryforwards
|
144
|
126
|
||||||
|
Foreign
- pensions
|
168
|
87
|
||||||
|
Foreign
- other
|
6
|
9
|
||||||
|
Contributions
in aid of construction
|
98
|
79
|
||||||
|
Domestic
- other
|
189
|
192
|
||||||
|
Valuation
allowances
|
(312
|
)
|
(285
|
)
|
||||
|
815
|
673
|
|||||||
|
Deferred
Tax Liabilities
|
||||||||
|
Plant
- net
|
1,855
|
1,467
|
||||||
|
Recoverable
transition costs
|
116
|
|||||||
|
Taxes
recoverable through future rates
|
104
|
103
|
||||||
|
Unrealized
gains on qualifying derivatives
|
437
|
72
|
||||||
|
Foreign
investments
|
5
|
6
|
||||||
|
Reacquired
debt costs
|
14
|
12
|
||||||
|
Foreign
- plant
|
546
|
519
|
||||||
|
Foreign
- other
|
35
|
67
|
||||||
|
Domestic
- other
|
67
|
55
|
||||||
|
3,063
|
2,417
|
|||||||
|
Net
deferred tax liability
|
$
|
2,248
|
$
|
1,744
|
||||
PPL had
federal foreign tax credit carryforwards that expire by 2019 of $23 million at
December 31, 2009 and 2008. PPL also had state net operating
loss carryforwards that expire between 2010 and 2029 of $2.8 billion and $2.5
billion at December 31, 2009 and 2008. Valuation allowances have
been established for the amount that, more likely than not, will not be
realized.
PPL
Global had no foreign net operating loss carryforwards at December 31, 2009
and 2008. PPL Global had foreign capital loss carryforwards of $514
million and $451 million at December 31, 2009 and 2008. All of
these losses have an indefinite carryforward period. Valuation
allowances have been established for the amount that, more likely than not, will
not be realized. Of the total valuation allowances related to foreign
capital loss carryforwards, $63 million was previously allocable to goodwill;
however, upon adoption of new business combination guidance, effective January
1, 2009, all changes in valuation allowances associated with business
combinations are now recognized in tax expense rather than in
goodwill. See Note 1 for additional information.
The
changes in deferred tax valuation allowances were
:
|
Additions
|
||||||||||||||||||||
|
Balance
at Beginning of Period
|
Charged
to Income
|
Charged
to Other Accounts
|
Deductions
|
Balance
at End of Period
|
||||||||||||||||
|
2009
|
$
|
285
|
$
|
24 |
$
|
17
|
(a)
|
$ |
14
|
(b)
|
$
|
312
|
||||||||
|
2008
(c)
|
323
|
9 |
|
|
47
|
(a)
|
285
|
|||||||||||||
|
2007
(c)
|
352
|
2 |
|
31
|
(d)
|
323
|
||||||||||||||
|
(a)
|
Related
to the change in foreign net operating loss carryforwards, including the
change in foreign currency exchange rates.
|
|
|
(b)
|
Resulting
from the projected revenue increase in connection with the expiration of
the generation rate caps in 2010, the valuation allowance related to state
net operating loss carryforwards was reduced by $13
million.
|
|
|
(c)
|
Pennsylvania
state legislation, enacted in 2007 and 2009, increased the net operating
loss limitation. As a result, the deferred tax asset (and
related valuation allowance) associated with certain of its Pennsylvania
net operating loss carryforwards for all periods presented were increased
to reflect the higher limitation. There was no impact on the
net deferred tax asset position as a result of the legislation and related
adjustments.
|
|
|
(d)
|
Primarily
related to the change in domestic net operating loss
carryforwards.
|
PPL
Global does not pay or record U.S. income taxes on the undistributed earnings of
WPD as management has determined that the earnings are permanently
reinvested.
Historically,
dividends paid by WPD have been distributions of the current year's
earnings. WPD's long-term working capital forecasts and capital
expenditure projections for the foreseeable future require reinvestment of
WPD's undistributed earnings and WPD would have to issue debt or access
credit facilities to fund any distributions in excess of current
earnings. Additionally, U.S. long-term working capital forecasts and
capital expenditure projections for the foreseeable future do not require or
anticipate WPD distributing any more than future earnings to its parent in the
U.S. The cumulative undistributed earnings are included in "Earnings
reinvested" on the Balance Sheets. The amounts considered permanently
reinvested at December 31, 2009 and 2008 were $622 million and $1.2
billion. If the earnings are remitted as dividends, PPL Global may be
subject to additional U.S. taxes, net of allowable foreign tax
credits. It is not practicable to estimate the amount of additional
taxes that might be payable on these foreign earnings.
Details
of the components of income tax expense, a reconciliation of federal income
taxes derived from statutory tax rates applied to "Income from Continuing
Operations Before Income Taxes" to income taxes for reporting purposes, and
details of "Taxes, other than income" were:
|
2009
|
2008
|
2007
|
||||||||||
|
Income
Tax Expense
|
||||||||||||
|
Current
- Federal
|
$
|
(59
|
)
|
$
|
237
|
$
|
181
|
|||||
|
Current
- State
|
21
|
9
|
9
|
|||||||||
|
Current
- Foreign
|
41
|
70
|
83
|
|||||||||
|
3
|
316
|
273
|
||||||||||
|
Deferred
- Federal
|
135
|
72
|
32
|
|||||||||
|
Deferred
- State (a)
|
(10
|
)
|
43
|
20
|
||||||||
|
Deferred
- Foreign (b)
|
16
|
13
|
(52
|
)
|
||||||||
|
141
|
128
|
|||||||||||
|
Investment
tax credit, net - Federal
|
(14
|
)
|
(14
|
)
|
(14
|
)
|
||||||
|
Total
income tax expense from continuing operations (c)
|
$
|
130
|
$
|
430
|
$
|
259
|
||||||
|
Total
income tax expense - Federal
|
$
|
62
|
$
|
295
|
$
|
199
|
||||||
|
Total
income tax expense - State
|
11
|
52
|
29
|
|||||||||
|
Total
income tax expense - Foreign
|
57
|
83
|
31
|
|||||||||
|
Total
income tax expense from continuing operations (c)
|
$
|
130
|
$
|
430
|
$
|
259
|
||||||
|
(a)
|
Includes
a $13 million reduction to state deferred tax expense related to the
reversal of deferred tax valuation allowances. See
"Reconciliation of Income Tax Expense" for additional
information.
|
|
|
(b)
|
Includes
a $54 million deferred tax benefit recorded in 2007 related to the U.K.
tax rate reduction effective April 1, 2008. See "Reconciliation
of Income Tax Expense" for additional information.
|
|
|
(c)
|
Excludes
current and deferred federal, state and foreign tax expense (benefit)
recorded to Discontinued Operations of $21 million in 2009 and $154
million in 2007. Excludes realized tax benefits related to
stock-based compensation, recorded as an increase to capital in excess of
par value of $1 million in 2009, $7 million in 2008 and $25 million in
2007. Also, excludes federal, state, and foreign tax expense
(benefit) recorded to OCI of $358 million in 2009, $(212) million in 2008
and $20 million in 2007.
|
|
2009
|
2008
|
2007
|
||||||||||
|
Reconciliation
of Income Tax Expense
|
||||||||||||
|
Federal
income tax on Income from Continuing Operations Before Income Taxes at
statutory tax rate - 35%
|
$
|
209
|
$
|
475
|
$
|
448
|
||||||
|
Increase
(decrease) due to:
|
||||||||||||
|
State
income taxes (a) (b)
|
40
|
47
|
29
|
|||||||||
|
State
net operating loss valuation allowance (c)
|
(13
|
)
|
||||||||||
|
Amortization
of investment tax credits
|
(10
|
)
|
(10
|
)
|
(10
|
)
|
||||||
|
Difference
related to income recognition of foreign affiliates (net of foreign income
taxes) (d)
|
(93
|
)
|
(48
|
)
|
(39
|
)
|
||||||
|
Enactment
of the U.K.'s Finance Act 2008 and 2007 (e)
|
(8
|
)
|
(54
|
)
|
||||||||
|
Change
in federal tax reserves (a)
|
6
|
10
|
(27
|
)
|
||||||||
|
Change
in foreign tax reserves (a) (d)
|
17
|
5
|
||||||||||
|
Stranded
cost securitization (a)
|
(6
|
)
|
(7
|
)
|
(7
|
)
|
||||||
|
Federal
income tax return adjustments (b)
|
(10
|
)
|
(6
|
)
|
(8
|
)
|
||||||
|
Foreign
income tax return adjustments (b)
|
(17
|
)
|
(2
|
)
|
||||||||
|
Federal
income tax credits (b)
|
(2
|
)
|
15
|
(57
|
)
|
|||||||
|
Domestic
manufacturing deduction
|
(3
|
)
|
(17
|
)
|
(15
|
)
|
||||||
|
Other
|
(5
|
)
|
(9
|
)
|
1
|
|||||||
|
(79
|
)
|
(45
|
)
|
(189
|
)
|
|||||||
|
Total
income tax expense
|
$
|
130
|
$
|
430
|
$
|
259
|
||||||
|
Effective
income tax rate
|
21.8%
|
31.7%
|
20.2%
|
|||||||||
|
(a)
|
Changes
in income tax reserves impacted the following components of income tax
expense, which are presented in the "Reconciliation of Income Tax Expense"
table.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||
|
Change
in foreign tax reserves
|
$
|
17
|
$
|
5
|
||||||||||
|
Change
in federal tax reserves (f)
|
6
|
10
|
$
|
(27
|
)
|
|||||||||
|
Stranded
cost securitization
|
(6
|
)
|
(7
|
)
|
(7
|
)
|
||||||||
|
State
income taxes (f)
|
(5
|
)
|
3
|
1
|
||||||||||
|
$
|
12
|
$
|
11
|
$
|
(33
|
)
|
||||||||
|
(b)
|
Adjustments
from filing prior year tax returns impacted the following components of
income tax expense, which are presented in the "Reconciliation of Income
Tax Expense" table.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||
|
State
income taxes (f)
|
$
|
31
|
$
|
4
|
$
|
(1
|
)
|
|||||||
|
Federal
income tax return adjustments (f)
|
(10
|
)
|
(6
|
)
|
(8
|
)
|
||||||||
|
Foreign
income tax return adjustments
|
(17
|
)
|
(2
|
)
|
||||||||||
|
Federal
income tax credits (g)
|
16
|
|||||||||||||
|
$
|
21
|
$
|
(3
|
)
|
$
|
(11
|
)
|
|||||||
|
(c)
|
Pennsylvania
H.B. 1531, enacted in October 2009, increased the net operating loss
limitation to 20% of taxable income for tax years beginning in
2010. In conjunction with the projected revenue increase
related to the expiration of the generation rate caps in 2010, PPL
recorded a $13 million reduction to state deferred income tax expense
related to the reversal of deferred tax valuation allowances for a portion
of its Pennsylvania net operating losses.
|
|||||||||||||
|
(d)
|
Income
tax (benefits) related to foreign income, which are presented in the
"Reconciliation of Income Tax Expense" table.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||
|
Losses
generated through restructuring and fully reserved (reflected in "Change
in foreign tax reserves")
|
$
|
(46
|
)
|
|||||||||||
|
Impact
of lower U.K. income tax rates
|
(23
|
)
|
$
|
(22
|
)
|
$
|
(16
|
)
|
||||||
|
U.S.
income tax on foreign earnings - net of foreign tax credit
|
(16
|
)
|
(21
|
)
|
(14
|
)
|
||||||||
|
Other
|
(8
|
)
|
(5
|
)
|
(9
|
)
|
||||||||
|
$
|
(93
|
)
|
$
|
(48
|
)
|
$
|
(39
|
)
|
||||||
|
(e)
|
The
U.K.'s Finance Act 2008, enacted in July 2008, included a phase-out of tax
depreciation on certain buildings. As a result, PPL recorded an
$8 million deferred tax benefit during 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, PPL recorded a $54 million deferred tax benefit during 2007
related to the reduction in its deferred tax
liabilities.
|
||||||||||||||
|
(f)
|
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 federal income tax return
and recorded a $24 million adjustment to federal and state income tax
expense resulting from the reduction of federal income tax benefits
related to the domestic manufacturing deduction and reduction of certain
state tax benefits related to state net operating losses and regulated
depreciation. The $24 million of income tax expense consisted
of $29 million expense reflected in "State income taxes," offset by $4
million benefit reflected in "Federal income tax return adjustments" and a
$1 million benefit reflected in "Change in federal tax
reserves."
|
|||||||||||||
|
(g)
|
During
March 2008, PPL Energy Supply recorded a $13 million expense to adjust the
amount of synthetic fuel tax credits recorded during 2007. See
Note 14 for additional information.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Taxes,
other than income
|
||||||||||||
|
State
gross receipts
|
$
|
187
|
$
|
199
|
$
|
193
|
||||||
|
State
utility realty
|
5
|
4
|
5
|
|||||||||
|
State
capital stock
|
6
|
5
|
8
|
|||||||||
|
Property
- foreign
|
57
|
66
|
67
|
|||||||||
|
Domestic
property and other
|
25
|
14
|
25
|
|||||||||
|
$
|
280
|
$
|
288
|
$
|
298
|
|||||||
See Note
1 for information on a settlement related to PURTA tax that will be returned to
PPL Electric customers.
For tax
years 2000 through 2007, PPL Montana protested certain property tax assessments
by the Montana Department of Revenue on its generation
facilities. The tax liabilities in dispute for 2000 through 2007,
which had been paid and expensed by PPL Montana, totaled $45
million. In January 2008, both parties reached a settlement for all
years outstanding. The settlement resulted in PPL Montana receiving a
refund of taxes paid and interest totaling $8 million. This
settlement was recorded in 2008, of which $7 million was reflected in "Taxes,
other than income" and $1 million was reflected in "Other Income - net" on the
Statement of Income.
(PPL
Energy Supply)
"Income
from Continuing Operations Before Income Taxes" included the following
components:
|
2009
|
2008
|
2007
|
|||||||||
|
Domestic
income
|
$
|
44
|
$
|
755
|
$
|
835
|
|||||
|
Foreign
income
|
290
|
330
|
260
|
||||||||
|
$
|
334
|
$
|
1,085
|
$
|
1,095
|
||||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for accounting purposes and their
basis for income tax purposes and the tax effects of net operating loss and tax
credit carryforwards.
Net
deferred tax assets have been recognized based on management's estimates of
future taxable income for U.S. and certain foreign jurisdictions in which PPL's
operations have historically been profitable.
Significant
components of PPL Energy Supply's deferred income tax assets and liabilities
from continuing operations were as follows:
|
2009
|
2008
|
|||||||
|
Deferred
Tax Assets
|
||||||||
|
Deferred
investment tax credits
|
$
|
12
|
$
|
16
|
||||
|
NUG
contracts and buybacks
|
6
|
22
|
||||||
|
Accrued
pension costs
|
149
|
135
|
||||||
|
Federal
tax credit carryforwards
|
23
|
23
|
||||||
|
Foreign
capital loss carryforwards
|
144
|
126
|
||||||
|
Foreign
- pensions
|
168
|
87
|
||||||
|
Foreign
- other
|
6
|
9
|
||||||
|
Other
domestic
|
100
|
98
|
||||||
|
Valuation
allowances
|
(144
|
)
|
(127
|
)
|
||||
|
464
|
389
|
|||||||
|
Deferred
Tax Liabilities
|
||||||||
|
Plant
- net
|
1,046
|
796
|
||||||
|
Unrealized
gain on qualifying derivatives
|
417
|
81
|
||||||
|
Foreign
investments
|
5
|
6
|
||||||
|
Foreign
- plant
|
546
|
519
|
||||||
|
Foreign
- other
|
35
|
67
|
||||||
|
Other
domestic
|
41
|
33
|
||||||
|
2,090
|
1,502
|
|||||||
|
Net
deferred tax liability
|
$
|
1,626
|
$
|
1,113
|
||||
PPL
Energy Supply had federal foreign tax credit carryforwards that expire by 2019
of $23 million at December 31, 2009 and 2008. PPL Energy Supply
also had state net operating loss carryforwards that expire between 2010 and
2029 of $9 million at December 31, 2009 and 2008. Valuation
allowances have been established for the amount that, more likely than not, will
not be realized.
PPL
Global had no foreign net operating loss carryforwards at December 31, 2009
and December 31, 2008. PPL Global had foreign capital loss
carryforwards of $514 million and $451 million at December 31, 2009 and
2008. All of these losses have an indefinite carryforward
period. Valuation allowances have been established for the amount
that, more likely than not, will not be realized. Of the total
valuation allowances related to foreign capital loss carryforwards, $63 million
was allocable to goodwill; however, upon adoption of new business combination
guidance, effective January 1, 2009, all changes in valuation allowances
associated with business combinations will be recognized in tax expense rather
than in goodwill. See Note 1 for additional information.
Changes
in deferred tax valuation allowances were
:
|
Additions
|
||||||||||||||||||||
|
Balance
at Beginning of Period
|
Charged
to Income
|
Charged
to Other Accounts
|
Deductions
|
Balance
at End of Period
|
||||||||||||||||
|
2009
|
$
|
127
|
$
|
17
|
(a)
|
$
|
144
|
|||||||||||||
|
2008
|
174
|
$
|
47
|
(a)
|
127
|
|||||||||||||||
|
2007
|
178
|
$ | 2 |
|
6
|
|
174
|
|||||||||||||
|
(a)
|
Primarily
related to the change in foreign net operating loss carryforwards
including the change in foreign currency exchange
rates.
|
PPL
Global does not pay or record U.S. income taxes on the undistributed earnings of
WPD as management has determined that the earnings are permanently
reinvested. Historically, dividends paid by WPD have been
distributions of the current year's earnings. WPD's long-term working
capital forecasts and capital expenditure projections for the foreseeable future
require reinvestment of WPD's undistributed earnings and WPD would have to
issue debt or access credit facilities to fund any distributions in excess of
current earnings. Additionally, U.S. long-term working capital
forecasts and capital expenditure projections for the foreseeable future do not
require or anticipate WPD distributing any more than future earnings to its
parent in the U.S. The cumulative undistributed earnings are included
in "Members Equity" on the Balance Sheets. The amounts considered
permanently reinvested at December 31, 2009 and 2008 were $622 million and $1.2
billion. If the earnings are remitted as dividends, PPL Global may be
subject to additional U.S. taxes, net of allowable foreign tax
credits. It is not practicable to estimate the amount of additional
taxes that might be payable on these foreign earnings.
Details
of the components of income tax expense, a reconciliation of federal income
taxes derived from statutory tax rates applied to "Income from Continuing
Operations Before Income Taxes" to income taxes for reporting purposes, and
details of "Taxes, other than income" were:
|
2009
|
2008
|
2007
|
||||||||||
|
Income
Tax Expense
|
||||||||||||
|
Current
- Federal
|
$
|
(155
|
)
|
$
|
61
|
$
|
13
|
|||||
|
Current
- State
|
(3
|
)
|
10
|
28
|
||||||||
|
Current
- Foreign
|
41
|
70
|
83
|
|||||||||
|
(117
|
)
|
141
|
124
|
|||||||||
|
Deferred
- Federal
|
128
|
144
|
121
|
|||||||||
|
Deferred
- State
|
32
|
49
|
25
|
|||||||||
|
Deferred
- Foreign (a)
|
16
|
13
|
(52
|
)
|
||||||||
|
176
|
206
|
94
|
||||||||||
|
Investment
tax credit, net - Federal
|
(12
|
)
|
(12
|
)
|
(12
|
)
|
||||||
|
Total
income tax expense from continuing operations (b)
|
$
|
47
|
$
|
335
|
$
|
206
|
||||||
|
Total
income tax expense - Federal
|
$
|
(39
|
)
|
$
|
193
|
$
|
122
|
|||||
|
Total
income tax expense - State
|
29
|
59
|
53
|
|||||||||
|
Total
income tax expense - Foreign
|
57
|
83
|
31
|
|||||||||
|
Total
income tax expense from continuing operations (b)
|
$
|
47
|
$
|
335
|
$
|
206
|
||||||
|
(a)
|
Includes
a $54 million deferred tax benefit recorded in 2007 related to the U.K.
tax rate reduction effective April 1, 2008. See "Reconciliation
of Income Tax Expense" for additional information.
|
|
|
(b)
|
Excludes
current and deferred federal, state and foreign tax expense recorded to
Discontinued Operations of $22 million in 2009, $1 million in 2008 and
$121 million in 2007. Also, excludes federal, state and foreign
tax expense (benefit) recorded to OCI of $338 million in 2009, $(168)
million in 2008 and $19 million in
2007.
|
|
2009
|
2008
|
2007
|
||||||||||
|
Reconciliation
of Income Tax Expense
|
||||||||||||
|
Federal
income tax on Income from Continuing Operations Before Income Taxes at
statutory tax rate - 35%
|
$
|
117
|
$
|
380
|
$
|
383
|
||||||
|
Increase
(decrease) due to:
|
||||||||||||
|
State
income taxes (a) (b)
|
27
|
40
|
36
|
|||||||||
|
Amortization
of investment tax credits
|
(8
|
)
|
(8
|
)
|
(8
|
)
|
||||||
|
Difference
related to income recognition of foreign affiliates (net of foreign income
taxes) (c)
|
(93
|
)
|
(48
|
)
|
(39
|
)
|
||||||
|
Enactment
of the U.K.'s Finance Act 2008 and 2007 (d)
|
(8
|
)
|
(54
|
)
|
||||||||
|
Change
in federal tax reserves (a)
|
11
|
(28
|
)
|
|||||||||
|
Change
in foreign tax reserves (a) (c)
|
17
|
5
|
||||||||||
|
Federal
income tax return adjustments (b)
|
(7
|
)
|
(11
|
)
|
(10
|
)
|
||||||
|
Foreign
income tax return adjustments (b)
|
(17
|
)
|
(2
|
)
|
||||||||
|
Federal
income tax credits (b)
|
(2
|
)
|
15
|
(57
|
)
|
|||||||
|
Domestic
manufacturing deduction
|
(3
|
)
|
(17
|
)
|
(15
|
)
|
||||||
|
Other
|
(1
|
)
|
(7
|
)
|
||||||||
|
(70
|
)
|
(45
|
)
|
(177
|
)
|
|||||||
|
Total
income tax expense
|
$
|
47
|
$
|
335
|
$
|
206
|
||||||
|
Effective
income tax rate
|
14.1%
|
30.9%
|
18.8%
|
|||||||||
|
(a)
|
Changes
in income tax reserves impacted the following components of income tax
expense, which are presented in the "Reconciliation of Income Tax Expense"
table.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||
|
Change
in foreign tax reserves
|
$
|
17
|
$
|
5
|
||||||||||
|
State
income taxes
|
(3
|
)
|
||||||||||||
|
Change
in federal tax reserves
|
11
|
$
|
(28
|
)
|
||||||||||
|
$
|
14
|
$
|
16
|
$
|
(28
|
)
|
||||||||
|
(b)
|
Adjustments
from filing prior year tax returns impacted the following components of
income tax expense, which are presented in the "Reconciliation of Income
Tax Expense" table.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||
|
State
income taxes (e)
|
$
|
25
|
$
|
2
|
$
|
2
|
||||||||
|
Federal
income tax return
adjustments
(e)
|
(7
|
)
|
(11
|
)
|
(10
|
)
|
||||||||
|
Foreign
income tax return adjustments
|
(17
|
)
|
(2
|
)
|
||||||||||
|
Federal
income tax credits (f)
|
16
|
|||||||||||||
|
$
|
18
|
$
|
(10
|
)
|
$
|
(10
|
)
|
|||||||
|
(c)
|
Income
tax (benefits) related to foreign income, which are presented in the
"Reconciliation of Income Tax Expense" table.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||
|
Losses
generated through restructuring and fully reserved (reflected in "Change
in foreign tax reserves")
|
$
|
(46
|
)
|
|||||||||||
|
Impact
of lower U.K. income tax rates
|
(23
|
)
|
$
|
(22
|
)
|
$
|
(16
|
)
|
||||||
|
U.S.
income tax on foreign earnings - net of foreign tax credit
|
(16
|
)
|
(21
|
)
|
(14
|
)
|
||||||||
|
Other
|
(8
|
)
|
(5
|
)
|
(9
|
)
|
||||||||
|
$
|
(93
|
)
|
$
|
(48
|
)
|
$
|
(39
|
)
|
||||||
|
(d)
|
The
U.K.'s Finance Act 2008, enacted in July 2008, included a phase-out of tax
depreciation on certain buildings. As a result, PPL Energy
Supply recorded an $8 million deferred tax benefit during 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, PPL recorded a $54 million deferred tax benefit during 2007
related to the reduction in its deferred tax
liabilities.
|
||||||||||||||
|
(e)
|
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
federal income tax return and recorded a $21 million reduction in federal
income tax benefits related to the domestic manufacturing deduction and
certain state tax benefits related to state net operating
losses. The $21 million income tax expense consisted of $24
million expense reflected in "State income taxes," offset by $2 million
benefit reflected in "Federal income tax return adjustments" and a $1
million benefit reflected in "Change in federal tax
reserves."
|
|||||||||||||
|
(f)
|
During
March 2008, PPL Energy Supply recorded a $13 million expense to adjust the
amount of synthetic fuel tax credits recorded during 2007. See
Note 14 for additional information.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Taxes,
other than income
|
||||||||||||
|
State
capital stock
|
$
|
3
|
$
|
3
|
$
|
5
|
||||||
|
Property
- foreign
|
57
|
66
|
67
|
|||||||||
|
Domestic
property and other
|
26
|
17
|
26
|
|||||||||
|
$
|
86
|
$
|
86
|
$
|
98
|
|||||||
For tax
years 2000 through 2007, PPL Montana protested certain property tax assessments
by the Montana Department of Revenue on its generation
facilities. The tax liabilities in dispute for 2000 through 2007,
which had been paid and expensed by PPL Montana, totaled $45
million. In January 2008, both parties reached a settlement for all
years outstanding. The settlement resulted in PPL Montana receiving a
refund of taxes paid and interest totaling $8 million. This
settlement was recorded in 2008, of which $7 million was reflected in "Taxes,
other than income" and $1 million was reflected in "Other Income - net" on the
Statement of Income.
(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 in "Taxes recoverable through future rates" on the Balance
Sheets.
The tax
effects of significant temporary differences comprising PPL Electric's net
deferred income tax liability were as follows:
|
2009
|
2008
|
|||||||
|
Deferred
Tax Assets
|
||||||||
|
Deferred
investment tax credits
|
$
|
3
|
$
|
4
|
||||
|
Accrued
pension costs
|
36
|
37
|
||||||
|
Contributions
in aid of construction
|
99
|
79
|
||||||
|
Regulatory
liabilities
|
28
|
|||||||
|
Other
|
39
|
43
|
||||||
|
205
|
163
|
|||||||
|
Deferred
Tax Liabilities
|
||||||||
|
Electric
utility plant - net
|
802
|
667
|
||||||
|
Recoverable
transition costs
|
116
|
|||||||
|
Taxes
recoverable through future rates
|
105
|
104
|
||||||
|
Reacquired
debt costs
|
14
|
11
|
||||||
|
Other
|
23
|
20
|
||||||
|
944
|
918
|
|||||||
|
Net
deferred tax liability
|
$
|
739
|
$
|
755
|
||||
Details
of the components of income tax expense, a reconciliation of federal income
taxes derived from statutory tax rates applied to "Income Before Income Taxes"
to income taxes for reporting purposes, and details of "Taxes, other than
income" were:
|
2009
|
2008
|
2007
|
||||||||||
|
Income
Tax Expense
|
||||||||||||
|
Current
- Federal
|
$
|
80
|
$
|
93
|
$
|
72
|
||||||
|
Current
- State
|
22
|
8
|
(7
|
)
|
||||||||
|
102
|
101
|
65
|
||||||||||
|
Deferred
- Federal
|
(4
|
)
|
10
|
24
|
||||||||
|
Deferred
- State
|
(17
|
)
|
(7
|
)
|
(4
|
)
|
||||||
|
(21
|
)
|
3
|
20
|
|||||||||
|
Investment
tax credit, net - Federal
|
(2
|
)
|
(2
|
)
|
(2
|
)
|
||||||
|
Total
income tax expense
|
$
|
79
|
$
|
102
|
$
|
83
|
||||||
|
Total
income tax expense - Federal
|
$
|
74
|
$
|
101
|
$
|
94
|
||||||
|
Total
income tax expense - State
|
5
|
1
|
(11
|
)
|
||||||||
|
Total
income tax expense
|
$
|
79
|
$
|
102
|
$
|
83
|
||||||
|
Reconciliation
of Income Tax Expense
|
||||||||||||
|
Federal
income tax on Income Before Income Taxes at statutory tax rate -
35%
|
$
|
77
|
$
|
97
|
$
|
86
|
||||||
|
Increase
(decrease) due to:
|
||||||||||||
|
State
income taxes (a) (b)
|
15
|
13
|
2
|
|||||||||
|
Amortization
of investment tax credit
|
(2
|
)
|
(2
|
)
|
(2
|
)
|
||||||
|
Stranded
cost
securitization
(a)
|
(6
|
)
|
(7
|
)
|
(7
|
)
|
||||||
|
Other
(a) (b)
|
(5
|
)
|
1
|
4
|
||||||||
|
2
|
5
|
(3
|
)
|
|||||||||
|
Total
income tax expense
|
$
|
79
|
$
|
102
|
$
|
83
|
||||||
|
Effective
income tax rate
|
35.7%
|
36.7%
|
33.7%
|
|||||||||
|
(a)
|
Changes
in income tax reserves impacted the following components of income tax
expense, which are presented in the "Reconciliation of Income Tax Expense"
table.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||
|
Stranded
cost securitization
|
$
|
(6
|
)
|
$
|
(7
|
)
|
$
|
(7
|
)
|
|||||
|
State
income taxes
|
2
|
1
|
||||||||||||
|
Other
|
(1
|
)
|
2
|
|||||||||||
|
$
|
(7
|
)
|
$
|
(5
|
)
|
$
|
(4
|
)
|
||||||
|
(b)
|
Adjustments
from filing prior year tax returns impacted the following components of
income tax expense, which are presented in the "Reconciliation of Income
Tax Expense" table.
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||
|
State
income taxes (c)
|
$
|
5
|
$
|
2
|
$
|
(4
|
)
|
|||||||
|
Other
(c)
|
(1
|
)
|
4
|
3
|
||||||||||
|
$
|
4
|
$
|
6
|
$
|
(1
|
)
|
||||||||
|
(c)
|
During
2009, PPL Electric received consent from the IRS to change its method of
accounting for certain expenditures for tax purposes. PPL
Electric deducted the resulting IRC Sec. 481 amount on its 2008 federal
income tax return and recorded a $3 million adjustment to federal and
state income tax expense resulting from the reversal of prior years' state
income tax benefits related to regulated depreciation. The $3
million income tax expense consisted of $5 million expense reflected in
"State income taxes" offset by a $2 million federal benefit reflected in
"Other".
|
|||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Taxes,
other than income
|
||||||||||||
|
State
gross receipts
|
$
|
187
|
$
|
199
|
$
|
193
|
||||||
|
State
utility realty
|
5
|
4
|
5
|
|||||||||
|
State
capital stock
|
2
|
2
|
3
|
|||||||||
|
Property
and other
|
(2
|
)
|
(1
|
)
|
||||||||
|
$
|
194
|
$
|
203
|
$
|
200
|
|||||||
See Note
1 for information on a settlement related to PURTA tax that will be returned to
PPL Electric customers.
Unrecognized
Tax Benefits
(PPL, PPL
Energy Supply and PPL Electric)
Changes
to unrecognized tax benefits were as follows:
|
2009
|
2008
|
|||||||
|
PPL
|
||||||||
|
Beginning
of period
|
$
|
202
|
$
|
204
|
||||
|
Additions
based on tax positions of prior years
|
36
|
38
|
||||||
|
Reduction
based on tax positions of prior years
|
(11
|
)
|
(13
|
)
|
||||
|
Additions
based on tax positions related to the current year
|
50
|
12
|
||||||
|
Settlements
|
(55
|
)
|
(12
|
)
|
||||
|
Lapse
of applicable statutes of limitations
|
(8
|
)
|
(8
|
)
|
||||
|
Effects
of foreign currency translation
|
(2
|
)
|
(19
|
)
|
||||
|
End
of period
|
$
|
212
|
$
|
202
|
||||
|
PPL Energy
Supply
|
||||||||
|
Beginning
of period
|
$
|
119
|
$
|
130
|
||||
|
Additions
based on tax positions of prior years
|
17
|
21
|
||||||
|
Reduction
based on tax positions of prior years
|
(5
|
)
|
(10
|
)
|
||||
|
Additions
based on tax positions related to the current year
|
50
|
9
|
||||||
|
Settlements
|
(55
|
)
|
(12
|
)
|
||||
|
Lapse
of applicable statutes of limitations
|
||||||||
|
Effects
of foreign currency translation
|
(2
|
)
|
(19
|
)
|
||||
|
End
of period
|
$
|
124
|
$
|
119
|
||||
|
PPL
Electric
|
||||||||
|
Beginning
of period
|
$
|
77
|
$
|
68
|
||||
|
Additions
based on tax positions of prior years
|
11
|
17
|
||||||
|
Reduction
based on tax positions of prior years
|
(6
|
)
|
(3
|
)
|
||||
|
Additions
based on tax positions related to the current year
|
3
|
|||||||
|
Lapse
of applicable statutes of limitations
|
(8
|
)
|
(8
|
)
|
||||
|
End
of period
|
$
|
74
|
$
|
77
|
||||
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, increase by as much as
$11 million or decrease by up to $123 million for PPL Energy Supply and increase
by as much as $23 million or decrease by up to $22 million for PPL
Electric. These changes 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.
At
December 31, the total unrecognized tax benefits and related indirect effects
that, if recognized, would decrease the effective tax rate were:
|
2009
|
2008
|
|||||||
|
PPL
|
$
|
119
|
$
|
129
|
||||
|
PPL
Energy Supply
|
95
|
103
|
||||||
|
PPL
Electric
|
15
|
21
|
||||||
At
December 31, 2009, PPL, PPL Energy Supply and PPL Electric had accrued
interest related to tax positions of $36 million, $27 million and $5
million. At December 31, 2008, PPL, PPL Energy Supply and PPL
Electric had accrued interest of $35 million, $28 million and $7
million.
PPL and
its subsidiaries recognize interest and penalties in "Income Taxes" on their
Statements of Income. The following expenses (benefits) were
recognized at December 31:
|
2009
|
2008
|
2007
|
||||||||||
|
PPL
|
$
|
1
|
$
|
4
|
$
|
(1
|
)
|
|||||
|
PPL
Energy Supply
|
(1
|
)
|
2
|
(4
|
)
|
|||||||
|
PPL
Electric
|
(2
|
)
|
2
|
3
|
||||||||
The
amounts recognized during 2009, 2008 and 2007 for PPL, PPL Energy Supply and PPL
Electric were primarily the result of additional interest accrued or reversed
related to tax positions of prior years and the lapse of applicable statutes of
limitations, with respect to certain issues.
PPL or
its subsidiaries file tax returns in five major tax
jurisdictions. PPL Energy Supply and PPL Electric's U.S. federal and
state tax provision are calculated in accordance with an intercompany tax
sharing policy with PPL, which provides that their taxable income be calculated
as if PPL Energy Supply and its domestic subsidiaries and PPL Electric and its
subsidiaries each filed a separate consolidated tax return. Based on
this tax sharing policy, PPL Energy Supply or its subsidiaries indirectly or
directly file tax returns in five major tax jurisdictions and PPL Electric or
its subsidiaries indirectly or directly file tax returns in two major tax
jurisdictions. With few exceptions, at December 31, 2009, these
jurisdictions, as well as the tax years that are no longer subject to
examination, were as follows:
|
PPL
and PPL Energy Supply
|
PPL
Electric
|
||||
|
U.S.
(federal)
|
1997
and prior
|
1997
and prior
|
|||
|
Pennsylvania
(state)
|
2004
and prior
|
2004
and prior
|
|||
|
Montana
(state)
|
2005
and prior
|
||||
|
U.K.
(foreign)
|
2006
and prior
|
||||
|
Chile
(foreign)
|
2006
and prior
|
(PPL)
PPL is
authorized to issue up to 10 million shares of preferred stock. No
PPL preferred stock was issued or outstanding in 2009, 2008 or
2007.
(PPL
and PPL Electric)
Details
of PPL Electric's preferred securities (with no stated maturity date and no
sinking fund requirements), which are reflected on PPL's Balance Sheets in
"Noncontrolling Interests," as of December 31, 2009 and 2008,
were:
|
Amount
|
Issued
and Outstanding
Shares
|
Shares
Authorized
|
Optional
Redemption Price Per Share
at
12/31/09
|
||||||||
|
4-1/2%
Preferred Stock (a)
|
$
|
25
|
247,524
|
629,936
|
$
|
110.00
|
|||||
|
Series
Preferred Stock (a)
|
|||||||||||
|
3.35%
|
2
|
20,605
|
103.50
|
||||||||
|
4.40%
|
12
|
117,676
|
102.00
|
||||||||
|
4.60%
|
3
|
28,614
|
103.00
|
||||||||
|
6.75%
|
9
|
90,770
|
101.35
|
||||||||
|
Total
Series Preferred Stock
|
26
|
257,665
|
10,000,000
|
||||||||
|
6.25%
Series Preference Stock (a) (b)
|
250
|
2,500,000
|
10,000,000
|
(c)
|
|||||||
|
Total
Preferred Securities
|
$
|
301
|
3,005,189
|
||||||||
|
(a)
|
In
2009, 2008 and 2007, there were no changes in the number of shares of
Preferred Stock or Preference Stock outstanding.
|
|
|
(b)
|
These
shares were issued to a bank that acts as depositary in connection with
the 2006 sale of 10 million depositary shares, each representing a quarter
interest in a share of PPL Electric's 6.25% Series Preference Stock
(Preference Shares).
|
|
|
(c)
|
Redeemable
by PPL Electric on or after April 6, 2011, for $100 per share (equivalent
to $25 per depositary share).
|
Dividend
requirements of $18 million were included in "Net Income Attributable to
Noncontrolling Interests" on PPL's Statements of Income for 2009, 2008 and
2007.
Preferred
Stock
The
involuntary liquidation price of the preferred stock is $100 per
share. The optional voluntary liquidation price is the optional
redemption price per share in effect, except for the 4-1/2% Preferred Stock and
the 6.75% Series Preferred Stock for which such price is $100 per share (plus,
in each case, any unpaid dividends in arrears).
Dividends
on the preferred stock are cumulative. Preferred stock ranks senior
to PPL Electric's common stock and its Preference Shares.
Holders
of the outstanding preferred stock are entitled to one vote per share on matters
on which PPL Electric's shareowners are entitled to vote. However, if
dividends on any preferred stock are in arrears in an amount equal to or greater
than the annual dividend rate, the holders of the preferred stock are entitled
to elect a majority of the Board of Directors of PPL Electric.
Preference
Stock
Holders
of the depositary shares, each of which represents a quarter interest in a share
of Preference Shares, are entitled to all proportional rights and preferences of
the Preference Shares, including dividend, voting, redemption and liquidation
rights, exercised through the bank acting as a depositary. The
Preference Shares rank senior to PPL Electric's common stock and junior to its
preferred stock; they have no voting rights, except as provided by law, and they
have a liquidation preference of $100 per share.
Dividends
on the Preference Shares will be paid when, as and if declared by the Board of
Directors at a fixed annual rate of 6.25%, or $1.5625 per depositary share per
year, and are not cumulative. PPL Electric may not pay dividends on,
or redeem, purchase or make a liquidation payment with respect to any of its
common stock, except in certain circumstances, unless full dividends on the
Preference Shares have been paid for the then-current dividend
period.
Credit
Arrangements and Short-term Debt
(PPL
and PPL Energy Supply)
PPL
Energy Supply maintains credit facilities in order to enhance liquidity and
provide credit support, and as a backstop to its commercial paper program, when
necessary. PPL Energy Supply had the following credit facilities in
place at:
|
December 31,
2009
|
December 31,
2008
|
||||||||||||||||||||||||||
|
Expiration
Date
|
Capacity
|
Borrowed
(a)
|
Letters
of Credit Issued
|
Unused
Capacity
|
Borrowed
(a)
|
Letters
of Credit Issued
|
|||||||||||||||||||||
|
PPL
Energy Supply Domestic Credit Facilities (b)
|
|||||||||||||||||||||||||||
|
364-day
Bilateral Credit Facility (c)
|
Mar-10
|
$
|
200
|
n/a
|
$
|
4
|
$
|
196
|
n/a
|
$
|
96
|
||||||||||||||||
|
364-day
Syndicated Credit Facility (d)
|
Sept-10
|
400
|
400
|
||||||||||||||||||||||||
|
5-year
Structured Credit Facility (e)
|
Mar-11
|
300
|
n/a
|
285
|
15
|
n/a
|
269
|
||||||||||||||||||||
|
5-year
Syndicated Credit Facility (f)
|
June-12
|
3,225
|
$
|
285
|
373
|
2,567
|
285
|
255
|
|||||||||||||||||||
|
Total
PPL Energy Supply Domestic Credit Facilities
|
$
|
4,125
|
$
|
285
|
$
|
662
|
$
|
3,178
|
285
|
$
|
620
|
||||||||||||||||
|
WPD
Credit Facilities
|
|||||||||||||||||||||||||||
|
WPDH
Limited 5-year Syndicated Credit Facility (g)
|
Jan-13
|
£
|
150
|
£
|
132
|
n/a
|
£
|
18
|
£
|
121
|
n/a
|
||||||||||||||||
|
WPD
(South West) 3-year Syndicated Credit Facility (h)
|
July-12
|
210
|
60
|
n/a
|
150
|
37
|
n/a
|
||||||||||||||||||||
|
WPD
(South West) Uncommitted Credit Facilities (i)
|
65
|
21
|
n/a
|
44
|
8
|
n/a
|
|||||||||||||||||||||
|
WPD
(South West) Letter of Credit Facility
|
Mar-10
|
4
|
n/a
|
£
|
3
|
1
|
n/a
|
£
|
4
|
||||||||||||||||||
|
Total
WPD Credit Facilities (j)
|
£
|
429
|
£
|
213
|
£
|
3
|
£
|
213
|
£
|
166
|
£
|
4
|
|||||||||||||||
|
(a)
|
Amounts
borrowed are recorded as "Short-term debt" on the Balance
Sheets.
|
|
|
(b)
|
These
credit facilities contain a financial covenant requiring debt to total
capitalization to not exceed 65%.
|
|
|
(c)
|
In
March 2009, PPL Energy Supply's 364-day bilateral credit facility was
amended. The amendment included extending the expiration date
from March 2009 to March 2010 and reducing the capacity from $300 million
to $200 million. Under this facility, PPL Energy Supply can
request the bank to issue letters of credit but cannot make cash
borrowings.
|
|
|
(d)
|
In
September 2009, PPL Energy Supply's 364-day syndicated credit facility was
amended and restated. The amendment included extending the
expiration date from September 2009 to September 2010, increasing the
capacity from $385 million to $400 million and limiting the amount of
letters of credit that may be issued. Under this facility, PPL
Energy Supply has the ability to make cash borrowings and to request the
lenders to issue up to $200 million of letters of
credit. Borrowings generally bear interest at LIBOR-based rates
plus a spread, depending upon the company's public debt
rating.
|
|
|
(e)
|
Under
this facility, PPL Energy Supply has the ability to request the lenders to
issue letters of credit but cannot make cash borrowings. PPL
Energy Supply's obligations under this facility are supported by a $300
million letter of credit issued on PPL Energy Supply's behalf under a
separate, but related, $300 million five-year credit agreement, also
expiring in March 2011.
|
|
|
(f)
|
Under
this facility, PPL Energy Supply has the ability to make cash borrowings
and to request the lenders to issue letters of
credit. Borrowings generally bear interest at LIBOR-based rates
plus a spread, depending upon the company's public debt
rating. The interest rate on the borrowings outstanding was
0.73% and 2.70% at December 31, 2009 and 2008. Under certain
conditions, PPL Energy Supply may elect to have the principal balance of
the loans outstanding on the final expiration date of the facility
continue as non-revolving term loans for a period of one year from that
final expiration date. Also, under certain conditions, PPL
Energy Supply may request that the facility's capacity be increased by up
to $500 million.
|
|
|
(g)
|
Under
this facility, WPDH Limited has the ability to make cash borrowings but
cannot request the lenders to issue letters of
credit. Borrowings under this facility bear interest at
LIBOR-based rates plus a spread, depending on the company's public debt
rating. The cash borrowings outstanding at December 31,
2009 were comprised of a USD-denominated borrowing of $181 million, which
equated to £107 million at the time of borrowing and bears interest at
approximately 1.55%, and GBP-denominated borrowings in an aggregate of £25
million, which bear interest at a weighted-average rate of approximately
1.53%. The interest rates at December 31, 2008 were 3.73% on
USD-denominated borrowings and 3.11% on GBP-denominated
borrowings.
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.
|
|
|
(h)
|
In
July 2009, WPD (South West) terminated its £150 million five-year
syndicated credit facility, which was to expire in October 2009, and
replaced it with a new £210 million three-year syndicated credit facility
expiring in July 2012. Under the new facility, WPD (South West)
has the ability to make cash borrowings but cannot request the lenders to
issue letters of credit. The new facility 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 its RAB, in each case calculated in accordance with the credit
facility.
|
|
|
Borrowings
under this facility bear interest at LIBOR-based rates plus a
margin. The borrowings outstanding at December 31, 2009
bear interest at a weighted-average rate of approximately
3.02%. The interest rate at December 31, 2008 on the borrowings
outstanding under the previous facility was approximately
3.01%.
|
||
|
(i)
|
The
weighted-average interest rate on the borrowings outstanding under these
facilities was 1.22% and 2.77% at December 31, 2009 and
2008.
|
|
|
(j)
|
The
total amount borrowed under WPD's credit facilities equated to
approximately $354 million and $299 million at December 31, 2009 and
2008. At December 31, 2009, the unused capacity of the WPD
credit facilities was approximately $349
million.
|
During
2008, PPL Energy Supply maintained a commercial paper program for up to $500
million, under which commercial paper issuances were supported by its credit
facilities, to provide an additional financing source to fund its short-term
liquidity needs, if and when necessary. PPL Energy Supply had no
commercial paper outstanding at December 31, 2008. In January 2009,
PPL Energy Supply closed its commercial paper program.
(PPL
and PPL Electric)
PPL
Electric maintains credit facilities in order to enhance liquidity and provide
credit support, and as a backstop to its commercial paper
program. PPL Electric had the following credit facilities in place
at:
|
December 31,
2009
|
December 31,
2008
|
||||||||||||||||||||||||||
|
Expiration
Date
|
Capacity
|
Borrowed
(a)
|
Letters
of Credit Issued
|
Unused
Capacity
|
Borrowed
(a)
|
Letters
of Credit Issued
|
|||||||||||||||||||||
|
5-year
Syndicated Credit Facility (b)
|
May-12
|
$
|
190
|
$
|
6
|
$
|
184
|
$
|
95
|
$
|
1
|
||||||||||||||||
|
Asset-backed
Credit Facility (c)
|
Jul-10
|
150
|
150
|
||||||||||||||||||||||||
|
Total
PPL Electric Credit Facilities
|
$
|
340
|
$
|
6
|
$
|
334
|
$
|
95
|
$
|
1
|
|||||||||||||||||
|
(a)
|
Amounts
borrowed are recorded as "Short-term debt" on the Balance
Sheets.
|
|
|
(b)
|
Under
this facility, PPL Electric has the ability to make cash borrowings and to
request the lenders to issue letters of credit. Borrowings
generally bear interest at LIBOR-based rates plus a spread, depending upon
the company's public debt rating. The interest rate on the
borrowings outstanding at December 31, 2008 was 2.44%. Under
certain conditions, PPL Electric may elect to have the principal balance
of the loans outstanding on the final expiration date of the facility
continue as non-revolving term loans for a period of one year from that
final expiration date. Also, 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%.
|
||
|
(c)
|
PPL
Electric participates in an asset-backed commercial paper program through
which PPL Electric obtains financing by selling and contributing its
eligible accounts receivable and unbilled revenue to a special purpose,
wholly owned subsidiary on an ongoing basis. The subsidiary has
pledged these assets to secure loans from a commercial paper conduit
sponsored by a financial institution. In July 2009, PPL
Electric and the subsidiary extended the expiration date of the credit
agreement to July 2010. The subsidiary's borrowing costs under
the credit facility vary based on the commercial paper conduit's actual
cost to issue commercial paper that supports the
debt. Borrowings under this program are subject to customary
conditions precedent. PPL Electric uses the proceeds under the
credit facility for general corporate purposes.
|
|
|
At
December 31, 2009 and 2008, $223 million and $76 million of accounts
receivable and $192 million and $170 million of unbilled revenue were
pledged by the subsidiary under the credit agreement related to PPL
Electric's and the subsidiary's participation in the asset-backed
commercial paper program. Based on the accounts receivable and
unbilled revenue pledged, $150 million was available for borrowing at
December 31, 2009. PPL Electric's sale to its subsidiary
of the accounts receivable and unbilled revenue is an absolute sale of the
assets, and PPL Electric does not retain an interest in these
assets. However, for financial reporting purposes, the
subsidiary's financial results are consolidated in PPL Electric's
financial statements. PPL Electric performs certain
record-keeping and cash collection functions with respect to the assets in
return for a servicing fee from the
subsidiary.
|
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 that expires in May 2012 based
on available capacity. PPL Electric had no commercial paper
outstanding at December 31, 2009 and 2008.
Long-term
Debt
|
2009
(a)
|
2008
|
|||||||||||||||||||||||
|
U.S.
|
PPL
|
PPL
Energy Supply
|
PPL
Electric
|
PPL
|
PPL
Energy Supply
|
PPL
Electric
|
||||||||||||||||||
|
4.33%
- 7.0% Senior Unsecured Notes, due 2009-2047 (b)
|
$
|
2,700
|
(c)
|
$
|
2,600
|
$
|
3,151
|
$
|
2,850
|
|||||||||||||||
|
Junior
Subordinated Notes, due 2067 (d)
|
500
|
500
|
||||||||||||||||||||||
|
8.05%
- 8.30% Senior Secured Notes, due 2013 (e)
|
437
|
437
|
437
|
437
|
||||||||||||||||||||
|
7.375%
1945 First Mortgage Bonds, due 2014 (f)
|
10
|
$
|
10
|
10
|
$
|
10
|
||||||||||||||||||
|
4.30%
- 7.125% Senior Secured Bonds, due 2009-2039 (g)
|
1,150
|
1,150
|
1,436
|
1,436
|
||||||||||||||||||||
|
4.70%
- 4.75% Senior Secured Bonds (Pollution Control Series), due 2027-2029
(h)(i)
|
224
|
224
|
224
|
224
|
||||||||||||||||||||
|
Variable
Rate Senior Secured Bonds (Pollution Control Series), due 2023
(h)(j)
|
90
|
90
|
90
|
90
|
||||||||||||||||||||
|
Variable
Rate Exempt Facilities Notes, due 2037-2038 (k)
|
231
|
231
|
231
|
231
|
||||||||||||||||||||
|
Variable
Rate Pollution Control Facilities Note, due 2027 (l)
|
9
|
9
|
||||||||||||||||||||||
|
5,342
|
3,268
|
1,474
|
6,088
|
3,518
|
1,769
|
|||||||||||||||||||
|
U.K.
|
||||||||||||||||||||||||
|
4.80436%
- 9.25% Senior Unsecured Notes, due 2017-2037 (m)
|
1,327
|
1,327
|
1,261
|
1,261
|
||||||||||||||||||||
|
1.541%
Index-linked Senior Unsecured Notes, due 2053-2056 (n)
|
397
|
397
|
377
|
377
|
||||||||||||||||||||
|
1,724
|
1,724
|
1,638
|
1,638
|
|||||||||||||||||||||
|
7,066
|
4,992
|
1,474
|
7,726
|
5,156
|
1,769
|
|||||||||||||||||||
|
Fair
value adjustments from hedging activities
|
44
|
3
|
80
|
5
|
||||||||||||||||||||
|
Fair
value adjustments from purchase accounting (o)
|
35
|
35
|
35
|
35
|
||||||||||||||||||||
|
Unamortized
premium
|
9
|
9
|
10
|
10
|
||||||||||||||||||||
|
Unamortized
discount
|
(11
|
)
|
(8
|
)
|
(2
|
)
|
(13
|
)
|
(10
|
)
|
||||||||||||||
|
7,143
|
5,031
|
1,472
|
7,838
|
5,196
|
1,769
|
|||||||||||||||||||
|
Less
amount due within one year
|
(696
|
)
|
(495
|
)
|
||||||||||||||||||||
|
Total
Long-term Debt
|
$
|
7,143
|
$
|
5,031
|
$
|
1,472
|
$
|
7,142
|
$
|
5,196
|
$
|
1,274
|
||||||||||||
|
(a)
|
Aggregate
maturities of long-term debt are:
PPL
- 2010, $0; 2011, $500; 2012, $0; 2013, $1,137; 2014, $310; and $5,119
thereafter.
PPL
Energy Supply - 2010, $0; 2011, $500; 2012, $0; 2013, $737; 2014, $300;
and $3,455 thereafter.
PPL
Electric - 2010, 2011 and 2012, $0; 2013, $400; 2014, $10; and $1,064
thereafter.
None
of the debt securities outstanding have sinking fund
requirements.
|
|
|
(b)
|
Includes
$300 million of 5.70% REset Put Securities due 2035 (REPS
SM
). The
REPS bear interest at a rate of 5.70% per annum to, but excluding, October
15, 2015 (Remarketing Date). The REPS are required to be put by
existing holders on the Remarketing Date either for (a) purchase and
remarketing by a designated remarketing dealer or (b) repurchase by PPL
Energy Supply. If the remarketing dealer elects to purchase the
REPS for remarketing, it will purchase the REPS at 100% of the principal
amount, and the REPS will bear interest on and after the Remarketing Date
at a new fixed rate per annum determined in the
remarketing. PPL Energy Supply has the right to terminate the
remarketing process. If the remarketing is terminated at the
option of PPL Energy Supply or under certain other circumstances,
including the occurrence of an event of default by PPL Energy Supply under
the related indenture or a failed remarketing for certain specified
reasons, PPL Energy Supply will be required to pay the remarketing dealer
a settlement amount as calculated in accordance with the related
remarketing agreement.
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|
|
Also
includes $250 million of notes that may be redeemed at par beginning in
July 2011.
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||
|
In
March 2009, PPL Energy Supply completed 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. Pursuant to the offers, PPL Energy Supply purchased
approximately $100 million aggregate principal amount of its 6.00% Senior
Notes due 2036 for $77 million, plus accrued interest, and approximately
$150 million aggregate principal amount of its 6.20% Senior Notes due 2016
for $143 million, plus accrued interest. In connection with the
extinguishment of these notes, PPL and PPL Energy Supply recorded a net
gain of $25 million, which is reflected in "Other Income - net" on the
Statement of Income for 2009. PPL recorded an additional net
gain of $4 million in "Other Income - net" on the Statement of Income as a
result of reclassifying gains and losses on related cash flow hedges from
AOCI into earnings.
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||
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(c)
|
Includes
$100 million of notes that may be redeemed at par beginning in July
2012.
In
March 2009, PPL Capital Funding retired the entire $201 million of its
4.33% Notes Exchange Series A upon maturity.
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|
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(d)
|
The
notes bear interest at 6.70% into March 2017, at which time the notes will
bear interest at three-month LIBOR plus 2.665%, reset quarterly, until
maturity. Interest payments may be deferred, from time to time,
on one or more occasions for up to ten consecutive years. The
notes may be redeemed at par beginning in March 2017. In
connection with the issuance of the notes, PPL and PPL Capital Funding
entered into a Replacement Capital Covenant, in which PPL and PPL Capital
Funding agreed for the benefit of holders of a designated series of
unsecured long-term indebtedness of PPL or PPL Capital Funding ranking
senior to the notes that (i) PPL Capital Funding will not redeem or
purchase the notes, or otherwise satisfy, discharge or defease the
principal amount of the notes and (ii) neither PPL nor any of its other
subsidiaries will purchase the notes before the end of March 2037, except,
subject to certain limitations, to the extent that the applicable
redemption or repurchase price or principal amount defeased does not
exceed a specified amount of proceeds from the sale of qualifying
replacement capital securities during the 180-day period prior to the date
of that redemption, repurchase or defeasance. The designated
series of covered debt benefiting from the Replacement Capital Covenant at
December 31, 2009 and 2008 was PPL Capital Funding's 6.85% Senior Notes
due 2047.
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(e)
|
Represents
lease financing consolidated through a variable interest
entity. See Note 3 for additional
information.
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(f)
|
The
1945 First Mortgage Bonds were issued under, and secured by, the lien of
the 1945 First Mortgage Bond Indenture. In December 2008, PPL
Electric completed an in-substance defeasance of the First Mortgage Bonds
by depositing sufficient funds with the trustee solely to satisfy the
principal and remaining interest obligations on the bonds when
due. The amount of funds on deposit with the trustee was $14
million at December 31, 2009 and $15 million at December 31, 2008, and is
recorded as restricted cash, primarily in other noncurrent assets on the
Balance Sheets.
Also
in December 2008, PPL Electric discharged the lien under the 1945 First
Mortgage Bond Indenture, which covered substantially all electric
distribution plant and certain transmission plant owned by PPL
Electric.
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(g)
|
The
senior secured bonds are secured by the lien of the 2001 Senior Secured
Bond Indenture, which covers substantially all electric distribution plant
and certain transmission plant owned by PPL Electric.
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|
In
May 2009, PPL Electric issued $300 million of 6.25% First Mortgage Bonds
due 2039 (6.25% Bonds). The 6.25% Bonds may be redeemed any
time prior to maturity at PPL Electric's option at make-whole redemption
prices. PPL Electric received proceeds of $296 million, net of
a discount and underwriting fees, from the issuance of the 6.25%
Bonds. Approximately $86 million of the proceeds were used in
August 2009 to partially fund the repayment at maturity of $486 million
aggregate principal amount of PPL Electric's Senior Secured Bonds, 6-1/4%
Series. The balance of such repayment was funded from the
issuance in October 2008 of $400 million of 7.125% Senior Secured Bonds
due 2013. The balance of the proceeds from the issuance of the
6.25% Bonds was used for general corporate purposes, including capital
expenditures.
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||
|
In
December 2009, PPL Electric Utilities redeemed the entire $100 million
aggregate principal amount of its 4.30% Senior Secured Bonds due
2013. PPL Electric paid a premium of $9 million in connection
with the redemption. The total loss on the redemption of
approximately $10 million pre-tax, which includes unamortized fees and
discounts, is reflected in "Regulatory assets" and "Other regulatory and
noncurrent assets" on the Balance Sheets of PPL and PPL Electric at
December 31, 2009 as an unamortized loss on reacquired debt and will
be amortized through the original maturity of the
debt. Additionally, PPL recorded a net gain of approximately $4
million pre-tax in "Other Income - net" on the Statement of Income as a
result of reclassifying gains and losses on related cash flow and fair
value hedges from AOCI and Long-term Debt into
earnings.
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(h)
|
PPL
Electric issued a series of its senior secured bonds to secure its
obligations to make payments with respect to each series of Pollution
Control Bonds that were issued by the LCIDA and the PEDFA on behalf of PPL
Electric. These senior secured bonds were issued in the same
principal amount, contain payment and redemption provisions that
correspond to and bear the same interest rate as such Pollution Control
Bonds. These senior secured bonds were issued under the 2001
Senior Secured Bond Indenture and are secured as noted in (g)
above.
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(i)
|
The
senior secured bonds may be redeemed at par beginning in
2015.
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(j)
|
The
related Pollution Control Bonds are structured as variable-rate
remarketable bonds. PPL Electric may convert the interest rate
on the bonds from time to time to a commercial paper rate, daily rate,
weekly rate or a term rate of at least one year. The bonds are
subject to mandatory purchase under certain circumstances, including upon
conversion to a different interest rate mode. To the extent
that a purchase is required prior to the maturity date, PPL Electric has
the ability and intent to refinance the bonds on a long-term
basis. At December 31, 2009 and 2008, the bonds were in a term
rate mode and bear interest at 4.85% until October 2010, at which time the
bonds will be remarketed based upon the interest rate mode elected by PPL
Electric.
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(k)
|
The
PEDFA issued Exempt Facilities Revenue Bonds on behalf of PPL Energy
Supply in December 2007 (Series 2007 Bonds) and December 2008 (Series 2008
Bonds). In connection with the issuances of such bonds, PPL
Energy Supply entered into loan agreements with the PEDFA pursuant to
which the PEDFA loaned to PPL Energy Supply the proceeds of the bonds on
payment terms that correspond to those of the bonds. PPL
Investment Corp. acted as initial purchaser of the Series 2008 Bonds upon
issuance. At December 31, 2008, the Series 2007 Bonds and the
Series 2008 Bonds bore interest at 3.20% and 5.50%.
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In
April 2009, the PEDFA issued $231 million aggregate principal amount of
Exempt Facilities Revenue Refunding Bonds, Series 2009A and 2009B due 2038
and Series 2009C due 2037 (PPL Energy Supply, LLC Project), on behalf of
PPL Energy Supply. The Series 2009A bonds, in an aggregate
principal amount of $100 million, and the Series 2009B bonds, in an
aggregate principal amount of $50 million, were issued by the PEDFA in
order to refund $150 million aggregate principal amount of Exempt
Facilities Revenue Bonds, Series 2008A and 2008B (PPL Energy Supply, LLC
Project) due 2038 that were issued by the PEDFA in December 2008 on behalf
of PPL Energy Supply, and for which PPL Investment Corp. acted as initial
purchaser. The Series 2009C bonds, in an aggregate principal
amount of $81 million, were issued in order to refund $81 million
aggregate principal amount of Exempt Facilities Revenue Bonds, Series 2007
(PPL Energy Supply, LLC Project) due 2037 that were issued by the PEDFA in
December 2007 on behalf of PPL Energy Supply. Among other
things, the completed refundings were able to take advantage of provisions
in the Economic Stimulus Package that eliminated the application of the
AMT to interest payable on the refinanced indebtedness. The
refundings of the bonds were effected by the ultimate distribution of $231
million by the PEDFA to the bond holders, including PPL Investment
Corp. As a result of the refundings of the bonds, PPL
Investment Corp. received proceeds of $150 million, which is reflected as
a cash flow from investing activities on the Statement of Cash Flows for
PPL and PPL Energy Supply in 2009.
Similar
to the Series 2007 Bonds and the Series 2008 Bonds, the Series 2009A,
2009B and 2009C bonds are structured as variable-rate remarketable
bonds. PPL Energy Supply may convert the interest rate mode on
the bonds from time to time to a commercial paper rate, daily rate, weekly
rate or a term rate of at least one year. The bonds are subject
to mandatory purchase under certain circumstances, including upon
conversion to a different interest rate mode, and are subject to mandatory
redemption upon a determination that the interest on the bonds would be
included in the holders' gross income for federal tax
purposes. To the extent that a purchase is required prior to
the maturity date, PPL Energy Supply has the ability and intent to
refinance the bonds on a long-term basis. The Series 2009A
bonds bore interest at an initial rate of 0.90% through June 30,
2009. The Series 2009B bonds bore interest at an initial rate
of 1.25% through September 30, 2009. The Series 2009C
bonds were in a weekly interest rate mode through December 9,
2009.
PPL
Energy Supply elected to change the interest rate mode on the Series 2009A
and Series 2009B bonds to a commercial paper rate mode upon expiration of
the initial rate period for each series. The Series 2009A bonds
were converted to a commercial paper rate mode in July 2009 and currently
bear interest at 0.62% through August 31, 2010. The Series
2009B bonds were converted to a commercial paper rate mode in October 2009
and currently bear interest at 0.50% through March 31, 2010. At
the end of each commercial paper rate period, the bonds will be remarketed
based upon an interest rate mode elected by PPL Energy
Supply.
PPL
Energy Supply converted the interest rate mode on the Series 2009C bonds
from a weekly interest rate mode to a commercial paper rate mode in
December 2009. The bonds currently bear interest at 0.62%
through August 31, 2010, at which time the bonds will be remarketed based
upon an interest rate mode elected by PPL Energy Supply.
In
connection with the issuance of each series of bonds by the PEDFA, PPL
Energy Supply entered into separate loan agreements with the PEDFA
pursuant to which the PEDFA loaned to PPL Energy Supply the proceeds of
the Series 2009A, Series 2009B and Series 2009C bonds on payment terms
that correspond to those of the bonds. PPL Energy Supply issued
separate promissory notes to the PEDFA to evidence its obligations under
each of the loan agreements. These loan agreements and
promissory notes replaced those associated with the refunded 2007 and 2008
PEDFA bonds in a non-cash transaction that is excluded from the Statement
of Cash Flows in 2009.
Separate
letters of credit were issued under PPL Energy Supply's $3.2 billion
five-year syndicated credit facility to the trustee in support of each
series of bonds. The letters of credit permit the trustee to
draw amounts to pay principal of and interest on, and the purchase price
of, the Series 2009A, Series 2009B and Series 2009C bonds when
due. PPL Energy Supply is required to reimburse any draws on
the letters of credit within one business day of such
draw.
|
||
|
(l)
|
In
June 2009, PPL Electric repaid its $9 million obligation under a Variable
Rate Pollution Control Facilities Note in connection with the early
redemption in full of the underlying pollution control revenue bonds that
were issued by the Indiana County Industrial Development Authority and due
in June 2027.
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|
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(m)
|
Although
financial information of foreign subsidiaries is recorded on a one-month
lag, WPD's December 2008 retirement of $225 million of senior notes is
reflected in the 2008 Financial Statements and its December 2007
retirement of $175 million of senior notes is reflected in the 2007
Financial Statements due to the materiality of these
retirements.
|
|
|
Includes
£225 million ($369 million at December 31, 2009 and $345 million at
December 31, 2008) of notes that may be redeemed, in total but not in
part, on December 21, 2026, at the greater of the principal value or a
value determined by reference to the gross redemption yield on a nominated
U.K. Government bond. Additionally, the £225 million of such notes
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 the
issuer operates.
|
||
|
Change
from 2008 to 2009 includes an increase of $66 million resulting from
movements in foreign currency exchange rates.
|
||
|
(n)
|
The
principal amount of these notes is adjusted on a semi-annual basis based
on changes in a specified index, as detailed in the terms of the related
indentures. The adjustment to the principal amount from 2008 to
2009 was a decrease of approximately £3 million ($6 million) and is offset
by a $26 million increase resulting from movements in foreign currency
exchange rates.
|
|
|
These
notes may be redeemed, in total by series, on December 1, 2026, at the
greater of the adjusted principal value and a make-whole value determined
by reference to the gross real yield on a nominated U.K. government
bond. Additionally, these notes 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 the issuer operates.
|
||
|
(o)
|
Represents
adjustments made to record WPD's long-term debt at fair value at the time
of acquisition of the controlling interest in WPD in
2002.
|
Legal
Separateness
(PPL, PPL
Energy Supply and PPL Electric)
In 2001,
PPL Electric completed a strategic initiative to confirm its legal separation
from PPL and PPL's other affiliated companies. This initiative was
designed to enable PPL Electric to substantially reduce its exposure to
volatility in energy prices and supply risks through 2009 and to reduce its
business and financial risk profile by, among other things, limiting its
business activities to the transmission and distribution of electricity and
businesses related to or arising out of the electric transmission and
distribution businesses. In connection with this initiative, PPL
Electric:
|
·
|
obtained
long-term electric supply contracts to meet its PLR obligations (with its
affiliate PPL EnergyPlus) through 2009, as further described in Note 15
under "PLR Contracts" (also see Note 14 under "Energy Purchase
Commitments" for information on current PLR supply procurement
procedures);
|
|
·
|
agreed
to limit its businesses to electric transmission and distribution and
related activities;
|
|
·
|
adopted
amendments to its Articles of Incorporation and Bylaws containing
corporate governance and operating provisions designed to clarify and
reinforce its legal and corporate separateness from PPL and its other
affiliated companies;
|
|
·
|
appointed
an independent director to its Board of Directors and required the
unanimous approval of the Board of Directors, including the consent of the
independent director, to amendments to these corporate governance and
operating provisions or to the commencement of any insolvency proceedings,
including any filing of a voluntary petition in bankruptcy or other
similar actions.
|
In
addition, in connection with the issuance of certain series of bonds, PPL
Electric entered into a compliance administration agreement with an independent
compliance administrator to review, on a semi-annual basis, its compliance with
the corporate governance and operating requirements contained in its Articles of
Incorporation and Bylaws. Such series of bonds are no longer
outstanding and the compliance administration agreement has terminated, but PPL
Electric continues to comply with the corporate separateness provisions in its
Articles of Incorporation and Bylaws.
The
enhancements to PPL Electric's legal separation from its affiliates are intended
to minimize the risk that a court would order PPL Electric's assets and
liabilities to be substantively consolidated with those of PPL or another
affiliate of PPL in the event that PPL or another PPL affiliate were to become a
debtor in a bankruptcy case. Based on these various measures, PPL
Electric was able to issue and maintain a higher level of debt and use it to
replace higher cost equity, thereby maintaining a lower total cost of
capital. Nevertheless, if PPL or another PPL affiliate were to become
a debtor in a bankruptcy case, there can be no assurance that a court would not
order PPL Electric's assets and liabilities to be consolidated with those of PPL
or such other PPL affiliate.
The
subsidiaries of PPL are separate legal entities. PPL's subsidiaries
are not liable for the debts of PPL. Accordingly, creditors of PPL
may not satisfy their debts from the assets of the subsidiaries absent a
specific contractual undertaking by a subsidiary to pay PPL's creditors or as
required by applicable law or regulation. Similarly, absent a
specific contractual undertaking or as required by applicable law or regulation,
PPL is not liable for the debts of its subsidiaries. Accordingly,
creditors of PPL's subsidiaries may not satisfy their debts from the assets of
PPL absent a specific contractual undertaking by PPL to pay the creditors of its
subsidiaries or as required by applicable law or regulation.
Similarly,
the subsidiaries of PPL Energy Supply and PPL Electric are separate legal
entities. These subsidiaries are not liable for the debts of PPL
Energy Supply and PPL Electric. Accordingly, creditors of PPL Energy
Supply and PPL Electric may not satisfy their debts from the assets of their
subsidiaries absent a specific contractual undertaking by a subsidiary to pay
the creditors or as required by applicable law or regulation. In
addition, absent a specific contractual undertaking or as required by applicable
law or regulation, PPL Energy Supply and PPL Electric are not liable for the
debts of their subsidiaries. Accordingly, creditors of these
subsidiaries may not satisfy their debts from the assets of PPL Energy Supply or
PPL Electric absent a specific contractual undertaking by that parent to pay the
creditors of its subsidiaries or as required by applicable law or
regulation.
In June
2007, PPL's Board of Directors authorized the repurchase by PPL of up to $750
million of its common stock. A total of 15,732,708 shares were
repurchased for $750 million, excluding related fees, under the plan during 2008
and 2007. These purchases were primarily recorded as a reduction to
"Capital in excess of par value" on the Balance Sheet.
Distributions,
Capital Contributions and Related Restrictions
(PPL)
In
February 2009, PPL announced an increase to its quarterly common stock dividend,
effective April 1, 2009, to 34.5 cents per share (equivalent to $1.38 per
annum). Future dividends, declared at the discretion of the Board of
Directors, will be dependent upon future earnings, cash flows, financial
requirements and other factors.
Neither
PPL Capital Funding nor PPL may declare or pay any cash dividend or distribution
on its capital stock during any period in which PPL Capital Funding defers
interest payments on its 2007 Series A Junior Subordinated Notes due
2067. At December 31, 2009, no interest payments were
deferred.
(PPL
and PPL Energy Supply)
The PPL
Montana Colstrip lease places certain restrictions on PPL Montana's ability to
declare dividends. At this time, PPL believes that these covenants
will not limit PPL's or PPL Energy Supply's ability to operate as desired and
will not affect their ability to meet any of their cash
obligations. WPD subsidiaries also have financing arrangements that
limit their ability to pay dividends. However, PPL does not, at this
time, expect that any of such limitations would significantly impact PPL's or
PPL Energy Supply's ability to meet their cash obligations.
(PPL
Energy Supply)
During
2009, PPL Energy Supply distributed $943 million to its parent company, PPL
Energy Funding, and received cash capital contributions of $50
million.
(PPL
and PPL Electric)
As
discussed in Note 6, PPL Electric may not pay dividends on its common stock,
except in certain circumstances, unless full dividends have been paid on the
Preference Shares for the then-current dividend period. The quarterly
dividend rate for PPL Electric's Preference Shares is $1.5625 per
share. PPL Electric has declared and paid dividends on its
outstanding Preference Shares since issuance. Dividends on the
Preference Shares are not cumulative and future dividends, declared at the
discretion of PPL Electric's Board of Directors, will be dependent upon future
earnings, cash flows, financial requirements and other factors.
PPL
Electric is subject to Section 305(a) of the Federal Power Act, which makes it
unlawful for a public utility to make or pay a dividend from any funds "properly
included in capital account." The meaning of this limitation has
never been clarified under the Federal Power Act. PPL Electric
believes, however, that this statutory restriction, as applied to its
circumstances, would not be construed or applied by the FERC to prohibit the
payment from retained earnings of dividends that are not excessive and are for
lawful and legitimate business purposes.
(PPL
Electric)
During
2009, PPL Electric paid common stock dividends of $274 million to PPL, and
received cash capital contributions of $400 million.
(PPL,
PPL Energy Supply and PPL Electric)
PPL and
its subsidiaries continuously evaluate strategic options and, from time to time,
PPL and its subsidiaries negotiate with third parties regarding acquisitions and
dispositions of businesses and assets, joint ventures and development projects,
which may or may not result in consummated transactions. Any such
transactions may impact future financial results. See Note 9 for
information on anticipated and completed sales of businesses that were presented
as discontinued operations by PPL and PPL Energy Supply.
Domestic
License
Renewals
(PPL and PPL Energy
Supply)
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 expiration date to 2042 for Unit 1 and to 2044 for Unit
2. At December 31, 2009 and 2008, $17 million and $15 million of
license renewal costs were capitalized and are included in noncurrent "Other
intangibles" on the Balance Sheets.
Development
(PPL
and PPL Energy Supply)
In 2007,
PPL requested FERC approval to expand the capacity of its Holtwood hydroelectric
plant by 125 MW. In 2008, PPL withdrew the application due to
then-prevailing economic conditions, including the high cost of capital and
projected future energy prices. As a result, the Supply segment
recorded an impairment of $22 million ($13 million after tax), which is included
in "Other operation and maintenance" on the Statements of Income.
In April
2009, PPL filed a new application with the FERC to expand capacity at its
Holtwood hydroelectric plant by 125 MW, and in October 2009 the FERC granted the
approval. PPL reconsidered this project in light of the availability
of tax incentives and potential federal loan guarantees for renewable projects
contained in the Economic Stimulus Package. In approving this
application, the FERC extended the operating license for the Holtwood plant to
August 2030. The expansion project has an expected capital cost of
approximately $434 million.
Site
preparation began in the fourth quarter of 2009 and construction began in the
first quarter of 2010, with commercial operations scheduled to begin in
2013.
A PPL subsidiary has applied to the DOE for a federal
loan guarantee for the project.
In March
2009, PPL Montana received FERC approval for its request to redevelop the
Rainbow hydroelectric facility, near Great Falls, Montana, for total plant
capacity of approximately 60 MW (an increase of 28 MW). The expected
redevelopment project cost is $230 million. Construction began in
October 2009, with commercial operations scheduled to begin in
2012. A PPL subsidiary has applied to the DOE for a federal loan
guarantee for the project.
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
is 143 MW. The first uprate for Unit 1 was 50 MW and was
completed in 2008. The second uprate for Unit 1 is scheduled to be
completed in 2010. The first uprate for Unit 2 was 50 MW and was
completed in 2009, and the second uprate is scheduled to be completed in
2011. The remaining 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 the proposed Bell
Bend nuclear generating unit (Bell Bend) to be built adjacent to PPL's
Susquehanna plant. The COLA was formally docketed and accepted for
review by the NRC in December 2008. The NRC is now reviewing the
COLA. In May 2009, the NRC published its official review schedule
that culminates with issuance of Bell Bend's final safety evaluation report in
2012, after which public hearings will be held before Bell Bend's license can be
issued.
In 2008,
a PPL subsidiary submitted Parts I and II of an application for a federal loan
guarantee for Bell Bend to the DOE. In June 2009, the DOE announced
that it was working to finalize loan guarantees related to four projects, none
of which was Bell Bend. None of the ten applicants who submitted Part
II applications has been formally eliminated by the DOE; however, the DOE has
stated that the $18.5 billion currently appropriated to support new nuclear
projects would not likely be enough for more than four projects. A
PPL subsidiary submits quarterly application updates for Bell Bend to the DOE to
remain active in the loan application process and plans to continue to do so in
2010.
The
President's proposed budget for fiscal year 2011 includes an additional $36
billion of loan guarantees for nuclear projects. If this increased
loan guarantee authorization is approved, PPL believes that Bell Bend could be a
candidate for a share of such additional guarantees. However, PPL has
made no decision to proceed with construction of Bell Bend and expects that such
decision will not be made for several years given the anticipated lengthy NRC
license approval process. Additionally, PPL has announced that it
does not expect to proceed with construction absent a joint arrangement with
other interested parties and a federal loan guarantee or other acceptable
financing. PPL and its subsidiaries are authorized by PPL's Board of
Directors to spend up to $111 million on the COLA and other permits necessary
for construction. At December 31, 2009 and 2008, $77 million and
$58 million of costs associated with the licensing application were capitalized
and are included in noncurrent "Other intangibles" on the Balance Sheets, as PPL
believes it is probable that these costs are ultimately recoverable following
approval by the NRC either through construction of the new nuclear unit,
transfer of the COLA rights to a joint venture, or sale of the COLA rights to
another party.
(PPL
and PPL Electric)
In June
2007, the PJM directed the construction of a new 150-mile, 500-kilovolt
transmission line between the Susquehanna substation in Pennsylvania and the
Roseland substation in New Jersey that it identified as essential to long-term
reliability of the mid-Atlantic electricity grid. The PJM determined
that the line is needed to prevent potential overloads that could occur in the
next decade on several existing transmission lines in the interconnected PJM
system. The PJM has directed PPL Electric to construct the portion of
the Susquehanna-Roseland line in Pennsylvania and has directed Public Service
Electric & Gas Company to construct the portion of the line in New
Jersey, in each case by June 1, 2012. PPL Electric's estimated share
of the project costs at December 31, 2009 was $510 million.
This
project is pending certain regulatory approvals. PPL Electric has
identified the approximately 100-mile route for the Pennsylvania portion of the
line. In February 2010, the PUC and the New Jersey Board of Public
Utilities approved the project. In addition, both companies are
working with the National Park Service to obtain any approvals that may be
required to route the line through the Delaware Water Gap National Recreation
Area. PPL Electric cannot predict the ultimate outcome or timing of
the National Park Service approval. However, PPL Electric currently
anticipates delays in the approval process which will affect the PJM-directed
in-service date and projected costs of the line. PPL Electric also
cannot predict what action, if any, the PJM might take in the event of a delay
to its scheduled in-service date for the new line.
(PPL
and PPL Energy Supply)
Sale of Telecommunication
Operations
In the
first quarter of 2007, PPL completed a review of strategic options for the
transport operations of its domestic telecommunications subsidiary, which
offered fiber optic capacity to other telecommunications companies and
enterprise customers. The operating results of this subsidiary were
included in the Supply segment. Due to significant capital
requirements for the telecommunication operations and competing capital needs in
PPL's core electricity supply and delivery businesses, PPL decided to market
these operations. The transport operations did not meet the criteria
for discontinued operations on the Statement of Income because there were not
separate and distinguishable cash flows, among other factors. In
August 2007, PPL sold its telecommunication operations.
In
connection with the sale, in 2007 PPL and PPL Energy Supply recorded impairments
of $39 million ($23 million after tax) of the telecommunication assets based on
their estimated fair value. The impairments are included in
"Energy-related businesses" expenses on the Statement of Income. PPL
realized net proceeds of $47 million from the sale.
Acquisition of a Long-term
Tolling Agreement
In 2008,
PPL EnergyPlus acquired the rights to an existing long-term tolling agreement
associated with the capacity and energy of Ironwood. The tolling
agreement extends through 2021 and is considered to contain an operating lease
for accounting purposes. As a result of this agreement, PPL
EnergyPlus recognized an intangible asset. See Note 10 for additional
information on the lease.
(PPL
and PPL Energy Supply)
Anticipated Sale of Long
Island Generation Business
As a
result of management's ongoing strategic review of PPL's non-core asset
portfolio, in May 2009, PPL Generation signed a definitive agreement to sell its
Long Island generation business, which is included in the Supply segment, for
approximately $135 million in cash, adjusted for working capital at the sale
date and subject to reduction monthly, effective September 1,
2009. The Long Island Power Authority has contracted with PPL Energy
Supply subsidiaries to purchase all of this business' capacity and ancillary
services as part of tolling agreements that expire in 2017 and
2018. Each agreement is considered to contain a lease for accounting
purposes. These tolling agreements will be transferred to the
purchaser upon completion of the sale.
The Long
Island generation business met the held for sale criteria in the second quarter
of 2009. As a result, net assets held for sale with a carrying amount
of $189 million were written down to their estimated fair value (less cost to
sell) of $137 million at June 30, 2009, resulting in a pre-tax impairment
charge of $52 million ($34 million after tax). At both
September 30 and December 31, 2009, the estimated fair value (less cost to
sell) was remeasured and additional impairments totaling $10 million ($3 million
after tax) were recorded. In addition, $2 million ($1 million after
tax) of goodwill allocated to this business was written off in
2009. The impairment charges recognized in the third and fourth
quarters of 2009 had no significant impact on earnings, as such amounts were
substantially offset by tolling revenues from the Long Island generation
assets. These charges are included in "Income (Loss) from
Discontinued Operations (net of income taxes)" on the 2009 Statement of
Income. Closing of the sale is expected to occur on or about February
26, 2010.
After
adjusting for the delayed closing provisions, proceeds will approximate $125
million, excluding working capital.
Following
are the components of Discontinued Operations in the Statements of
Income.
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
revenues
|
$
|
24
|
$
|
26
|
$
|
28
|
||||||
|
Operating
expenses (a)
|
73
|
8
|
8
|
|||||||||
|
Operating
income (loss)
|
(49
|
)
|
18
|
20
|
||||||||
|
Interest
expense (b)
|
4
|
3
|
2
|
|||||||||
|
Income
(loss) before income taxes
|
(53
|
)
|
15
|
18
|
||||||||
|
Income
taxes
|
(20
|
)
|
5
|
8
|
||||||||
|
Income
(Loss) from Discontinued Operations
|
$
|
(33
|
)
|
$
|
10
|
$
|
10
|
|||||
|
(a)
|
2009
includes impairments to the carrying value of the
business.
|
|
|
(b)
|
Represents
allocated interest expense based upon debt attributable to PPL's Long
Island generation business.
|
The major
classes of assets reported as held for sale on the Balance Sheet at
December 31, 2009 were $41 million of PP&E and an $86 million net
investment in a direct-financing lease (corresponding amounts at
December 31, 2008, were $88 million of PP&E and a $104 million net
investment in a direct-financing lease, which have not been reclassified on the
Balance Sheet as of that date).
Sale of Maine Hydroelectric
Generation Business
In 2004,
PPL Maine entered into an agreement with a coalition of government agencies and
private groups to sell three of its hydroelectric facilities in
Maine. Under the agreement, a non-profit organization designated by
the coalition received a five-year option to purchase the hydroelectric
facilities for $25 million and, if the option was exercised, PPL Maine would
receive rights to increase energy output at its other Maine hydroelectric
facilities. The coalition announced plans to remove or bypass the
subject facilities to restore runs of Atlantic salmon and other migratory fish
to the Penobscot River. In June 2008, the coalition notified PPL
Maine of its intent to exercise the purchase option. The agreement
requires updates to its representations and warranties, and is subject to
approvals by the FERC and other regulatory agencies. In November
2008, PPL Maine and the coalition requested the FERC, the U.S. Army Corps of
Engineers and the Maine DEP to approve the transfer of ownership of the three
facilities. Certain of these required approvals have been obtained,
but PPL cannot predict whether or when all of them will be
obtained. As a result, these three Maine hydroelectric facilities did
not meet the held for sale criteria at December 31, 2009.
In July
2009, indirectly related to the above potential sale and as a result of
management's ongoing strategic review of PPL's non-core asset portfolio, PPL
Maine signed a definitive agreement to sell the majority of its hydroelectric
generation business, which was included in the Supply segment. PPL
completed this sale in November 2009 for $81 million in cash, adjusted for
working capital. The assets sold in this transaction included five
hydroelectric facilities and PPL's 50% equity interest in a sixth hydroelectric
facility, which had been accounted for as an equity investment, as well as the
rights to increase energy output at these facilities if the potential sale of
the three other hydroelectric facilities (discussed above) is
completed. PPL's interest in these six facilities represented a total
of 30 MW of electric generating capacity. As a result of this sale,
PPL recorded a gain of $38 million ($22 million after tax), reflected in "Income
(Loss) from Discontinued Operations (net of income taxes)" on the 2009 Statement
of Income. In addition, upon completion of the sale of the three
other hydroelectric facilities noted above, PPL will receive $14 million in
contingent consideration and record an associated additional after-tax gain of
between $7 and $9 million.
Following
are the components of Discontinued Operations in the Statements of
Income.
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
revenues
|
$
|
5
|
$
|
11
|
$
|
8
|
||||||
|
Operating
expenses (a)
|
(34
|
)
|
3
|
4
|
||||||||
|
Operating
income
|
39
|
8
|
4
|
|||||||||
|
Other
income-net
|
3
|
2
|
2
|
|||||||||
|
Interest
expense (b)
|
1
|
1
|
||||||||||
|
Income
before income taxes
|
41
|
9
|
6
|
|||||||||
|
Income
taxes
|
17
|
4
|
4
|
|||||||||
|
Income
from Discontinued Operations
|
$
|
24
|
$
|
5
|
$
|
2
|
||||||
|
(a)
|
2009
includes the gain recorded on the sale.
|
|
|
(b)
|
Represents
allocated interest expense based upon debt attributable to the Maine
hydroelectric generation business.
|
Upon
completion of the sale, $23 million of PP&E, an $18 million equity method
investment and $1 million of allocated goodwill were removed from the Balance
Sheet.
Sale of Interest in Wyman
Unit 4
As a
result of management's ongoing strategic review of PPL's non-core asset
portfolio, in December 2009, PPL Maine sold its 8.33% ownership interest in the
610 MW Wyman Unit 4 generating station, an oil-fired plant located in Yarmouth,
Maine. PPL's interest in the plant was included in the Supply
segment. In connection with the sale, PPL recorded a loss of $6
million ($4 million after tax). This charge is included in "Income
(Loss) from Discontinued Operations (net of income taxes)" on the 2009 Statement
of Income. PPL's share of the results of operations for the years
2007 - 2009 was insignificant.
Sale of Latin American
Businesses
In March
2007, PPL completed a review of strategic options for its Latin American
businesses and announced its intention to sell its regulated electricity
delivery businesses in Chile, El Salvador and Bolivia, which were included in
the International Delivery segment.
In April
2007, PPL agreed to sell its Bolivian businesses. As a result, in
2007, PPL recorded impairments totaling $37 million ($20 million after tax) to
reflect the estimated fair value of the businesses at the date of the
agreement. This sale was completed in July 2007. In May
2007, PPL completed the sale of its El Salvadoran business for $180 million in
cash. PPL recorded a gain of $94 million ($89 million after tax) as a
result of the sale. In November 2007, PPL completed the sale of its
Chilean business for $660 million in cash and recorded a related gain of $306
million ($197 million after tax).
In 2008,
PPL Global recognized income tax benefits and miscellaneous expenses in
Discontinued Operations in connection with the dissolution of certain Latin
American holding companies. This process was substantially completed
in 2008.
In 2009,
PPL identified a correction to the previously computed tax bases of the Latin
American businesses. The most significant adjustment related to the
sale of the El Salvadoran business and was largely due to returns of capital in
certain prior years that had not been reflected in the calculated tax
basis. As a result, PPL and PPL Energy Supply recorded $24 million of
additional income tax expense in 2009, which is reflected on the Statement of
Income in "Income (Loss) from Discontinued Operations (net of income
taxes)." The additional expense is not considered by management to be
material to the financial statements of PPL and PPL Energy Supply for the years
ended 2007 and 2009.
Following
are the components of Discontinued Operations in the Statements of
Income.
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
revenues
|
$
|
529
|
||||||||||
|
Operating
expenses (a)
|
$
|
2
|
497
|
|||||||||
|
Operating
income (loss)
|
(2
|
)
|
32
|
|||||||||
|
Other
income - net
|
(1
|
)
|
15
|
|||||||||
|
Interest
expense (b)
|
25
|
|||||||||||
|
Income
(Loss) before income taxes
|
(3
|
)
|
22
|
|||||||||
|
Income
taxes (c)
|
$
|
27
|
(8
|
)
|
(5
|
)
|
||||||
|
Gain
on sale of businesses (net of tax expense of $114 million)
|
286
|
|||||||||||
|
Income
(Loss) from Discontinued Operations
|
(27
|
)
|
5
|
313
|
||||||||
|
Income
from Discontinued Operations Attributable to Noncontrolling
Interests
|
6
|
|||||||||||
|
Income
(Loss) from Discontinued Operations Attributable to PPL/PPL Energy
Supply
|
$
|
(27
|
)
|
$
|
5
|
$
|
307
|
|||||
|
(a)
|
2007
includes the impairments to the carrying value of the Bolivian
businesses. Also included are fees associated with the
divestiture of the Latin American businesses of $12 million ($7 million
after tax).
|
|
|
(b)
|
2007
includes $5 million of allocated interest expense based on the
discontinued operation's share of the net assets of PPL Energy
Supply.
|
|
|
(c)
|
2009
includes the $24 million income tax adjustment referred to
above. 2008 includes $6 million from the recognition of a
previously unrecognized tax benefit associated with a prior year tax
position. 2007 includes U.S. deferred tax charges of $7
million. As a result of PPL's decision to sell its Latin
American businesses, it no longer qualified for the permanently reinvested
exception to recording deferred
taxes.
|
(PPL)
Sale of Gas and Propane
Businesses
In July
2007, PPL completed a review of strategic options for its natural gas
distribution and propane businesses and announced its intention to sell these
businesses, which were included in the Pennsylvania Delivery
segment. Based on the
expectation
that the natural gas distribution and propane assets would be sold and an
assessment of prevailing market conditions, an impairment charge of $22 million
and an associated income tax benefit of $1 million were recorded in
2007.
In March
2008, PPL signed a definitive agreement to sell these businesses for $268
million in cash, adjusted for working capital at the sale date, pursuant to a
stock purchase agreement. PPL completed the sale in October
2008. Sale proceeds of $303 million, including estimated working
capital, were contributed to PPL Energy Supply through its parent, PPL Energy
Funding. In 2008, PPL recorded impairment and other charges related
to the sale totaling $10 million ($6 million after tax). Also in
2008, PPL Gas Utilities paid a $3 million ($2 million after tax) premium to
prepay the entire $10 million aggregate principal of its 8.70% Senior Notes due
December 2022. In the first quarter of 2009, PPL recognized an
insignificant charge in Discontinued Operations in connection with the
settlement of the working capital adjustment.
Following
are the components in Discontinued Operations in the Statements of
Income.
|
2008
|
2007
|
|||||||
|
Operating
revenues
|
$
|
162
|
$
|
218
|
||||
|
Operating
expenses (a)
|
154
|
211
|
||||||
|
Operating
income
|
8
|
7
|
||||||
|
Other
income - net
|
(3
|
)
|
||||||
|
Interest
expense (b)
|
4
|
6
|
||||||
|
Income
before income taxes
|
1
|
1
|
||||||
|
Income
taxes (c)
|
(2
|
)
|
33
|
|||||
|
Income
(Loss) from Discontinued Operations
|
$
|
3
|
$
|
(32
|
)
|
|||
|
(a)
|
2008
and 2007 include impairment and other charges related to the sale of $10
million and $22 million.
|
|
|
(b)
|
2008
and 2007 include $3 million and $5 million of allocated interest expense
based upon debt attributable to PPL's natural gas distribution and propane
businesses.
|
|
|
(c)
|
As
a result of classifying the natural gas distribution and propane
businesses as Discontinued Operations in 2007, PPL recorded a deferred
income tax charge of $23 million related to its book/tax basis difference
in the investment in these assets.
|
(PPL
and PPL Energy Supply)
Lessee
Transactions
Tolling
Agreement
In 2008,
PPL EnergyPlus acquired the rights to an existing long-term tolling agreement
for the capacity and energy of Ironwood. Under the agreement, PPL
EnergyPlus has control over the plant's dispatch into the electricity grid and
will supply the natural gas necessary to operate the plant. The
tolling agreement extends through 2021 and is considered to contain an operating
lease for accounting purposes. The fixed payments under the tolling
agreement are subject to adjustment based upon changes to the facility capacity
rating, which may occur up to twice per year. Certain costs within
the tolling agreement, primarily non-lease costs, are subject to
escalation.
Colstrip Generating
Plant
In July
2000, PPL Montana sold its interest in the Colstrip generating plants to owner
lessors who are leasing a 50% interest in Colstrip Units 1 and 2 and a 30%
interest in Unit 3 back to PPL Montana under four 36-year non-cancelable
leases. This transaction is accounted for as a sale-leaseback and
classified as an operating lease. These leases provide two renewal
options based on the economic useful life of the generation
assets. PPL Montana currently amortizes material leasehold
improvements over no more than the remaining life of the original
leases. PPL Montana is required to pay all expenses associated with
the operations of the generation units. The leases place certain
restrictions on PPL Montana's ability to incur additional debt, sell assets and
declare dividends and require PPL Montana to maintain certain financial ratios
related to cash flow and net worth. There are no residual value
guarantees in these leases. However, upon an event of default or an
event of loss, PPL Montana could be required to pay a termination value of
amounts sufficient to allow the lessor to repay amounts owing on the lessor
notes and make the lessor whole for its equity investment and anticipated return
on investment. The events of default include payment defaults,
breaches of representations or covenants, acceleration of other indebtedness of
PPL Montana, change in control of PPL Montana and certain bankruptcy
events. The termination value was estimated to be $734 million at
December 31, 2009.
Kerr Dam
At
December 31, 2009, PPL Montana continued to participate in a lease
arrangement with the Confederated Salish and Kootenai Tribes of the Flathead
Reservation. Under a joint operating license, issued by the FERC to
Montana Power in 1985, and subsequently to PPL Montana as a result of the
purchase of Kerr Dam from Montana Power, PPL Montana is responsible to make
payments to the tribes, for the use of their property. This
agreement, subject to escalation based upon inflation, extends until the end of
the license term in 2035. Between 2015 and 2025, the tribes have the
option to purchase, hold and operate the project, which would result in the
termination of this leasing arrangement.
Other
Leases
PPL and
its subsidiaries have entered into various agreements for the lease of office
space, land and other equipment.
Rent - Operating
Leases
Rent
expense for PPL's and PPL Energy Supply's operating leases was $86 million, $73
million and $54 million in 2009, 2008 and 2007.
Total
future minimum rental payments for all operating leases are estimated to
be:
|
2010
|
$
|
108
|
||
|
2011
|
109
|
|||
|
2012
|
107
|
|||
|
2013
|
112
|
|||
|
2014
|
111
|
|||
|
Thereafter
|
421
|
|||
|
$
|
968
|
(a)
|
|
(a)
|
Includes
$9 million in aggregate of future minimum lease payments related to the
Long Island generation business. See Note 9 for additional
information on the anticipated sale of this
business.
|
Lessor
Transactions
A PPL
Energy Supply subsidiary is the lessor, for accounting purposes, of each of the
Shoreham and Edgewood plants (collectively with related tolling agreements, the
Long Island generation business). In May 2009, PPL Generation signed
a definitive agreement to sell the Long Island generation
business. The tolling agreements related to these plants, accounted
for as containing leases, will be transferred to the purchaser upon completion
of the sale. See Note 9 for additional information.
Direct Financing
Lease
The lease
related to the Shoreham plant is classified as a direct-financing
lease. Rental income received during 2009 and 2007 was $14 million
and $13 million in 2008. Total future minimum lease payments are
estimated at $16 million for each of the years from 2010 through
2014. Substantially all of these lease payments are no longer
expected to be received subsequent to the anticipated sale of the Long Island
generation business.
Operating
Lease
The lease
related to the Edgewood plant is classified as an operating lease. At
December 31, 2009, total minimum future rentals under this lease were
estimated to be $25 million, including $3 million per year for 2010 through
2014. These minimum future rentals are no longer expected to be
received subsequent to the anticipated sale of the Long Island generation
business.
(PPL,
PPL Energy Supply and PPL Electric)
Under the
PPL Incentive Compensation Plan (ICP) and the Incentive Compensation Plan for
Key Employees (ICPKE) (together, the Plans), restricted shares of PPL common
stock, restricted stock units, performance units and stock options may be
granted to officers and other key employees of PPL, PPL Energy Supply, PPL
Electric and other affiliated companies. Awards under the Plans are
made by the Compensation Governance and Nominating Committee (CGNC) of the PPL
Board of Directors, in the case of the ICP, and by the PPL Corporate Leadership
Council (CLC), in the case of the ICPKE.
The ICP
limits the total number of awards that may be granted under it after
April 23, 1999 to 15,769,430 awards, or 5% of the total shares of PPL
common stock that were outstanding at April 23, 1999. The ICPKE
limits the total number of awards that may be granted under it after April 25,
2003 to 16,573,608 awards, or 5% of the total shares of PPL common stock that
were outstanding at January 1, 2003, reduced by outstanding awards of 2,373,812,
for which PPL common stock was not yet issued as of April 25, 2003, resulting in
a limit of 14,199,796. In addition, each Plan limits the number of
shares available for awards in any calendar year to 2% of the outstanding common
stock of PPL on the first day of such calendar year. The maximum
number of options that can be awarded under each Plan to any single eligible
employee in any calendar year is three million shares. Any portion of
these options that has not been granted may be carried over and used in any
subsequent year. If any award lapses, is forfeited or the rights of
the participant terminate, the shares of PPL common stock underlying such an
award are again available for grant. Shares delivered under the Plans
may be in the form of authorized and unissued PPL common stock, common stock
held in treasury by PPL or PPL common stock purchased on the open market
(including private purchases) in accordance with applicable securities
laws.
Restricted
Stock and Restricted Stock Units
Restricted
shares of PPL common stock are outstanding shares with full voting and dividend
rights. Restricted stock awards are granted as a retention award for
select key executives and vest when the recipient reaches a certain age or meets
service or other criteria set forth in the executive's restricted stock award
agreement. The shares are subject to forfeiture or accelerated payout
under Plan provisions for termination, retirement, disability and death of
employees. Restricted shares vest fully if control of PPL changes, as
defined by the plans.
The Plans
allow for the grant of restricted stock units. Restricted stock units
are awards based on the fair market value of PPL common stock. Actual
PPL common shares will be issued upon completion of a vesting period, generally
three years. Recipients of restricted stock units may also be granted
the right to receive dividend equivalents through the end of the restriction
period or until the award is forfeited. Restricted stock units are
subject to forfeiture or accelerated payout under the Plan provisions for
termination, retirement, disability and death of
employees. Restricted stock units vest fully if control of PPL
changes, as defined by the Plans.
Restricted
stock and restricted stock unit activity for 2009 was:
|
Restricted
Shares/Units
|
Weighted-Average
Grant Date Fair Value
|
|||||||
|
PPL
|
||||||||
|
Nonvested,
beginning of period
|
1,656,830
|
$
|
36.56
|
|||||
|
Granted
|
528,580
|
29.07
|
||||||
|
Vested
|
(743,968
|
)
|
30.23
|
|||||
|
Forfeited
|
(33,400
|
)
|
39.79
|
|||||
|
Nonvested,
end of period
|
1,408,042
|
36.97
|
||||||
|
PPL Energy
Supply
|
||||||||
|
Nonvested,
beginning of period
|
788,010
|
$
|
35.07
|
|||||
|
Granted
|
228,000
|
28.49
|
||||||
|
Vested
|
(416,548
|
)
|
28.41
|
|||||
|
Forfeited
|
(22,050
|
)
|
41.16
|
|||||
|
Nonvested,
end of period
|
577,412
|
37.04
|
||||||
|
PPL
Electric
|
||||||||
|
Nonvested,
beginning of period
|
123,390
|
$
|
39.28
|
|||||
|
Granted
|
81,230
|
29.49
|
||||||
|
Vested
|
(49,660
|
)
|
33.44
|
|||||
|
Forfeited
|
(740
|
)
|
42.94
|
|||||
|
Nonvested,
end of period
|
154,220
|
36.05
|
Substantially
all restricted stock and restricted stock unit awards are expected to
vest.
The
weighted-average grant date fair value of restricted stock and restricted stock
units granted during 2008 was $46.22 for PPL, $46.03 for PPL Energy Supply and
$45.92 for PPL Electric.
The
weighted-average grant date fair value of restricted stock and restricted stock
units granted during 2007 was $37.10 for PPL, $37.88 for PPL Energy Supply and
$37.95 for PPL Electric.
At
December 31, 2009, unrecognized compensation cost related to nonvested
awards was:
|
Restricted
Stock/Units Unrecognized Compensation Cost
|
Weighted-Average
Period
for Recognition
|
|||||||
|
PPL
|
$
|
11
|
2.8
years
|
|||||
|
PPL
Energy Supply
|
5
|
1.7
years
|
||||||
|
PPL
Electric
|
2
|
4.6
years
|
||||||
The total
fair value of restricted shares/units vesting was:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
PPL
|
$
|
22
|
$
|
25
|
$
|
32
|
||||
|
PPL
Energy Supply
|
12
|
13
|
8
|
|||||||
|
PPL
Electric
|
2
|
2
|
4
|
|||||||
Performance
Units
PPL began
granting performance units in 2008. Performance units are intended to
encourage and award future performance. Performance units represent a
target number of shares (Target Award) of PPL's common stock that the officer
would receive upon PPL's attainment of the applicable performance
goal. Performance is determined based on total shareowner return
during a three-year performance period. At the end of the period,
payout is determined by comparing PPL's performance to the total shareowner
return of the companies included in an Index Group, in this case the S&P
Electric Utilities Index. Awards are payable on a graduated basis
within the following ranges: if PPL's performance is at or above the
85th percentile of the Index Group, the award is paid at 200% of the Target
Award; at the 50th percentile of the Index Group, the award is paid at 100% of
the Target Award; at the 40th percentile of the Index Group, the award is paid
at 50% of the Target Award; and below the 40th percentile, no award is
payable. Dividends payable during the performance cycle accumulate
and will be converted into additional performance units and are payable in
shares of PPL common stock upon completion of the performance period based on
the determination of the CGNC of whether the performance goals have been
achieved. Under the Plan provisions, performance units are subject to
forfeiture upon termination of employment except for retirement, disability or
death of an employee, in which case the total performance units remain
outstanding and eligible for vesting through the conclusion of the performance
period. Performance units vest on a pro rata basis if control of PPL
changes, as defined by the Plan.
Performance
unit activity for 2009 was:
|
Performance
Units
|
Weighted-Average
Grant Date Fair Value
|
|||||||
|
PPL
|
||||||||
|
Nonvested,
beginning of period
|
66,785
|
$
|
48.94
|
|||||
|
Granted
|
106,587
|
39.76
|
||||||
|
Forfeited
|
(6,908
|
)
|
45.06
|
|||||
|
Nonvested,
end of period
|
166,464
|
43.23
|
||||||
|
PPL Energy
Supply
|
||||||||
|
Nonvested,
beginning of period
|
22,583
|
$
|
48.58
|
|||||
|
Granted
|
27,451
|
38.18
|
||||||
|
Forfeited
|
(3,607
|
)
|
49.04
|
|||||
|
Nonvested,
end of period
|
46,427
|
42.39
|
||||||
|
PPL
Electric
|
||||||||
|
Nonvested,
beginning of period
|
3,732
|
$
|
48.57
|
|||||
|
Granted
|
7,903
|
39.95
|
||||||
|
Nonvested,
end of period
|
11,635
|
42.71
|
||||||
Substantially
all performance unit awards are expected to vest.
The
weighted-average grant date fair value of performance units granted during 2008
was $48.97 for PPL, $48.69 for PPL Energy Supply and $48.57 for PPL
Electric.
At
December 31, 2009, unrecognized compensation cost related to nonvested
awards was:
|
Performance
Units Unrecognized Compensation Cost
|
Weighted-Average
Period for Recognition
|
|||||||
|
PPL
|
$
|
4
|
1.8
years
|
|||||
|
PPL
Energy Supply
|
1
|
1.8
years
|
||||||
At
December 31, 2009, PPL Electric's unrecognized compensation cost was
insignificant and the weighted-average period for recognition was 1.9
years.
The
estimated fair value of each performance unit granted was calculated using a
Monte Carlo pricing model that considers historical volatility over three years
using daily stock price observations for PPL and all companies in the Index
Group. Volatility over the expected term of the performance units is
evaluated with consideration given to prior periods that may need to be excluded
based on events not likely to recur that had impacted PPL and companies in the
Index Group.
The
weighted-average assumptions used in the model were:
|
2009
|
2008
|
|||||
|
Risk-free
interest rate
|
1.11%
|
2.30%
|
||||
|
Expected
stock volatility
|
31.30%
|
20.70%
|
||||
|
Expected
life
|
3
years
|
3
years
|
Stock
Options
Under the
Plans, stock options may also be granted with an option exercise price per share
not less than the fair market value of PPL's common stock on the date of
grant. The options are exercisable in installments beginning one year
after the date of grant, assuming the individual is still employed by PPL or a
subsidiary. Options outstanding at December 31, 2009, become
exercisable in equal installments over a three-year period from the date of
grant. The CGNC and CLC have discretion to accelerate the
exercisability of the options, except that the exercisability of an option
issued under the ICP may not be accelerated unless the individual remains
employed by PPL or a subsidiary for one year from the date of
grant. All options expire no later than ten years from the grant
date. The options become exercisable immediately if control of PPL
changes, as defined by the Plans.
Stock
option activity for 2009 was:
|
Number
of Options
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Total Intrinsic Value
|
|||||||||||
|
PPL
|
||||||||||||||
|
Outstanding
at beginning of period
|
4,027,371
|
$
|
32.56
|
|||||||||||
|
Granted
|
1,053,320
|
31.86
|
||||||||||||
|
Exercised
|
(137,840
|
)
|
22.15
|
|||||||||||
|
Forfeited
|
(340,810
|
)
|
34.12
|
|||||||||||
|
Outstanding
at end of period
|
4,602,041
|
32.59
|
6.8
|
$
|
11
|
|||||||||
|
Options
exercisable at end of period
|
2,968,551
|
30.73
|
5.8
|
11
|
||||||||||
|
PPL Energy
Supply
|
||||||||||||||
|
Outstanding
at beginning of period
|
1,434,356
|
$
|
32.05
|
|||||||||||
|
Granted
|
262,770
|
31.83
|
||||||||||||
|
Exercised
|
(46,900
|
)
|
19.56
|
|||||||||||
|
Forfeited
|
(241,290
|
)
|
34.20
|
|||||||||||
|
Outstanding
at end of period
|
1,408,936
|
32.05
|
6.3
|
$
|
4
|
|||||||||
|
Options
exercisable at end of period
|
1,022,909
|
32.84
|
6.2
|
4
|
||||||||||
|
PPL
Electric
|
||||||||||||||
|
Outstanding
at beginning of period
|
146,120
|
$
|
36.09
|
|||||||||||
|
Granted
|
79,550
|
32.22
|
||||||||||||
|
Outstanding
at end of period
|
225,670
|
34.72
|
7.1
|
|||||||||||
|
Options
exercisable at end of period
|
100,388
|
29.05
|
5.4
|
Substantially
all stock option awards are expected to vest.
The
estimated fair value of each option granted was calculated using a Black-Scholes
option-pricing model. PPL uses historical volatility and exercise
behavior to value its stock options. Volatility over the expected
term of the options is evaluated with consideration given to prior periods that
may need to be excluded based on events not likely to recur that had impacted
PPL's volatility in those prior periods. Management's expectations
for future volatility, considering potential changes to PPL's business model and
other economic conditions, are also reviewed in addition to the historical data
to determine the final volatility assumption. The weighted-average
assumptions used in the model were:
|
2009
|
2008
|
2007
|
|||||
|
Risk-free
interest rate
|
2.07%
|
2.95%
|
4.85%
|
||||
|
Expected
option life
|
5.25
years
|
5.41
years
|
6.00
years
|
||||
|
Expected
stock volatility
|
26.06%
|
20.85%
|
21.61%
|
||||
|
Dividend
yield
|
3.48%
|
3.10%
|
3.31%
|
The
weighted-average grant date fair values of options granted were:
|
2009
|
2008
|
2007
|
||||||||
|
PPL
|
5.55
|
7.61
|
7.08
|
|||||||
|
PPL
Energy Supply
|
5.55
|
7.62
|
7.08
|
|||||||
|
PPL
Electric
|
5.65
|
7.60
|
7.08
|
|||||||
The total
intrinsic value of stock options exercised was:
|
Year
Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
PPL
|
$
|
2
|
$
|
20
|
$
|
54
|
||||
|
PPL
Energy Supply
|
1
|
7
|
13
|
|||||||
|
PPL
Electric
|
2
|
3
|
||||||||
At
December 31, 2009, unrecognized compensation cost related to stock options
was:
|
Unrecognized
Compensation Cost
|
Weighted-Average
Period
for Recognition
|
|||||||
|
PPL
|
$
|
3
|
1.8
years
|
|||||
|
PPL
Energy Supply
|
1
|
1.9
years
|
||||||
At
December 31, 2009, PPL Electric's unrecognized compensation cost was
insignificant and the weighted-average period for recognition was 1.9
years.
PPL
received cash from stock option exercises during 2009 of $3
million.
Compensation
Costs
Compensation
costs for restricted stock, restricted stock units, performance units and stock
options accounted for as equity awards were as follows:
|
2009
|
2008
|
2007
|
||||||||
|
PPL
(a)
|
$
|
23
|
$
|
28
|
$
|
26
|
||||
|
PPL
Energy Supply (b)
|
17
|
22
|
21
|
|||||||
|
PPL
Electric (c)
|
5
|
6
|
5
|
|||||||
|
(a)
|
Net
of an income tax benefit of $9 million, $11 million and $10
million.
|
|
|
(b)
|
Net
of an income tax benefit of $7 million, $9 million and $9
million.
|
|
|
(c)
|
Net
of an income tax benefit of $2 million for each
year.
|
The
income tax benefit PPL realized from stock-based arrangements for 2009 was
insignificant.
Directors Stock Units
(PPL)
Under the
Directors Deferred Compensation Plan, a mandatory amount of the cash retainers
of the members of the Board of Directors who are not employees of PPL is
deferred into stock units. Such deferred stock units represent the
number of shares of PPL's common stock to which the board members are entitled
after they cease serving as a member of the Board of Directors. Board
members are entitled to defer any or all of their fees and cash retainers that
are not part of the mandatory deferral into stock units. The stock
unit accounts of each board member are increased based on dividends paid or
other distributions on PPL's common stock. There were 406,584 such
stock units outstanding at December 31, 2009, which were accounted for as
liabilities with changes in fair value recognized currently in earnings based on
PPL's common stock price at the end of each reporting period.
|
Compensation
Costs (Credits)
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
PPL
(a)
|
$
|
2
|
$
|
(4
|
)
|
$
|
5
|
|||||
|
(a)
|
Net
of income tax benefit (expense) of $1 million, $(2) million and $2
million.
|
Awards
paid during 2009, 2008 and 2007 were insignificant.
Stock
Appreciation Rights
(PPL and PPL Energy
Supply)
WPD uses
stock appreciation rights to compensate senior management
employees. Stock appreciation rights are granted with a reference
price to PPL's common stock at the date of grant. These awards vest
over a three-year period and have a 10-year term, during which time employees
are entitled to receive a cash payment of any appreciation in the price of PPL's
common stock over the grant date fair value. At December 31,
2009, there were 416,891 stock appreciation rights outstanding, which are
accounted for as liabilities with changes in fair value recognized currently in
earnings based on updated Black-Scholes calculations.
Compensation
costs related to stock appreciation rights in 2009 were
insignificant. Compensation credits in 2008 were $2 million, with
related income tax expense of $1 million. Compensation costs for 2007
were $5 million, with related income tax benefits of $2 million.
There
were no awards exercised and paid in 2009. Awards paid in 2008 and
2007 were each $2 million.
(PPL,
PPL Energy Supply and PPL Electric)
Defined
Benefits
PPL and
certain of its subsidiaries sponsor various defined benefit plans.
The
majority of PPL's domestic employees are eligible for pension benefits under
non-contributory defined benefit pension plans with benefits based on length of
service and final average pay, as defined by the plans. Certain
employees may also be eligible for pension enhancements in the form of special
termination benefits under PPL's separation plan. See "Separation
Benefits" below for additional information regarding PPL's separation
plan.
Employees
of PPL Montana are eligible for pension benefits under a cash balance pension
plan and employees of certain of PPL's mechanical contracting companies are
eligible for benefits under multi-employer plans sponsored by various
unions. The employees of WPD are eligible for pension benefits under
a defined benefit pension plan with benefits based on length of service and
final average pay.
PPL and
certain of its subsidiaries also provide supplemental retirement benefits to
executives and other key management employees through unfunded nonqualified
retirement plans.
The
majority of employees of PPL's domestic subsidiaries will become eligible for
certain health care and life insurance benefits upon retirement through
contributory plans. Postretirement benefits under the PPL Retiree
Health Plan are paid from funded VEBA trusts sponsored by PPL Services and a
401(h) account established within the PPL Services pension master trust by the
respective companies. Postretirement benefits under the PPL Montana
Retiree Health Plan are paid from company assets. WPD does not
sponsor any postretirement benefit plans other than pensions.
The
following disclosures distinguish between the domestic (U.S.) and WPD (U.K.)
pension plans.
|
Pension
Benefits
|
||||||||||||||||||||||||||||||||||||
|
U.S.
|
U.K.
|
Other
Postretirement Benefits
|
||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||
|
PPL
|
||||||||||||||||||||||||||||||||||||
|
Net
periodic defined benefit costs:
|
||||||||||||||||||||||||||||||||||||
|
Service
cost
|
$
|
60
|
$
|
62
|
$
|
63
|
$
|
9
|
$
|
16
|
$
|
24
|
$
|
6
|
$
|
8
|
$
|
8
|
||||||||||||||||||
|
Interest
cost
|
145
|
140
|
132
|
156
|
188
|
170
|
29
|
33
|
31
|
|||||||||||||||||||||||||||
|
Expected
return on plan assets
|
(169
|
)
|
(180
|
)
|
(175
|
)
|
(189
|
)
|
(231
|
)
|
(227
|
)
|
(18
|
)
|
(21
|
)
|
(21
|
)
|
||||||||||||||||||
|
Amortization
of:
|
||||||||||||||||||||||||||||||||||||
|
Transition
(asset) obligation
|
(5
|
)
|
(4
|
)
|
(4
|
)
|
9
|
9
|
9
|
|||||||||||||||||||||||||||
|
Prior
service cost
|
19
|
20
|
19
|
4
|
5
|
5
|
9
|
9
|
9
|
|||||||||||||||||||||||||||
|
Actuarial
(gain) loss
|
3
|
(9
|
)
|
2
|
2
|
18
|
55
|
2
|
5
|
6
|
||||||||||||||||||||||||||
|
Net
periodic defined benefit costs (credits) prior to settlement charges and
termination benefits
|
53
|
29
|
37
|
(18
|
)
|
(4
|
)
|
27
|
37
|
43
|
42
|
|||||||||||||||||||||||||
|
Settlement
charges (a)
|
2
|
3
|
||||||||||||||||||||||||||||||||||
|
Termination
benefits (b)
|
9
|
6
|
3
|
|||||||||||||||||||||||||||||||||
|
Net
periodic defined benefit costs (credits)
|
$
|
64
|
$
|
29
|
$
|
46
|
$
|
(18
|
)
|
$
|
(4
|
)
|
$
|
30
|
$
|
37
|
$
|
43
|
$
|
42
|
||||||||||||||||
|
Other
Changes in Plan Assets and Benefit Obligations Recognized in OCI and
regulatory assets - Gross
|
||||||||||||||||||||||||||||||||||||
|
Settlements
|
$
|
(2
|
)
|
$
|
(3
|
)
|
||||||||||||||||||||||||||||||
|
Current
year net (gain) loss
|
102
|
$
|
635
|
(137
|
)
|
$
|
403
|
$
|
476
|
$
|
(254
|
)
|
$
|
32
|
$
|
(31
|
)
|
$
|
(4
|
)
|
||||||||||||||||
|
Current
year prior service cost (credit)
|
1
|
9
|
(4
|
)
|
(2
|
)
|
5
|
|||||||||||||||||||||||||||||
|
Amortization
of:
|
||||||||||||||||||||||||||||||||||||
|
Transition
asset (obligation)
|
5
|
4
|
4
|
(9
|
)
|
(9
|
)
|
(9
|
)
|
|||||||||||||||||||||||||||
|
Prior
service cost
|
(19
|
)
|
(22
|
)
|
(19
|
)
|
(4
|
)
|
(5
|
)
|
(5
|
)
|
(8
|
)
|
(9
|
)
|
(9
|
)
|
||||||||||||||||||
|
Actuarial
loss
|
(3
|
)
|
(1
|
)
|
(2
|
)
|
(2
|
)
|
(18
|
)
|
(55
|
)
|
(2
|
)
|
(9
|
)
|
(6
|
)
|
||||||||||||||||||
|
Total
recognized in OCI and regulatory assets (c) (d)
|
84
|
616
|
(148
|
)
|
397
|
453
|
(314
|
)
|
9
|
(60
|
)
|
(23
|
)
|
|||||||||||||||||||||||
|
Total
recognized in net periodic benefit costs, OCI and regulatory assets
(d)
|
$
|
148
|
$
|
645
|
$
|
(102
|
)
|
$
|
379
|
$
|
449
|
$
|
(284
|
)
|
$
|
46
|
$
|
(17
|
)
|
$
|
19
|
|
(a)
|
Includes
the settlement of the pension plan of PPL's former mining subsidiary, PA
Mines, LLC in 2009 and a non-qualified plan settlement in
2007.
|
||||||||||||||||||||||||||
|
(b)
|
The
$9 million U.S. cost of termination benefits in 2009 was related to a 2009
cost reduction initiative. The $6 million U.S. and $3 million
U.K. costs of termination benefits for 2007 were related primarily to the
elimination of positions at PPL's Martins Creek plant due to the shutdown
of two coal-fired units in September 2007, and the closing of WPD's meter
test station.
|
||||||||||||||||||||||||||
|
(c)
|
For
PPL's U.S. pension and other post-retirement benefits the amounts
recognized in OCI and regulatory assets are as follows:
|
||||||||||||||||||||||||||
|
U.S.
Pension Benefits
|
Other
Postretirement Benefits
|
||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
OCI
|
$
|
51
|
$
|
395
|
$
|
(87
|
)
|
$
|
6
|
$
|
(38
|
)
|
$
|
(7
|
)
|
||||||||||||
|
Regulatory
assets
|
33
|
221
|
(61
|
)
|
3
|
(22
|
)
|
(16
|
)
|
||||||||||||||||||
|
Total
recognized in OCI and regulatory assets
|
$
|
84
|
$
|
616
|
$
|
(148
|
)
|
$
|
9
|
$
|
(60
|
)
|
$
|
(23
|
)
|
||||||||||||
|
(d)
|
WPD
is not subject to accounting for the effects of certain types of
regulation as prescribed by GAAP. As a result, WPD does not
record regulatory assets.
|
||||||||||||||||||||||||||
The
estimated amounts to be amortized from AOCI and regulatory assets into net
periodic benefit costs in 2010 are as follows:
|
Pension
Benefits
|
||||||||||||
|
U.S.
|
U.K.
|
Other
Postretirement Benefits
|
||||||||||
|
Transition
obligation
|
$
|
9
|
||||||||||
|
Prior
service cost
|
$
|
19
|
$
|
4
|
7
|
|||||||
|
Actuarial
loss
|
3
|
52
|
5
|
|||||||||
|
Total
|
$
|
22
|
$
|
56
|
$
|
21
|
||||||
|
Amortization
from Balance Sheet:
|
||||||||||||
|
AOCI
|
$
|
15
|
$
|
56
|
$
|
13
|
||||||
|
Regulatory
assets
|
7
|
8
|
||||||||||
|
Total
|
$
|
22
|
$
|
56
|
$
|
21
|
||||||
|
Pension
Benefits
|
||||||||||||||||||||||||||||||||||||
|
U.S.
|
U.K.
|
Other
Postretirement Benefits
|
||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||
|
PPL
Energy Supply
|
||||||||||||||||||||||||||||||||||||
|
Net
periodic defined benefit costs:
|
||||||||||||||||||||||||||||||||||||
|
Service
cost
|
$
|
4
|
$
|
4
|
$
|
4
|
$
|
9
|
$
|
16
|
$
|
24
|
$
|
1
|
$
|
1
|
$
|
1
|
||||||||||||||||||
|
Interest
cost
|
6
|
6
|
6
|
156
|
188
|
170
|
1
|
1
|
1
|
|||||||||||||||||||||||||||
|
Expected
return on plan assets
|
(6
|
)
|
(8
|
)
|
(8
|
)
|
(189
|
)
|
(231
|
)
|
(227
|
)
|
||||||||||||||||||||||||
|
Amortization
of:
|
||||||||||||||||||||||||||||||||||||
|
Prior
service cost
|
4
|
5
|
5
|
|||||||||||||||||||||||||||||||||
|
Actuarial
loss
|
2
|
2
|
18
|
55
|
||||||||||||||||||||||||||||||||
|
Net
periodic pension and postretirement costs (credits) prior to settlement
charges and termination benefits
|
6
|
2
|
2
|
(18
|
)
|
(4
|
)
|
27
|
2
|
2
|
2
|
|||||||||||||||||||||||||
|
Settlement
charges (a)
|
2
|
|||||||||||||||||||||||||||||||||||
|
Termination
benefits (b)
|
3
|
|||||||||||||||||||||||||||||||||||
|
Net
periodic defined benefit costs (credits)
|
$
|
8
|
$
|
2
|
$
|
2
|
$
|
(18
|
)
|
$
|
(4
|
)
|
$
|
30
|
$
|
2
|
$
|
2
|
$
|
2
|
||||||||||||||||
|
Other
Changes in Plan Assets and Benefit Obligations Recognized in
OCI
|
||||||||||||||||||||||||||||||||||||
|
Settlements
|
$
|
(2
|
)
|
|||||||||||||||||||||||||||||||||
|
Current
year net (gain) loss
|
4
|
$
|
27
|
$
|
(7
|
)
|
$
|
403
|
$
|
476
|
$
|
(254
|
)
|
$
|
(1
|
)
|
||||||||||||||||||||
|
Current
year prior service credit
|
(1
|
)
|
||||||||||||||||||||||||||||||||||
|
Amortization
of:
|
||||||||||||||||||||||||||||||||||||
|
Prior
service cost
|
(4
|
)
|
(5
|
)
|
(5
|
)
|
||||||||||||||||||||||||||||||
|
Actuarial
loss
|
(2
|
)
|
(2
|
)
|
(18
|
)
|
(55
|
)
|
||||||||||||||||||||||||||||
|
Total
recognized in OCI
|
27
|
(7
|
)
|
397
|
453
|
(314
|
)
|
(2
|
)
|
|||||||||||||||||||||||||||
|
Total
recognized in net periodic benefit cost and OCI
|
$
|
8
|
$
|
29
|
$
|
(5
|
)
|
$
|
379
|
$
|
449
|
$
|
(284
|
)
|
$
|
2
|
$
|
$
|
2
|
|
(a)
|
Includes
the settlement of the pension plan of PPL's former mining subsidiary, PA
Mines, LLC in 2009.
|
|
|
(b)
|
The
$3 million U.K. cost of termination benefits for 2007 was related to the
closing of a WPD meter test station. In addition, severance of
$2 million was also recorded for a total charge of $5 million ($4 million
after tax).
|
Prior
service costs for PPL Energy Supply of $4 million and actuarial loss of $52
million related to the U.K. pension plans are expected to be amortized from AOCI
into net periodic benefit costs in 2010.
Net
periodic defined benefit costs (credits) charged to operating expense, excluding
amounts charged to construction and other non-expense accounts,
were:
|
Pension
Benefits
|
||||||||||||||||||||||||||||||||||||
|
U.S.
|
U.K.
|
Other
Postretirement Benefits
|
||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||
|
PPL
|
$
|
56
|
$
|
24
|
$
|
40
|
$
|
(17
|
)
|
$
|
(4
|
)
|
$
|
27
|
$
|
31
|
$
|
36
|
$
|
35
|
||||||||||||||||
|
PPL
Energy Supply (a)
|
26
|
10
|
19
|
(17
|
)
|
(4
|
)
|
27
|
14
|
16
|
16
|
|||||||||||||||||||||||||
|
PPL
Electric (b)
|
14
|
5
|
7
|
10
|
13
|
10
|
||||||||||||||||||||||||||||||
|
(a)
|
In
addition to the specific plans it sponsors, PPL Energy Supply and its
subsidiaries are also allocated costs of defined benefit plans sponsored
by PPL Services, included in the total cost above, based on their
participation in those plans.
|
|
|
(b)
|
PPL
Electric does not directly sponsor any defined benefit
plans. PPL Electric was allocated these costs of defined
benefit plans sponsored by PPL Services, based on its participation in
those plans.
|
The
following weighted-average assumptions were used in the valuation of the benefit
obligations at December 31.
|
Pension
Benefits
|
|||||||||||||||||||||||||||||||||||
|
U.S.
|
U.K.
|
Other
Postretirement Benefits
|
|||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||
|
PPL
|
|||||||||||||||||||||||||||||||||||
|
Discount
rate
|
6.00%
|
6.50%
|
6.39%
|
5.55%
|
7.47%
|
6.37%
|
5.81%
|
6.45%
|
6.26%
|
||||||||||||||||||||||||||
|
Rate
of compensation increase
|
4.75%
|
4.75%
|
4.75%
|
4.00%
|
4.00%
|
4.25%
|
4.75%
|
4.75%
|
4.75%
|
||||||||||||||||||||||||||
|
PPL
Energy Supply
|
|||||||||||||||||||||||||||||||||||
|
Discount
rate
|
6.00%
|
6.50%
|
6.39%
|
5.55%
|
7.47%
|
6.37%
|
5.55%
|
6.37%
|
6.13%
|
||||||||||||||||||||||||||
|
Rate
of compensation increase
|
4.75%
|
4.75%
|
4.75%
|
4.00%
|
4.00%
|
4.25%
|
4.75%
|
4.75%
|
4.75%
|
||||||||||||||||||||||||||
The
following weighted-average assumptions were used to determine the net periodic
benefit costs for the year ended December 31.
|
Pension
Benefits
|
|||||||||||||||||||||||||||||||||||
|
U.S.
|
U.K.
|
Other
Postretirement Benefits
|
|||||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||
|
PPL
|
|||||||||||||||||||||||||||||||||||
|
Discount
rate
|
6.50%
|
6.39%
|
5.94%
|
7.47%
|
6.37%
|
5.17%
|
6.45%
|
6.26%
|
5.88%
|
||||||||||||||||||||||||||
|
Rate
of compensation increase
|
4.75%
|
4.75%
|
4.75%
|
4.00%
|
4.25%
|
4.00%
|
4.75%
|
4.75%
|
4.75%
|
||||||||||||||||||||||||||
|
Expected
return on plan assets (a)
|
8.00%
|
8.25%
|
8.50%
|
7.90%
|
7.90%
|
8.09%
|
7.00%
|
7.80%
|
7.75%
|
||||||||||||||||||||||||||
|
PPL
Energy Supply
|
|||||||||||||||||||||||||||||||||||
|
Discount
rate
|
6.50%
|
6.39%
|
5.94%
|
7.47%
|
6.37%
|
5.17%
|
6.37%
|
6.13%
|
5.79%
|
||||||||||||||||||||||||||
|
Rate
of compensation increase
|
4.75%
|
4.75%
|
4.75%
|
4.00%
|
4.25%
|
4.00%
|
4.75%
|
4.75%
|
4.75%
|
||||||||||||||||||||||||||
|
Expected
return on plan assets (a)
|
7.78%
|
8.04%
|
8.27%
|
7.90%
|
7.90%
|
8.09%
|
N/A
|
N/A
|
N/A
|
||||||||||||||||||||||||||
|
(a)
|
The
expected long-term rates of return for PPL and PPL Energy Supply's U.S.
pension and other postretirement benefits have been developed using a
best-estimate of expected returns, volatilities and correlations for each
asset class. The best estimates are based on historical
performance, future expectations and periodic portfolio rebalancing among
the diversified asset classes. 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.
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. The best
estimates are based on historical performance, future expectations and
periodic portfolio rebalancing among the diversified asset
classes.
|
|
Assumed
Health Care Cost Trend Rates at December 31,
|
||||||
|
2009
|
2008
|
2007
|
||||
|
PPL
and PPL Energy Supply
|
||||||
|
Health
care cost trend rate assumed for next year
|
||||||
|
-
obligations
|
8.0%
|
8.4%
|
9.0%
|
|||
|
-
cost
|
8.4%
|
9.0%
|
9.0%
|
|||
|
Rate
to which the cost trend rate is assumed to decline (the ultimate trend
rate)
|
||||||
|
-
obligations
|
5.5%
|
5.5%
|
5.5%
|
|||
|
-
cost
|
5.5%
|
5.5%
|
5.5%
|
|||
|
Year
that the rate reaches the ultimate trend rate
|
||||||
|
-
obligations
|
2016
|
2014
|
2014
|
|||
|
-
cost
|
2014
|
2014
|
2012
|
|||
A one
percentage point change in the assumed health care costs trend rate assumption
would have had the following effects on the other postretirement benefit plans
in 2009.
|
One
Percentage Point
|
||||||||
|
Increase
|
Decrease
|
|||||||
|
PPL
|
||||||||
|
Effect
on service cost and interest cost components
|
$
|
1
|
$
|
(1
|
)
|
|||
|
Effect
on accumulated postretirement benefit obligation
|
14
|
(12
|
)
|
|||||
The
effects on PPL Energy Supply's other postretirement benefit plans would not have
been significant.
(PPL)
The
funded status of the PPL plans was as follows.
|
Pension
Benefits
|
||||||||||||||||||||||||
|
U.S.
|
U.K.
|
Other
Postretirement Benefits
|
||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
|
Change
in Benefit Obligation
|
||||||||||||||||||||||||
|
Benefit
Obligation, beginning of period
|
$
|
2,231
|
$
|
2,189
|
$
|
2,152
|
$
|
3,295
|
$
|
451
|
$
|
541
|
||||||||||||
|
Service
cost
|
60
|
62
|
9
|
15
|
6
|
8
|
||||||||||||||||||
|
Interest
cost
|
145
|
140
|
156
|
188
|
29
|
33
|
||||||||||||||||||
|
Participant
contributions
|
5
|
7
|
6
|
8
|
||||||||||||||||||||
|
Plan
amendments
|
1
|
(4
|
)
|
(2
|
)
|
|||||||||||||||||||
|
Actuarial
(gain) loss
|
125
|
(13
|
)
|
611
|
(411
|
)
|
43
|
(94
|
)
|
|||||||||||||||
|
Termination
benefits
|
9
|
|||||||||||||||||||||||
|
Actual
expenses paid
|
(1
|
)
|
(1
|
)
|
||||||||||||||||||||
|
Gross
benefits paid
|
(104
|
)
|
(95
|
)
|
(189
|
)
|
(180
|
)
|
(36
|
)
|
(36
|
)
|
||||||||||||
|
Settlements
(b)
|
(6
|
)
|
||||||||||||||||||||||
|
Federal
subsidy
|
3
|
2
|
||||||||||||||||||||||
|
Currency
conversion
|
189
|
(762
|
)
|
|||||||||||||||||||||
|
Divestiture
(a)
|
(51
|
)
|
(9
|
)
|
||||||||||||||||||||
|
Benefit
Obligation, end of period
|
2,460
|
2,231
|
2,933
|
2,152
|
498
|
451
|
||||||||||||||||||
|
Change
in Plan Assets
|
||||||||||||||||||||||||
|
Plan
assets at fair value, beginning of period
|
1,637
|
2,212
|
1,842
|
3,388
|
267
|
291
|
||||||||||||||||||
|
Actual
return on plan assets
|
192
|
(469
|
)
|
427
|
(770
|
)
|
28
|
(42
|
)
|
|||||||||||||||
|
Employer
contributions
|
54
|
29
|
95
|
92
|
33
|
38
|
||||||||||||||||||
|
Participant
contributions
|
5
|
7
|
6
|
12
|
||||||||||||||||||||
|
Actual
expenses paid
|
(1
|
)
|
(1
|
)
|
||||||||||||||||||||
|
Gross
benefits paid
|
(104
|
)
|
(95
|
)
|
(189
|
)
|
(179
|
)
|
(33
|
)
|
(32
|
)
|
||||||||||||
|
Settlements
(a)
|
(6
|
)
|
||||||||||||||||||||||
|
Currency
conversion
|
151
|
(696
|
)
|
|||||||||||||||||||||
|
Divestiture
(b)
|
(39
|
)
|
||||||||||||||||||||||
|
Plan
assets at fair value, end of period
|
1,772
|
1,637
|
2,331
|
1,842
|
301
|
267
|
||||||||||||||||||
|
Funded
Status, end of period
|
$
|
(688
|
)
|
$
|
(594
|
)
|
$
|
(602
|
)
|
$
|
(310
|
)
|
$
|
(197
|
)
|
$
|
(184
|
)
|
||||||
|
Amounts
recognized in the Balance Sheets consist of:
|
||||||||||||||||||||||||
|
Current
liability
|
$
|
(7
|
)
|
$
|
(5
|
)
|
$
|
(1
|
)
|
$
|
(1
|
)
|
||||||||||||
|
Noncurrent
liability
|
(681
|
)
|
(589
|
)
|
$
|
(602
|
)
|
$
|
(310
|
)
|
(196
|
)
|
(183
|
)
|
||||||||||
|
Net
amount recognized, end of period
|
$
|
(688
|
)
|
$
|
(594
|
)
|
$
|
(602
|
)
|
$
|
(310
|
)
|
$
|
(197
|
)
|
$
|
(184
|
)
|
||||||
|
Amounts
recognized in AOCI and regulatory assets (pre-tax) consist of:
(c)
|
||||||||||||||||||||||||
|
Transition
(asset) obligation
|
$
|
(4
|
)
|
$
|
26
|
$
|
35
|
|||||||||||||||||
|
Prior
service cost
|
$
|
120
|
139
|
$
|
13
|
$
|
16
|
31
|
43
|
|||||||||||||||
|
Net
actuarial loss
|
398
|
300
|
1,126
|
726
|
101
|
70
|
||||||||||||||||||
|
Total
|
$
|
518
|
$
|
435
|
$
|
1,139
|
$
|
742
|
$
|
158
|
$
|
148
|
||||||||||||
|
Total
accumulated benefit obligation for defined benefit pension
plans
|
$
|
2,237
|
$
|
1,999
|
$
|
2,806
|
$
|
2,058
|
|
(a)
|
Includes
the settlement of the pension plan of PPL's former mining subsidiary, PA
Mines LLC in 2009.
|
||||||||||||||||||
|
(b)
|
Includes
the pension and postretirement medical plans related to the gas and
propane businesses that were sold in 2008. See Note 9 for
additional information.
|
||||||||||||||||||
|
(c)
|
For
PPL's U.S. pension and other post-retirement benefits, the amounts
recognized in AOCI and regulatory assets are as
follows:
|
||||||||||||||||||
|
U.S.
Pension Benefits
|
Other
Postretirement Benefits
|
||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||
|
AOCI
|
$
|
346
|
$
|
295
|
$
|
95
|
$
|
89
|
|||||||||||
|
Regulatory
assets
|
172
|
140
|
63
|
59
|
|||||||||||||||
|
Total
|
$
|
518
|
$
|
435
|
$
|
158
|
$
|
148
|
|||||||||||
All of
PPL's pension plans had projected and accumulated benefit obligations in excess
of plan assets at December 31, 2009 and 2008. All of PPL's other
postretirement benefit plans had accumulated postretirement benefit obligations
in excess of plan assets at December 31, 2009 and 2008.
(PPL
Energy Supply)
The
funded status of the PPL Energy Supply plans was as follows.
|
Pension
Benefits
|
||||||||||||||||||||||||
|
U.S.
|
U.K.
|
Other
Postretirement Benefits
|
||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
|
Change
in Benefit Obligation
|
||||||||||||||||||||||||
|
Benefit
Obligation, beginning of period
|
$
|
95
|
$
|
89
|
$
|
2,152
|
$
|
3,295
|
$
|
15
|
$
|
16
|
||||||||||||
|
Service
cost
|
4
|
4
|
9
|
15
|
1
|
1
|
||||||||||||||||||
|
Interest
cost
|
6
|
6
|
156
|
188
|
1
|
1
|
||||||||||||||||||
|
Participant
contributions
|
5
|
7
|
||||||||||||||||||||||
|
Plan
amendments
|
(1
|
)
|
||||||||||||||||||||||
|
Actuarial
(gain) loss
|
7
|
(2
|
)
|
611
|
(411
|
)
|
(1
|
)
|
||||||||||||||||
|
Settlements
(a)
|
(6
|
)
|
||||||||||||||||||||||
|
Gross
benefits paid
|
(2
|
)
|
(2
|
)
|
(189
|
)
|
(180
|
)
|
(1
|
)
|
||||||||||||||
|
Currency
conversion
|
189
|
(762
|
)
|
|||||||||||||||||||||
|
Benefit
Obligation, end of period
|
104
|
95
|
2,933
|
2,152
|
17
|
15
|
||||||||||||||||||
|
Change
in Plan Assets
|
||||||||||||||||||||||||
|
Plan
assets at fair value, beginning of period
|
78
|
100
|
1,842
|
3,388
|
||||||||||||||||||||
|
Actual
return on plan assets
|
9
|
(20
|
)
|
427
|
(770
|
)
|
||||||||||||||||||
|
Employer
contributions
|
9
|
95
|
92
|
1
|
||||||||||||||||||||
|
Participant
contributions
|
5
|
7
|
||||||||||||||||||||||
|
Gross
benefits paid
|
(3
|
)
|
(2
|
)
|
(189
|
)
|
(179
|
)
|
(1
|
)
|
||||||||||||||
|
Settlements
(a)
|
(6
|
)
|
||||||||||||||||||||||
|
Currency
conversion
|
151
|
(696
|
)
|
|||||||||||||||||||||
|
Plan
assets at fair value, end of period
|
87
|
78
|
2,331
|
1,842
|
||||||||||||||||||||
|
Funded
Status, end of period
|
$
|
(17
|
)
|
$
|
(17
|
)
|
$
|
(602
|
)
|
$
|
(310
|
)
|
$
|
(17
|
)
|
$
|
(15
|
)
|
||||||
|
Amounts
recognized in the Balance Sheets consist of:
|
||||||||||||||||||||||||
|
Current
liability
|
$
|
(1
|
)
|
$
|
(1
|
)
|
||||||||||||||||||
|
Noncurrent
liability
|
$
|
(17
|
)
|
$
|
(17
|
)
|
$
|
(602
|
)
|
$
|
(310
|
)
|
(16
|
)
|
(14
|
)
|
||||||||
|
Net
amount recognized, end of period
|
$
|
(17
|
)
|
$
|
(17
|
)
|
$
|
(602
|
)
|
$
|
(310
|
)
|
$
|
(17
|
)
|
$
|
(15
|
)
|
||||||
|
Amounts
recognized in AOCI (pre-tax) consist of:
|
||||||||||||||||||||||||
|
Prior
service cost (credit)
|
$
|
2
|
$
|
2
|
$
|
13
|
$
|
16
|
$
|
(1
|
)
|
$
|
(1
|
)
|
||||||||||
|
Net
actuarial loss
|
30
|
30
|
1,126
|
726
|
4
|
4
|
||||||||||||||||||
|
Total
|
$
|
32
|
$
|
32
|
$
|
1,139
|
$
|
742
|
$
|
3
|
$
|
3
|
||||||||||||
|
Total
accumulated benefit obligation for defined benefit pension
plans
|
$
|
104
|
$
|
95
|
$
|
2,806
|
$
|
2,058
|
||||||||||||||||
|
(a)
|
Includes
the settlement of the pension plan of PPL Energy Supply's former mining
subsidiary, PA Mines LLC in 2009.
|
All of
PPL Energy Supply's pension plans had projected and accumulated benefit
obligations in excess of plan assets at December 31, 2009 and
2008. All of PPL Energy Supply's other postretirement benefit plans
had accumulated postretirement benefit obligations in excess of plan assets at
December 31, 2009 and 2008.
In
addition to the plans it sponsors, PPL Energy Supply and its subsidiaries are
allocated a portion of the funded status and costs of the defined benefit plans
sponsored by PPL Services based on their participation in those
plans. PPL Energy Supply's allocated share of the funded status of
the pension plans resulted in a liability of $265 million and $229 million at
December 31, 2009 and 2008. PPL Energy Supply's allocated share
of other postretirement benefits was a liability of $74 million and $69 million
at December 31, 2009 and 2008.
PPL
Energy Supply's subsidiaries engaged in the mechanical contracting business make
contributions to various multi-employer pension and health and welfare plans,
depending on an employee's status. Contributions were $54 million in
2009 and $61 million in both 2008 and 2007.
(PPL
Electric)
Although
PPL Electric does not directly sponsor any defined benefit plans, it is
allocated a portion of the funded status and costs of plans sponsored by PPL
Services based on its participation in those plans. PPL Electric's
allocated share of the funded status of the pension plans resulted in a
liability of $245 million and $209 million at December 31, 2009 and
2008. PPL Electric's allocated share of other postretirement benefits
was a liability of $73 million and $69 million at December 31, 2009 and
2008.
(PPL
and PPL Electric)
PPL
Electric maintains a liability for the cost of health care of retired miners of
former subsidiaries that had been engaged in coal mining, as required by the
Coal Industry Retiree Health Benefit Act of 1992. However, total
obligations of $59 million are offset by assets in a retired miners VEBA fund
and excess Black Lung Trust assets.
Plan Assets - U.S. Pension
Plans
(PPL
and PPL Energy Supply)
PPL and
PPL Energy Supply's U.S. pension plans are invested in a master trust that also
includes a 401(h) account that is restricted for certain other postretirement
benefit obligations. The investment strategy for the master trust is
to achieve a risk-adjusted return on a mix of assets that, in combination with
PPL's funding policy and tolerance for return volatility, will ensure that
sufficient assets are available to provide long-term growth and liquidity for
benefit payments. The master trust benefits from a wide
diversification of asset types, investment fund strategies and external
investment fund managers, and therefore has no significant concentration of
risk.
The
investment policies of the U.S. pension plans outline allowable investments and
define the responsibilities of the internal pension administrative committee and
the external investment managers. The only prohibited investments are
investments in debt or equity securities issued by PPL and its subsidiaries or
PPL's pension plan consultant. The investment policies are reviewed
and approved annually by PPL's Board of Directors.
Target
allocation ranges have been developed based on input from external consultants
with a goal of limiting funded status volatility. The assets in the
U.S. pension plans are rebalanced as necessary to maintain the target asset
allocation ranges. The asset allocation for the master trust and the
target allocation, by asset class, at December 31 are detailed
below.
|
Asset
Class
|
Percentage
of plan assets
|
Target
Range
|
Target
Asset Allocation
|
||||||
|
2009
|
2008
|
2009
|
2009
|
||||||
|
Equity
securities
|
|||||||||
|
U.S.
|
31%
|
37%
|
18-32%
|
25%
|
|||||
|
International
|
19%
|
15%
|
10-24%
|
17%
|
|||||
|
Debt
securities and derivatives
|
38%
|
41%
|
31-45%
|
38%
|
|||||
|
Alternative
investments
|
8%
|
5%
|
8-22%
|
15%
|
|||||
|
Cash
and cash equivalents
|
4%
|
2%
|
0-12%
|
5%
|
|||||
|
Total
|
100%
|
100%
|
100%
|
||||||
U.S.
equity securities include investments in large-cap and small-cap
companies. International equity securities include investments in
developed markets and emerging markets. The investments in U.S. and
international equity securities include investments in individual securities and
investments in commingled funds. Investments in debt securities include U.S.
Treasuries, U.S. government agencies, residential mortgage-backed securities,
asset-backed securities, investment-grade corporate bonds, high-yield corporate
bonds, municipal bonds and international debt securities. Alternative
investments include investments in real estate, private equity funds and hedge
fund of funds that follow several different strategies. Derivative instruments
are utilized as a cost-effective means to mitigate risk and match the duration
of investments to projected obligations.
(PPL)
The fair
value of net assets in the U.S. pension plans by asset class and level within
the fair value hierarchy was:
|
December
31, 2009
|
||||||||||||||||
|
Fair
Value Measurements Using
|
||||||||||||||||
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
90
|
$
|
90
|
||||||||||||
|
Equity
securities:
|
||||||||||||||||
|
U.S.:
|
||||||||||||||||
|
Large-cap
(a)
|
511
|
361
|
$
|
150
|
||||||||||||
|
Small-cap
(b)
|
84
|
84
|
||||||||||||||
|
International:
|
||||||||||||||||
|
Developed
markets (c)
|
327
|
205
|
122
|
|||||||||||||
|
Emerging
markets (d)
|
71
|
9
|
62
|
|||||||||||||
|
Debt
securities:
|
||||||||||||||||
|
U.S.:
|
||||||||||||||||
|
U.S.
Treasury
|
212
|
212
|
||||||||||||||
|
U.S.
government agency
|
6
|
6
|
||||||||||||||
|
Residential
mortgage-backed (e)
|
50
|
48
|
$
|
2
|
||||||||||||
|
Asset-backed
(f)
|
9
|
9
|
||||||||||||||
|
Investment-grade
corporate (g)
|
191
|
189
|
2
|
|||||||||||||
|
High-yield
corporate (h)
|
92
|
84
|
8
|
|||||||||||||
|
Other
|
||||||||||||||||
|
International
(i)
|
5
|
5
|
||||||||||||||
|
Alternative
investments:
|
||||||||||||||||
|
Real
estate (j)
|
65
|
65
|
||||||||||||||
|
Private
equity (k)
|
6
|
6
|
||||||||||||||
|
Hedge
fund of funds (l)
|
64
|
64
|
||||||||||||||
|
Derivatives:
|
||||||||||||||||
|
Foreign
currency forward contracts (m)
|
1
|
1
|
||||||||||||||
|
To-be-announced
(TBA) debt securities (n)
|
10
|
10
|
||||||||||||||
|
Interest
rate swaps
|
(4
|
)
|
(4
|
)
|
||||||||||||
|
Receivables
(o)
|
15
|
8
|
7
|
|||||||||||||
|
Payables
(p)
|
(22
|
)
|
(22
|
)
|
||||||||||||
|
Total
master trust assets
|
1,783
|
947
|
808
|
28
|
||||||||||||
|
401(h)
account restricted for other postretirement benefit
obligations
|
(11
|
)
|
(6
|
)
|
(5
|
)
|
||||||||||
|
Fair
value - U.S. pension plans
|
$
|
1,772
|
$
|
941
|
$
|
803
|
$
|
28
|
||||||||
|
(a)
|
Represents
actively and passively managed investments that are measured against
various U.S. equity indices.
|
|
|
(b)
|
Represents
actively managed investments in small-cap growth companies that are
measured against the Russell 2000 Growth Index.
|
|
|
(c)
|
Represents
actively managed investments that are measured against the MSCI EAFE
Index.
|
|
|
(d)
|
Represents
actively managed investments that are measured against the MSCI Emerging
Markets Index.
|
|
|
(e)
|
Represents
investments in securities issued by U.S. agencies and securitized by
residential mortgages.
|
|
|
(f)
|
Represents
investments securitized by auto loans, credit cards and other pooled
loans.
|
|
|
(g)
|
Represents
investments in investment grade bonds issued by U.S. companies across
several industries.
|
|
|
(h)
|
Represents
investments in non-investment grade bonds issued by U.S. companies across
several industries.
|
|
|
(i)
|
Represents
investments in debt securities issued by foreign governments and
corporations.
|
|
|
(j)
|
Represents
an investment in a real estate fund through a partnership that invests in
core U.S. real estate properties diversified geographically and across
major property types (e.g., office, industrial, retail,
etc). The manager is focused on properties with high occupancy
rates with quality tenants. This results in a focus on high income and
stable cash flows with appreciation being a secondary factor. Core real
estate generally has a lower degree of leverage when compared to more
speculative real estate investing strategies.
|
|
|
(k)
|
Represents
investments through partnerships in multiple early-state venture capital
funds and private equity fund of funds that use diverse investment
strategies.
|
|
|
(l)
|
Represents
investments in hedge fund of funds that follow a number of different
investment strategies to create a well-diversified
portfolio.
|
|
|
(m)
|
Represents
contracts utilized to mitigate foreign currency risk associated with
anticipated foreign denominated cash receipts and
payments.
|
|
|
(n)
|
Represents
commitments to purchase debt securities. Used as a cost
effective means of managing the duration of assets in the
trust.
|
|
|
(o)
|
Represents
interest and dividends earned but not received (Level 2) as well as
investments sold but not yet settled (Level 1).
|
|
|
(p)
|
Represents
costs incurred but not yet paid (Level 2) and investments purchased but
not yet settled (Level 1).
|
A
reconciliation of master trust assets classified as Level 3 at December 31, 2009
is as follows.
|
Residential
mortgage backed securities
|
Investment-grade
corporate debt
|
High-yield
corporate debt
|
Private
equity
|
TBA
Debt Securities
|
Total
|
|||||||||||||||||||
|
Balance
at beginning of period
|
$
|
4
|
$
|
3
|
$
|
4
|
$
|
5
|
$
|
51
|
$
|
67
|
||||||||||||
|
Actual
return on plan assets
|
||||||||||||||||||||||||
|
Relating
to assets still held at the reporting date
|
(1
|
)
|
1
|
1
|
1
|
|||||||||||||||||||
|
Relating
to assets sold during the period
|
1
|
(1
|
)
|
(2
|
)
|
(1
|
)
|
(3
|
)
|
|||||||||||||||
|
Purchases,
sales and settlements
|
(2
|
)
|
(1
|
)
|
4
|
3
|
(41
|
)
|
(37
|
)
|
||||||||||||||
|
Transfers
into and/or (out of) Level 3
|
||||||||||||||||||||||||
|
Balance
at end of period
|
$
|
2
|
$
|
2
|
$
|
8
|
$
|
6
|
$
|
10
|
$
|
28
|
||||||||||||
The fair
value measurements of cash and cash equivalents are based on amounts on
deposit. The fair value measurements of equity securities (excluding
commingled funds), which are generally classified as Level 1, are based on
quoted prices in active markets. The fair value measurements of
investments in commingled funds, which are classified as Level 2 and
categorized as equity securities, are based on firm quotes of net asset values
per share, which are not considered quoted prices in active
markets. The fair value measurements of debt securities are generally
based on evaluated prices that reflect observable market information, such as
actual trade information for identical securities or for similar securities,
adjusted for observable differences. When this information is not
available, the fair value of debt securities is measured using present value
techniques, which incorporate other observable inputs including interest rates
for debt securities with credit ratings and terms to maturity similar to the
debt securities being measured. When these inputs are not observable,
the fair value of debt securities is classified as Level 3. The fair
value measurements of derivative instruments utilize various inputs that include
quoted prices for similar contracts or market-corroborated inputs. In
certain instances when observable market prices are not available, these
instruments may be valued using models with market observable inputs including
forward prices and interest rates, among others.
The U.S.
pension plans hold alternative investments including investments in real estate,
private equity and hedge fund of funds.
|
·
|
Real
estate - Represents an investment in a partnership whose purpose is to
manage investments in U.S. real estate. The partnership has
limitations on the amounts that may be redeemed based on available cash to
fund redemptions. Additionally, the general partner may decline
to accept redemptions when necessary to avoid adverse consequences for the
partnership, including legal and tax implications, among
others. The fair value of the investment is based upon a
partnership unit value.
|
|
·
|
Private
equity - Represents interests in partnerships that invest across
industries using a number of diverse investment strategies. Two
of the partnerships have limited lives of ten years, while the third has a
life of 15 years, after which the master trust will receive liquidating
distributions. Prior to the end of each partnership's life, the
master trust's investment can not be redeemed with the partnership;
however, the interest may be sold to other parties, subject to the general
partner's approval. The master trust has unfunded commitments
of $56 million that may be required during the lives of the
partnerships. Fair value is based on an ownership interest in
partners' capital to which a proportionate share of net assets is
attributed.
|
|
·
|
Hedge
fund of funds - Represents investments in two hedge fund of funds each
with a different investment objective. Generally, shares may be
redeemed on 90 days prior written notice. Both funds are
subject to short term lockups and have limitations on the amount that may
be withdrawn based on a percentage of the total net asset value of the
fund, among other restrictions. All withdrawals are subject to
the general partner's approval. Major investment strategies for
both hedge fund of funds include long/short equity, market neutral,
distressed debt, and relative value. One fund's fair value has
been estimated using the net asset value per share and the other fund's
fair value is based on an ownership interest in partners' capital to which
a proportionate share of net assets is
attributed.
|
(PPL
Energy Supply)
PPL
Montana, a subsidiary of PPL Energy Supply, has a pension plan whose assets are
solely invested in the master trust, which is fully disclosed by PPL
(above). The fair value of this plan's assets of $87 million at
December 31, 2009 represents a 4.9% undivided interest in each asset and
liability of PPL's master trust, including each asset whose fair value
measurement was determined using significant unobservable inputs (Level
3).
Plan Assets - U.S. Other
Postretirement Benefit Plans
(PPL)
PPL's
investment strategy with respect to its other postretirement benefit obligations
is to fund VEBA trusts and a 401(h) account with voluntary contributions and to
invest in a tax efficient manner. Excluding the 401(h) account
included in the master trust, discussed in the U.S. Pensions Plans section
above, PPL's other postretirement benefit plans are invested in a mix of assets
for long-term growth with an objective of earning returns that provide liquidity
as required for benefit payments. These plans benefit from
diversification of asset types, investment fund strategies and investment fund
managers and therefore have no significant concentration of risk. The
only prohibited investments are investments in debt or equity securities issued
by PPL and its subsidiaries. Equity securities include investments in
domestic large-cap commingled funds. Securities issued by commingled
funds that invest entirely in debt securities are traded as equity units, but
treated by PPL as debt securities for asset allocation and target allocation
purposes. Securities issued by commingled money market funds that
invest entirely in money market securities are traded as equity units, but
treated by PPL as cash and cash equivalents for asset allocation and target
allocation purposes. The asset allocation for the VEBA trusts and the
target allocation, by asset class, at December 31, are detailed
below.
|
Asset
Class
|
Percentage
of
plan
assets
|
Permitted
Range
|
Target
Asset Allocation
|
||||||
|
2009
|
2008
|
2009
|
2009
|
||||||
|
U.S.
equity securities
|
54%
|
43%
|
45-65%
|
55%
|
|||||
|
Debt
securities (a)
|
37%
|
45%
|
30-50%
|
40%
|
|||||
|
Cash
and cash equivalents (b)
|
9%
|
12%
|
0-15%
|
5%
|
|||||
|
Total
|
100%
|
100%
|
100%
|
||||||
|
(a)
|
Includes
commingled debt funds and debt securities.
|
|
|
(b)
|
Includes
commingled money market fund.
|
The fair
value of assets in the U.S. other postretirement benefit plans by asset class
and level within the fair value hierarchy was:
|
December
31, 2009
|
||||||||||||||||
|
Fair
Value Measurements Using
|
||||||||||||||||
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
U.S.
equity securities:
|
||||||||||||||||
|
Large-cap
(a)
|
$
|
156
|
$
|
156
|
||||||||||||
|
Commingled
debt (b)
|
61
|
61
|
||||||||||||||
|
Commingled
money market funds
|
26
|
26
|
||||||||||||||
|
Debt
securities:
|
||||||||||||||||
|
Municipalities
(c)
|
46
|
46
|
||||||||||||||
|
Receivables
(d)
|
1
|
1
|
||||||||||||||
|
Total
VEBA trust assets
|
290
|
290
|
||||||||||||||
|
401(h)
account assets in master trust
|
11
|
$
|
6
|
5
|
||||||||||||
|
Fair
value - U.S. other postretirement benefit plans
|
$
|
301
|
$
|
6
|
$
|
295
|
||||||||||
|
(a)
|
Represents
investments in passively managed equity index funds that that are measured
against the S&P 500 Index.
|
|
|
(b)
|
Represents
investments in passively managed commingled funds invested in obligations
of the U.S. Treasury.
|
|
|
(c)
|
Represents
investments in a diverse mix of tax-exempt municipal
securities.
|
|
|
(d)
|
Represents
interest and dividends earned but not received as well as investments sold
but not yet settled.
|
The fair
value measurements of the domestic other postretirement benefit plan assets are
based on the same inputs and measurement techniques used to measure the U.S.
pension assets described above.
Plan Assets - U.K. Pension
Plans
(PPL
and PPL Energy Supply)
The
overall investment strategy of WPD's pension plans is developed by each plan's
independent trustees in its Statement of Investment Principles in compliance
with the U.K. Pensions Act of 1995 and other U.K. legislation. The
trustees' primary focus is to ensure that assets are sufficient to meet members'
benefits as they fall due with a longer term objective to reduce investment
risk. The investment strategy is intended to maximize investment
returns while not incurring excessive volatility in the funding
position. WPD's plans are invested in a wide diversification of asset
types, fund strategies and fund managers and therefore have no significant
concentration of risk. Equity securities primarily include
investments in U.K. and other international large and mid-cap
companies. Commingled funds that consist entirely of debt securities
are traded as equity units, but treated by WPD as debt securities for asset
allocation and target allocation purposes. These include investments
in U.K. corporate bonds and U.K. gilts. Debt securities include
corporate bonds of companies from diversified U.K. industries. The
only alternative investment is an investment in a real estate fund.
The asset
allocation and target allocation at December 31 of WPD's pension plans are
detailed below.
|
Asset
Class
|
Percentage
of plan assets
|
Target
Asset Allocation
|
|||||
|
2009
|
2008
|
2009
|
|||||
|
Equity
securities:
|
|||||||
|
U.K.
companies
|
22%
|
25%
|
18%
|
||||
|
European
companies (excluding the U.K.)
|
13%
|
11%
|
12%
|
||||
|
Asian-Pacific
companies
|
10%
|
10%
|
10%
|
||||
|
North
American companies
|
6%
|
7%
|
9%
|
||||
|
Emerging
markets companies
|
5%
|
1%
|
5%
|
||||
|
Currency
|
2%
|
2%
|
2%
|
||||
|
Global
Tactical Asset Allocation
|
1%
|
1%
|
3%
|
||||
|
Debt
securities (a)
|
35%
|
37%
|
33%
|
||||
|
Alternative
investments and cash
|
6%
|
6%
|
8%
|
||||
|
Total
|
100%
|
100%
|
100%
|
||||
|
(a)
|
Includes
commingled debt funds.
|
The fair
value of assets in the U.K. pension plans by asset class and level within the
fair value hierarchy was:
|
December
31, 2009
|
||||||||||||||||
|
Fair
Value Measurements Using
|
||||||||||||||||
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
5
|
$
|
5
|
||||||||||||
|
Equity
securities:
|
||||||||||||||||
|
U.K.
companies (a)
|
501
|
$
|
501
|
|||||||||||||
|
European
companies (excluding the U.K.) (b)
|
290
|
290
|
||||||||||||||
|
Asian-Pacific
companies (c)
|
242
|
242
|
||||||||||||||
|
North
American companies (d)
|
149
|
149
|
||||||||||||||
|
Emerging
markets companies (e)
|
110
|
110
|
||||||||||||||
|
Currency
(f)
|
42
|
42
|
||||||||||||||
|
Global
Tactical Asset Allocation (g)
|
30
|
30
|
||||||||||||||
|
Commingled
debt:
|
||||||||||||||||
|
U.K.
corporate bonds
|
308
|
308
|
||||||||||||||
|
U.K.
gilts
|
24
|
24
|
||||||||||||||
|
U.K.
index-linked gilts
|
489
|
489
|
||||||||||||||
|
Alternative
investments:
|
||||||||||||||||
|
Real
estate (h)
|
141
|
141
|
||||||||||||||
|
Fair
value - international pension plans
|
$
|
2,331
|
$
|
5
|
$
|
2,326
|
||||||||||
|
(a)
|
Represents
passively managed equity index funds that are measured against the FTSE
All Share Index.
|
|
|
(b)
|
Represents
passively managed equity index funds that are measured against the FTSE
Europe ex UK Index.
|
|
|
(c)
|
Represents
an actively managed equity index fund that aims to outperform 50% FTSE
Asia Pacific ex-Japan Index and 50% FTSE Japan Index.
|
|
|
(d)
|
Represents
passively managed equity index funds that are measured against the FTSE
North America Index.
|
|
|
(e)
|
Represents
passively managed equity index funds that are measured against the MSCI
Emerging Markets Index.
|
|
|
(f)
|
Represents
investments in unitized passive and actively traded currency
funds.
|
|
|
(g)
|
The
Global Tactical Asset Allocation investment strategy attempts to benefit
from short-term market inefficiencies by taking positions in worldwide
markets with the objective to profit from relative movements across those
markets.
|
|
|
(h)
|
Represents
investments in a unitized fund that owns and manages U.K. industrial and
commercial real estate with a strategy of earning current rental income
and achieving capital growth.
|
Except
for investments in real estate, the fair value measurements of WPD's pension
plan assets are based on the same inputs and measurement techniques used to
measure the U.S. pension assets described above.
Investments
in real estate represent holdings in a U.K. unitized fund whose fair value is
based upon a net asset value per share. The fund's net asset value is
based on the value of underlying properties that are independently appraised in
accordance with Royal Institution of Chartered Surveyors valuation standards at
least annually with quarterly valuation updates based on recent sales of similar
properties, leasing levels, property operations and/or market
conditions. The fund may be subject to redemption restrictions in the
unlikely event of a large forced sale in order to ensure other unit holders are
not disadvantaged.
Expected Cash Flows - U.S. Defined
Benefit Plans
(PPL)
There are
no cash contributions required for PPL's primary U.S. pension plan because
contribution requirements could be satisfied by applying prior year credit
balances. However, PPL contributed $120 million to its primary U.S.
pension plan in January 2010 to ensure future compliance with minimum funding
requirements.
PPL
sponsors various non-qualified supplemental pension plans for which no assets
are segregated from corporate assets. PPL expects to make
approximately $4 million of benefit payments under these plans in
2010.
PPL is
not required to make contributions to its other postretirement benefit plans but
has historically funded these plans in amounts equal to the postretirement
benefit costs recognized. Continuation of this past practice would
cause PPL to contribute $34 million to its other postretirement benefit plans in
2010.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid and the following federal subsidy payments
are expected to be received by the separate plan trusts.
|
Other
Postretirement
|
||||||||||||
|
Pension
|
Benefit
Payment
|
Expected
Federal Subsidy
|
||||||||||
|
2010
|
$
|
115
|
$
|
42
|
$
|
3
|
||||||
|
2011
|
123
|
47
|
3
|
|||||||||
|
2012
|
131
|
50
|
3
|
|||||||||
|
2013
|
145
|
55
|
4
|
|||||||||
|
2014
|
148
|
60
|
4
|
|||||||||
|
2015
- 2019
|
897
|
359
|
28
|
|||||||||
(PPL
Energy Supply)
There are
no contributions expected or required for the PPL Montana pension
plan.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid by the separate plan trusts.
|
Pension
|
Other
Postretirement
|
||||||||
|
2010
|
$
|
2
|
$
|
1
|
|||||
|
2011
|
3
|
2
|
|||||||
|
2012
|
4
|
2
|
|||||||
|
2013
|
4
|
2
|
|||||||
|
2014
|
5
|
2
|
|||||||
|
2015
- 2019
|
36
|
13
|
|||||||
Expected Cash Flows - U.K. Pension
Plans
(PPL
and PPL Energy Supply)
The
pension plans of WPD are subject to formal actuarial valuations every three
years, which are used to determine funding requirements. Future
contributions were evaluated in accordance with the latest valuation performed
as of March 31, 2007, in respect of WPD's principal pension scheme, to
determine contribution requirements for 2009 and forward. WPD expects
to make contributions of approximately $62 million in 2010. WPD is
currently permitted to recover in rates approximately 65% of its deficit funding
requirements for its primary pension plan. This recovery rate will
increase to 76% effective April 1, 2010.
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid by the separate plan trusts.
|
Pension
|
||||
|
2010
|
$
|
161
|
||
|
2011
|
165
|
|||
|
2012
|
170
|
|||
|
2013
|
174
|
|||
|
2014
|
179
|
|||
|
2015
- 2019
|
974
|
|||
(PPL,
PPL Energy Supply and PPL Electric)
Savings
Plans
Substantially
all employees of PPL's domestic subsidiaries are eligible to participate in
deferred savings plans (401(k)s). Employer contributions to the plans
approximated the following.
|
2009
|
2008
|
2007
|
||||||||
|
PPL
|
$
|
17
|
$
|
17
|
$
|
16
|
||||
|
PPL
Energy Supply
|
10
|
9
|
9
|
|||||||
|
PPL
Electric
|
4
|
4
|
4
|
|||||||
Employee
Stock Ownership Plan
PPL
sponsors a non-leveraged ESOP in which substantially all domestic employees,
excluding those of PPL Montana and the mechanical contractors, are enrolled on
the first day of the month following eligible employee
status. Dividends paid on ESOP shares are treated as ordinary
dividends by PPL. Under existing income tax laws, PPL is permitted to
deduct the amount of those dividends for income tax purposes and to contribute
the resulting tax savings (dividend-based contribution) to the
ESOP.
The
dividend-based contribution is used to buy shares of PPL's common stock and is
expressly conditioned upon the deductibility of the contribution for federal
income tax purposes. Contributions to the ESOP are allocated to
eligible participants' accounts as of the end of each year, based 75% on shares
held in existing participants' accounts and 25% on the eligible participants'
compensation.
Compensation
expense for ESOP contributions was $8 million in 2009 and $7 million in 2008 and
2007. These amounts were offset by the dividend-based contribution
tax savings and had no impact on PPL's earnings.
ESOP
shares outstanding at December 31, 2009, were 7,691,540 or 2% of total
common shares outstanding, and are included in all EPS
calculations.
Postemployment
Benefits
Certain
PPL subsidiaries provide health and life insurance benefits to disabled
employees and income benefits to eligible spouses of deceased
employees. Postemployment benefits charged to operating expenses were
not significant for 2009, 2008 and 2007.
Separation
Benefits
Certain
PPL subsidiaries provide separation benefits to eligible
employees. These benefits may be provided in the case of separations
due to performance issues, loss of job related qualifications or organizational
changes. Certain employees separated are eligible for cash severance
payments, outplacement services, accelerated stock award vesting, continuation
of group health and welfare coverage, and enhanced pension and postretirement
medical benefits. The type and amount of benefits provided is based
upon age, years of service and the nature of the
separation. Separation benefits are recorded when such amounts are
probable and estimable.
In
February 2009, PPL announced workforce reductions that resulted in the
elimination of approximately 200 management and staff positions across PPL's
domestic operations, or approximately 6% of PPL's non-union, domestic
workforce. The charges noted below consisted primarily of enhanced
pension and severance benefits under PPL's Pension Plan and Separation Policy
and were recorded to "Other operation and maintenance" expense on the Statement
of Income.
As a
result of the workforce reductions, PPL recorded a charge of $22 million ($13
million after tax) in 2009.
PPL
Energy Supply eliminated approximately 50 management and staff positions and
recorded a charge of $13 million ($8 million after tax) in
2009. Included in this charge was $8 million ($4 million after tax)
of allocated costs associated with the elimination of employees of PPL
Services.
PPL
Electric eliminated approximately 50 management and staff positions and recorded
a charge of $9 million ($5 million after tax) in 2009. Included in
this charge was $3 million ($1 million after tax) of allocated costs associated
with the elimination of employees of PPL Services.
Separation
benefits were not significant in 2008.
Separation
benefits recorded in 2007 were related to the elimination of positions at PPL's
Martins Creek plant due to the shutdown of two coal-fired units and the closing
of WPD's meter test station. Total costs recorded were $13 million
($9 million after tax). These costs included $4 million of cash
severance payments and enhanced pension benefits provided to domestic employees
of $6 million and $3 million provided to WPD employees. See "Defined
Benefits" above for more information.
(PPL
and PPL Energy Supply)
At
December 31, 2009 and 2008, subsidiaries of PPL and PPL Energy Supply owned
interests in the facilities listed below. The Balance Sheets of PPL
and PPL Energy Supply include the amounts noted in the following
table.
|
Ownership
Interest
|
Electric
Plant
|
Other
Property
|
Accumulated
Depreciation
|
Construction
Work in Progress
|
||||||||||
|
December 31,
2009
|
||||||||||||||
|
PPL
Generation
|
||||||||||||||
|
Generating
Stations
|
||||||||||||||
|
Susquehanna
|
90.00%
|
$
|
4,571
|
$
|
3,475
|
$
|
108
|
|||||||
|
Conemaugh
|
16.25%
|
206
|
99
|
9
|
||||||||||
|
Keystone
|
12.34%
|
199
|
61
|
4
|
||||||||||
|
Merrill
Creek Reservoir
|
8.37%
|
$
|
22
|
15
|
||||||||||
|
December 31,
2008
|
||||||||||||||
|
PPL
Generation
|
||||||||||||||
|
Generating
Stations
|
||||||||||||||
|
Susquehanna
|
90.00%
|
$
|
4,513
|
$
|
3,472
|
$
|
111
|
|||||||
|
Conemaugh
|
16.25%
|
206
|
93
|
1
|
||||||||||
|
Keystone
|
12.34%
|
105
|
58
|
64
|
||||||||||
|
Wyman
Unit 4 (a)
|
8.33%
|
15
|
7
|
|||||||||||
|
Merrill
Creek Reservoir
|
8.37%
|
$
|
22
|
14
|
||||||||||
|
(a)
|
See
Note 9 for information regarding the December 2009 sale of this
interest.
|
In
addition to the interests mentioned above, PPL Montana had a 50% leasehold
interest in Colstrip Units 1 and 2 and a 30% leasehold interest in Colstrip Unit
3 under operating leases. See Note 10 for additional
information. At December 31, 2009 and 2008, NorthWestern owned 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.
Each PPL
Generation subsidiary provides its own funding for its share of the
facility. Each receives a portion of the total output of the
generating stations equal to its percentage ownership. The share of
fuel and other operating costs associated with the stations is included in the
corresponding operating expenses on the Statements of Income.
Energy
Purchases, Energy Sales and Other Commitments
Energy Purchase
Commitments
(PPL
and PPL Energy Supply)
PPL and
PPL Energy Supply enter into long-term purchase contracts to supply the fuel
requirements for generation facilities. These contracts include
commitments to purchase coal, emission allowances, limestone, natural gas, oil
and nuclear fuel. These long-term contracts extend through 2019,
excluding a limestone contract that extends through 2030. PPL and PPL
Energy Supply also enter into long-term contracts for the storage and
transportation of natural gas. The long-term natural gas storage
contracts extend through 2015, and the long-term natural gas transportation
contracts extend through 2032. Additionally, PPL and PPL Energy
Supply have entered into long-term contracts to purchase power that extend
through 2017, excluding long-term power purchase agreements for the full output
of two wind farms that extend through 2027.
As part
of the purchase of generation assets from Montana Power, PPL Montana assumed a
power purchase and power sales agreement, which expires at December 31,
2010. In accordance with purchase accounting guidelines, PPL Montana
recorded a liability of $58 million as the fair value of the agreement at the
acquisition date. The liability is being reduced over the term of the
agreement as an adjustment to "Energy purchases" on the Statements of
Income. At December 31, 2009, the $11 million unamortized balance of
this liability was included in "Other current liabilities" on the Balance
Sheet. At December 31, 2008, the unamortized balance of this
liability was $24 million, of which $13 million was included in "Other current
liabilities" and $11 million was included in "Other deferred credits and
noncurrent liabilities" on the Balance Sheet.
In 1998,
PPL Electric recorded an $879 million loss accrual for above-market contracts
with NUGs, due to deregulation of its generation business. Effective
January 1999, PPL Electric began reducing this liability as an offset to "Energy
purchases" on the Statements of Income. This reduction is based on
the estimated timing of the purchases from the NUGs and projected market prices
for this generation. The final NUG contract expires in
2014. In connection with PPL's corporate realignment in 2000, the
remaining balance of this liability was transferred to PPL
EnergyPlus. At December 31, 2009, the unamortized balance of this
liability was $4 million, of which $1 million was included in "Other current
liabilities" and $3 million was included in "Other deferred credits and
noncurrent liabilities" on the Balance Sheet. At December 31, 2008,
the unamortized balance of this liability was $29 million, of which $25 million
was included in "Other current liabilities" and $4 million was included in
"Other deferred credits and noncurrent liabilities" on the Balance
Sheet.
In 2008,
PPL EnergyPlus acquired the rights to an existing long-term tolling agreement
associated with the capacity and energy of Ironwood. Under the
agreement, PPL EnergyPlus has control over the plant's dispatch into the
electricity grid and supplies the natural gas necessary to operate the
plant. The tolling agreement extends through 2021. See
Note 10 for additional information.
(PPL
and PPL Electric)
From 2007
through October 2009, PPL Electric conducted six competitive solicitations to
purchase electricity generation supply in 2010 for customers who do not choose
an alternative supplier. Average generation supply prices (per MWh)
for all six solicitations, including Pennsylvania gross receipts tax and an
adjustment for line losses, were $99.48 for residential customers and $100.52
for small commercial and small industrial 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 plan to purchase its PLR electricity
supply for January 2011 through May 2013. In August and October 2009,
PPL Electric conducted the first two of its 14 planned competitive
solicitations. A third solicitation was conducted in January
2010. The solicitations include a mix of long-term and short-term
purchases for customer supply, including contracts for load-following, spot,
block and alternative energy credits.
(PPL
Energy Supply and PPL Electric)
See Note
15 for information on the power supply agreements between PPL EnergyPlus and PPL
Electric.
Energy Sales
Commitments
(PPL
and PPL Energy Supply)
In
connection with its marketing activities or hedging strategy
for its power plants,
PPL Energy Supply has entered into long-term power sales contracts that extend
through 2023, excluding a long-term retail sales agreement for the full output
from a solar generator that extends through 2034. All long-term
contracts were executed at prices approximating market prices at the time of
execution.
(PPL
Energy Supply and PPL Electric)
See Note
15 for information on the power supply agreements between PPL EnergyPlus and PPL
Electric.
PPL Montana Hydroelectric
License Commitments
(PPL
and PPL Energy Supply)
PPL
Montana owns and operates 11 hydroelectric facilities and one storage reservoir
licensed by the FERC under long-term licenses pursuant to the Federal Power
Act. Pursuant to Section 8(e) of the Federal Power Act, the FERC
approved the transfer from Montana Power to PPL Montana of all pertinent
licenses and any amendments in connection with the Montana Asset Purchase
Agreement.
The Kerr
Dam Project license (50-year term) was jointly issued by the FERC to Montana
Power and the Confederated Salish and Kootenai Tribes of the Flathead
Reservation in 1985, and requires Montana Power to hold and operate the project
for 30 years (to 2015). The license requires Montana Power and PPL
Montana, as successor to Montana Power, to continue to implement a plan to
mitigate the impact of the Kerr Dam on fish, wildlife and their
habitats. Under this arrangement, PPL Montana has a remaining
commitment to spend $12 million between 2010 and 2015, in addition to the annual
rent it pays to the tribes. Between 2015 and 2025, the tribes have
the option to purchase, hold and operate the project for the remainder of the
license term, which expires in 2035.
PPL
Montana entered into two Memoranda of Understanding (MOUs) with state, federal
and private entities related to the issuance in 2000 of the FERC renewal license
for the nine dams for the Missouri-Madison project. The MOUs are
periodically updated and renewed and require PPL Montana to implement plans to
mitigate the impact of its projects on fish, wildlife and their habitats, and to
increase recreational opportunities. The MOUs were created to
maximize collaboration between the parties and enhance the possibility to
receive matching funds from relevant federal agencies. Under these
arrangements, PPL Montana has a remaining commitment to spend $36 million
between 2010 and 2040.
Legal
Matters
(PPL,
PPL Energy Supply and PPL Electric)
PPL and
its subsidiaries are involved in legal proceedings, claims and litigation in the
ordinary course of business. PPL and its subsidiaries cannot predict
the outcome of such matters, or whether such matters may result in material
liabilities.
(PPL
and PPL Energy Supply)
Montana Power Shareholders'
Litigation
In August
2001, a purported class-action lawsuit was filed by a group of Montana Power
shareholders against Montana Power, the directors of Montana Power, certain
advisors and consultants of Montana Power, and PPL Montana. The
plaintiffs allege, among other things, that Montana Power failed to obtain
shareholder approval for the sale of Montana Power's generation assets to PPL
Montana in 1999, and that the sale was null and void. Among the
remedies sought by the plaintiffs is the establishment of a "resulting and/or
constructive trust" on both the generation assets and all profits earned by PPL
Montana from the generation assets, plus interest on the amounts subject to the
trust. This lawsuit is pending in the U.S. District Court of Montana,
Butte Division. Settlement discussions resumed in June
2009. A proposed settlement of this lawsuit has been reached under
which plaintiffs will receive approximately $115 million. Under the
proposed settlement, PPL Montana is not required to pay any portion of this
settlement amount. The proposed settlement was filed with the judge
in November 2009 and is pending court approval. PPL and PPL Energy
Supply cannot predict the outcome of this matter.
Montana Hydroelectric
Litigation
In
November 2004, PPL Montana, Avista Corporation (Avista) and PacifiCorp commenced
an action for declaratory judgment in Montana First Judicial District Court
seeking a determination that no lease payments or other compensation for their
hydroelectric facilities' use and occupancy of streambeds in Montana can be
collected by the State of Montana. This request was brought following
the dismissal on jurisdictional grounds of the State of Montana's federal
lawsuit seeking such payments or compensation in the U.S. District Court of
Montana, Missoula Division. The State's federal lawsuit was founded
on allegations that the beds of Montana's navigable rivers became state-owned
trust property upon Montana's admission to statehood, and that the use of them
for placement of dam structures, affiliated structures and reservoirs should,
under a 1931 regulatory scheme enacted after all but one of the dams in question
were constructed, trigger lease payments for use of land beneath. In
July 2006, the Montana state court approved a stipulation by the State of
Montana that it is not seeking lease payments or other compensation from PPL
Montana for the period prior to PPL Montana's December 1999 acquisition of the
hydroelectric facilities.
In June
and October 2007, Pacificorp and Avista, respectively, entered into settlement
agreements with the State of Montana providing, in pertinent part, that each
company would make prospective lease payments of $50,000 and $4 million per year
for use of the State's navigable streambed (adjusted annually for inflation and
subject to other future adjustments). Under these settlement
agreements, the future annual payments resolved the State's claims for both past
and future compensation.
In the
October 2007 trial of this matter, the State of Montana asserted that PPL
Montana should make a prospective lease payment for use of the State's
streambeds of $6 million per year (adjusted annually for inflation) and a
retroactive compensation payment for the 2000-2006 period (including interest)
of $41 million. PPL Montana vigorously contested both such
assertions.
In June
2008, the District Court issued a decision awarding compensation of
approximately $34 million for prior years and approximately $6 million for 2007
compensation. The Court also deferred the determination of
compensation for 2008 and future years to the Montana State Land
Board.
PPL
Montana believes that the District Court's decision and a number of its pretrial
rulings are erroneous. In October 2008, PPL Montana filed an appeal
of the decision to the Montana Supreme Court and a stay of judgment, including a
stay of the Land Board's authority to assess compensation for 2008 and future
periods. Oral argument of the case was held before the Montana
Supreme Court in September 2009. For 2007 and subsequent years, PPL's
management believes it is probable that its hydroelectric projects will be
subject to annual estimated compensation ranging from $3 million to $6
million. PPL Montana's loss accrual at December 31, 2009 was $9
million, of which $8 million ($5 million after tax or $0.01 per share) was
recorded in 2009. PPL Montana cannot predict the outcome of this
matter.
PJM/MISO Billing
Dispute
(PPL,
PPL Energy Supply and PPL Electric)
In
September 2009, PJM reported that it had discovered a modeling error in the
market-to-market power flow calculations between PJM and the Midwest ISO
(MISO). The error was a result of incorrect modeling of certain
generation resources that have an impact on power flows across the PJM/MISO
border. PJM's preliminary estimate of the magnitude of the error is
approximately $77 million. To date, the MISO does not agree with
PJM's estimate. Informal settlement discussions on this issue have
commenced. PPL participates in markets in both the MISO and
PJM. The amount and timing of any payment by PJM to the MISO relating
to this modeling error is uncertain, as is the method by which PJM or the MISO
would allocate any such payment to PJM and the MISO participants.
PPL
cannot predict the outcome of this matter; however, the impact on PPL
subsidiaries is not expected to be material.
Regulatory
Issues
Pennsylvania
Activities
(PPL and PPL
Electric)
Certain
Pennsylvania legislators proposed legislation in 2009 to extend PLR generation
rate caps or otherwise limit cost recovery through rates for Pennsylvania
utilities beyond their transition periods, which in PPL Electric's case was
December 31, 2009. PPL and PPL Electric previously expressed
strong concern regarding the adverse consequences of such legislation on
customer service, system reliability, adequate future generation supply and PPL
Electric's financial viability. As generation rate caps are set to
expire for three other Pennsylvania electric delivery companies at the end of
2010, it is possible that a debate on rate caps, rate mitigation and the
creation of a state power authority may resume in 2010. PPL and PPL
Electric believe the enactment of legislation extending PPL Electric rate caps
would be a violation of federal law and the U.S. Constitution.
For
several years, PPL and PPL Electric worked with Pennsylvania legislators,
regulators and others to develop programs to help customers transition to market
rates after 2009, including rate mitigation, educational and energy conservation
programs. Two plans were proposed and approved by the
PUC. Under the first plan, residential and small commercial customers
could elect to pay additional amounts with their electric bills from mid-2008
through 2009, with such additional amounts, plus accrued interest of 6%, applied
to their 2010 and 2011 electric bills. Approximately 123,000
customers enrolled in the program, and at December 31, 2009, PPL Electric has
recorded a liability of $36 million related to this activity. Under
the second plan, eligible residential and eligible small-business customers
could elect to defer payment of any increase greater than 25% in their 2010
electric bills. Deferred amounts, plus 6% interest, will be paid by
customers over a one- or two-year period, depending on their electricity
use. All deferrals will be paid by the end of 2012.
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 Alternative Energy
Portfolio Standard
.
The law also
requires electric utilities to meet specified goals for reduction in customer
electricity usage and peak demand by specified dates. Utilities not
meeting the requirements of Act 129 are subject to significant
penalties.
Under Act
129, Electric Distribution Companies (EDCs) must develop and file an energy
efficiency and conservation plan (EE&C Plan) with the PUC and contract with
a conservation service provider to implement all or a portion of the EE&C
Plan. Act 129 requires EDCs to cause reduced electricity consumption
of 1% by 2011 and 3% by 2013, and reduced peak demand of 4.5% by
2013. EDCs will be able to recover the costs (capped at 2% of the
EDC's 2006 revenue) of implementing their EE&C Plans. In October
2009, the PUC approved PPL Electric's EE&C Plan. The plan
includes 14 programs, all of which are voluntary for customers. The
plan includes a proposed rate mechanism for recovery of all costs incurred by
PPL Electric to implement the plan.
Act 129
also requires installation of smart meters for new construction, upon the
request of consumers at their cost, or on a depreciation schedule not exceeding
15 years. Under Act 129, EDCs will be able to recover the costs of
providing smart metering technology. In August 2009, PPL Electric
filed its proposed smart meter technology procurement and installation plan with
the PUC. All of PPL Electric's metered customers currently have smart
meters installed at their service locations and PPL Electric's current advanced
metering technology generally satisfies the requirements of Act 129 and does not
need to be replaced. PPL Electric's smart meter plan proposes to
study, test and pilot applications to enhance and expand smart meter
capabilities. PPL Electric estimates these studies will cost
approximately $62 million over the next five years. PPL Electric has
proposed a rate mechanism for recovery of these costs. An
Administrative Law Judge has issued a recommended decision generally approving
PPL Electric's plan, but PPL Electric cannot predict whether the plan will be
approved.
Act 129
also requires the default service provider (DSP) to provide electric generation
supply service to customers pursuant to a PUC-approved competitive procurement
plan through auctions, requests for proposal and bilateral contracts at the sole
discretion of the DSP. Act 129 requires a mix of spot market
purchases, short-term contracts and long-term contracts (4 to 20 years, with
long-term contracts limited to up to 25% of the load unless otherwise approved
by the PUC). The DSP will be able to recover the costs associated
with a competitive procurement plan.
Under Act
129, the DSP competitive procurement plan must ensure adequate and reliable
service "at least cost to customers" over time. Act 129 grants the
PUC authority to extend long-term power contracts up to 20 years, if necessary,
to achieve the "least cost" standard. The PUC has approved PPL
Electric's procurement plan for the period January 1, 2011 through May 31,
2013 and PPL Electric has begun purchasing under that plan.
FERC
Transmission Rates
(PPL
and PPL Electric)
In August
2008, PPL Electric asked the FERC to change the method for calculating its
transmission rates to formula-based rates to support continued investment in its
transmission system. Under formula-based rates, a fixed earnings
level is set for the utility, and the utility annually adjusts its transmission
rates, subject to FERC review, to reflect cost changes. The process
offers an opportunity for public input. The proposed rate design
prevents over-recovery or under-recovery of the actual costs of providing
transmission delivery service. This request would not affect
generation charges or distribution rates. PPL Electric requested that
the proposed rate take effect November 1, 2008.
In
October 2008, the FERC accepted the proposed rate for filing, effective November
1, 2008, subject to refund, and set the matter for hearing, but held the
hearings in abeyance to establish settlement judge procedures. In May
2009, a settlement was reached by all interested parties which, among other
things, reduced PPL Electric's return on equity to approximately
11.70%. PPL Electric was granted approval to implement the
formula-based rate as established in the settlement, effective June 1,
2009. In August 2009, the FERC approved the
settlement. See Note 1 for information on a true-up of these
revenues.
California ISO and Western
Markets
(PPL
and PPL Energy Supply)
Through
its subsidiaries, PPL made $18 million of sales to the California ISO during the
period October 2000 through June 2001, $17 million of which has not been paid to
PPL subsidiaries. Given the myriad of electricity supply problems
faced by California electric utilities and the California ISO, PPL cannot
predict whether or when it will receive payment. At December 31,
2009, PPL continues to be fully reserved for non-payment for these
sales.
Regulatory
proceedings arising out of the California electricity supply controversy have
been filed at the FERC. The FERC has determined that all sellers of
energy into markets operated by the California ISO and the California Power
Exchange, including PPL Montana, should be subject to refund liability for the
period beginning October 2, 2000 through June 20, 2001, but the FERC has not yet
ruled on the exact amounts that the sellers, including PPL Montana, would be
required to refund. In decisions in September 2004 and August 2006,
the U.S. Court of Appeals for the Ninth Circuit held that the FERC had the
additional legal authority to order refunds for periods prior to October 2,
2000, and ordered the FERC to determine whether or not it would be appropriate
to grant such additional refunds. In February 2008, the FERC
initiated proceedings to determine whether it would be appropriate to grant
additional refunds.
In
November 2009, the FERC issued an order scheduling evidentiary hearings in 2010
on such refunds but has suspended certain of these proceedings and instituted
settlement procedures.
In June
2003, the FERC took several actions as a result of a number of related
investigations. The FERC terminated proceedings to consider whether
to order refunds for spot market bilateral sales made in the Pacific Northwest,
including sales made by PPL Montana, during the period December 2000 through
June 2001. In August 2007, the U.S. Court of Appeals for the Ninth
Circuit reversed the FERC's decision and ordered the FERC to consider additional
evidence. The FERC also commenced additional investigations relating
to "gaming" and bidding practices during 2000 and 2001, but neither PPL
EnergyPlus nor PPL Montana believes it is a subject of these
investigations.
In
February 2004, the Montana Public Service Commission initiated a limited
investigation of the Montana retail electricity market for the years 2000 and
2001, focusing on how that market was affected by transactions involving the
possible manipulation of the electricity grid in the western U.S. The
investigation includes all public utilities and licensed electricity suppliers
in Montana, including PPL Montana, as well as other entities that may possess
relevant information. In June 2004, the Montana Attorney General
served PPL Montana and more than 20 other companies with subpoenas requesting
documents, and PPL Montana has provided responsive documents to the Montana
Attorney General.
While PPL
and its subsidiaries believe that they have not engaged in any improper trading
or marketing practices affecting the California and western markets, PPL cannot
predict the outcome of the above-described investigations, lawsuits and
proceedings or whether any PPL subsidiaries will be the target of any additional
governmental investigations or named in other lawsuits or refund
proceedings.
PJM
RPM Litigation
(PPL,
PPL Energy Supply and PPL Electric)
In May
2008, a group of state public utility commissions, state consumer advocates,
municipal entities and electric cooperatives, industrial end-use customers and a
single electric distribution company (collectively, the RPM Buyers) filed a
complaint before the FERC objecting to the prices for capacity under the PJM
Reliability Pricing Model (RPM) that were set in the 2008-09, 2009-10 and
2010-11 RPM base residual auctions. The RPM Buyers requested that the
FERC reset the rates paid to generators for capacity in those periods to a
significantly lower level. Thus, the complaint requests that
generators be paid less for those periods through refunds and/or prospective
changes in rates. The relief requested in the complaint, if granted,
could have a material effect on PPL, PPL Energy Supply and PPL
Electric. PJM, PPL and numerous other parties have responded to the
complaint, strongly opposing the relief sought by the RPM Buyers. In
September 2008, the FERC entered an order denying the complaint. In
August 2009, the RPM Buyers appealed the FERC's decision to the U.S. Court of
Appeals for the Fourth Circuit. PPL cannot predict the outcome of
this proceeding.
In
December 2008, the PJM submitted amendments to certain provisions governing its
RPM capacity market. The amendments were intended to permit the
compensation available to suppliers that provide capacity, like PPL Energy
Supply, to increase. The PJM sought approval of the amendments in
time for them to be implemented for the May 2009 capacity auction (for service
in June 2012 through May 2013). Numerous parties, including PPL,
protested the PJM's filing. Certain of the protesting parties
proposed changes to the capacity market auction that would result in a reduction
in compensation to capacity suppliers. The changes proposed by the
PJM and by other parties in response to the PJM proposals could significantly
affect the compensation available to suppliers of capacity participating in
future RPM auctions. In March 2009, the FERC entered an order
approving in part and disapproving in part the changes proposed by the
PJM. In August 2009, the FERC issued an order granting rehearing in
part, denying rehearing in part and clarifying its March 2009
order. PPL cannot predict the outcome of this
proceeding. No request for rehearing or appeal of the August 2009
order has been timely filed.
FERC Market-Based Rate
Authority
(PPL
and PPL Energy Supply)
In
December 1998, the FERC authorized PPL EnergyPlus to make wholesale sales of
electric power and related products at market-based rates. In that
order, the FERC directed PPL EnergyPlus to file an updated market analysis
within three years after the order, and every three years
thereafter. Since then, periodic market-based rate filings with the
FERC have been made by PPL EnergyPlus, PPL Electric, PPL Montana and most of PPL
Generation's subsidiaries. These filings consisted of a Western
market-based rate filing for PPL Montana and an Eastern market-based rate filing
for most of the other PPL subsidiaries in the PJM region. The next
filings will be due later in 2010.
Currently,
a seller granted market-based rate authority by the FERC may enter into power
contracts during an authorized time period. If the FERC determines
that the market is not workably competitive or that the seller possesses market
power or is not charging "just and reasonable" rates, it may institute
prospective action, but any contracts entered into pursuant to the FERC's
market-based rate authority remain in effect and are generally subject to a high
standard of review before the FERC can order changes. Recent court
decisions by the U.S. Court of Appeals for the Ninth Circuit have raised issues
that may make it more difficult for the FERC to continue its program of
promoting wholesale electricity competition through market-based rate
authority. These court decisions permit retroactive refunds and a
lower standard of review by the FERC for changing power contracts, and could
have the effect of requiring the FERC in advance to review most, if not all,
power contracts. In June 2008, the U.S. Supreme Court reversed one of
the decisions of the U.S. Court of Appeals for the Ninth Circuit, thereby
upholding the higher standard of review for modifying contracts. The
FERC has not yet taken action in response to these recent court
decisions. At this time, PPL cannot predict the impact of these court
decisions on the FERC's future market-based rate authority program or on PPL's
business.
IRS Synthetic Fuels Tax
Credits
(PPL
and PPL Energy Supply)
PPL,
through its subsidiaries, had interests in two synthetic fuel production
facilities: the Somerset facility, located in Pennsylvania, and the
Tyrone facility, located in Kentucky. PPL received tax credits
pursuant to Section 29/45K of the Internal Revenue Code based on the sale of
synthetic fuel from these facilities. The Section 29/45K tax credit
program expired at the end of 2007, and production of synthetic fuel at these
facilities and all other synthetic fuel operations ceased as of
December 31, 2007. The facilities were dismantled and retired in
2008.
In April
2008, the IRS published the domestic first purchase price (DFPP) for 2007
indicating that the DFPP reference price increased above PPL's estimated price
levels for 2007 and the inflation-adjusted phase-out range decreased from PPL's
estimate for 2007. Therefore, PPL recorded an expense of $13 million
($0.04 per share, basic and diluted, for PPL) in 2008, to "Income Taxes" on the
Statement of Income to account for this difference.
Energy Policy Act of 2005 -
Reliability Standards
(PPL,
PPL Energy Supply and PPL Electric)
In August
2005, the Energy Policy Act of 2005 (the 2005 Energy Act) became
law. The 2005 Energy Act substantially affects the regulation of
energy companies, amends federal energy laws and provides the FERC with new
oversight responsibilities. Among the important changes in this law
is the appointment of the NERC to establish and enforce mandatory reliability
standards (Reliability Standards) regarding the bulk power
system. The FERC oversees this process and independently enforces the
Reliability Standards.
The
Reliability Standards have the force and effect of law and apply to certain
users of the bulk power electricity system, including electric utility
companies, generators and marketers. The FERC has indicated it
intends to enforce vigorously the Reliability Standards using, among other
means, civil penalty authority. Under the Federal Power Act, the FERC
may assess civil penalties of up to $1 million per day, per violation, for
certain violations. The first group of Reliability Standards approved
by the FERC became effective in June 2007.
Since
2007, PPL Electric and certain subsidiaries of PPL Energy Supply have
self-reported to the RFC potential violations of certain applicable reliability
requirements and submitted accompanying mitigation plans, the resolutions of
which potential violation reports are pending. Any RFC determination
concerning the resolution of violations of the Reliability Standards remains
subject to the approval of the NERC and the FERC. PPL Electric has
reached agreement with the RFC concerning some, but not all, of the reliability
matters reported by it to the RFC. PPL Electric and PPL Energy Supply
cannot predict the outcome of these matters.
In the
course of implementing its program to ensure compliance with the Reliability
Standards by those PPL affiliates subject to the standards, certain other
instances of potential non-compliance will continue to be identified from time
to time. PPL cannot predict the fines or penalties that may be
imposed.
U.K. Overhead Electricity
Networks
(PPL
and PPL Energy Supply)
In 2002,
for safety reasons, the U.K. Government issued guidance that low voltage
overhead electricity networks within three meters horizontal clearance of a
building should either be insulated or relocated. This imposed a
retroactive requirement on existing assets that were built with lower
clearances. In 2008, following extensive discussion, the U.K.
Government determined that the U.K. electricity network should comply with the
guidance issued. WPD estimates that the cost of compliance will be
approximately $93 million. The projected expenditures over the next
five years have been allowed to be recovered through rates and it is expected
that expenditures beyond this five year period will also be recovered through
rates. The Government has determined that WPD (South Wales) should
comply by 2015 and WPD (South West) by 2018.
In
January 2009, to improve network reliability the U.K. Government enforced a
regulation requiring network operators to implement a risk-based program over 25
years to clear trees within falling distance of key high-voltage overhead
lines. WPD estimates that the cost of compliance will be
approximately $107 million over the 25-year period. The projected
expenditures over the next five years have been allowed to be recovered through
rates and it is expected that expenditures beyond this five year period will
also be recovered through rates.
Environmental
Matters - Domestic
(PPL,
PPL Energy Supply and PPL Electric)
Due to
the environmental issues discussed below or other environmental matters, PPL
subsidiaries may be required to modify, curtail, replace or cease operating
certain facilities or operations to comply with statutes, regulations and other
requirements of regulatory bodies or courts. In this regard, PPL
subsidiaries also may incur capital expenditures or operating expenses in
amounts which are not now determinable, but could be significant.
Air
(PPL and PPL Energy
Supply)
The Clean
Air Act addresses, among other things, emissions causing acid deposition,
installation of best available control technologies for new or substantially
modified sources, attainment of federal ambient air quality standards, toxic air
emissions and visibility standards in the U.S. Amendments to the
Clean Air Act requiring additional emission reductions are likely to continue to
be proposed in the U.S. Congress. The Clean Air Act allows states to
develop more stringent regulations and in some instances, as discussed below,
Pennsylvania and Montana have done so.
Clean
Air Interstate Rule (CAIR)
Citing
its authority under the Clean Air Act, in 1997, the EPA developed new standards
for ambient levels of ozone and fine particulates in the U.S. To
facilitate attainment of these standards, the EPA promulgated CAIR for 28
midwestern and eastern states, including Pennsylvania, to reduce sulfur dioxide
emissions by about 50% by 2010 and to extend the current seasonal program for
reduction in nitrogen oxides emissions to a year-round program starting in
2009. Starting in 2015, CAIR requires further reductions in the CAIR
region, in sulfur dioxide of 30% from 2010 levels, and nitrogen oxides during
the ozone season of approximately 17% from 2009 levels. CAIR allows
these reductions to be achieved through cap-and-trade programs.
In July
2008, the United States Court of Appeals for the D.C. Circuit (the U.S. Circuit
Court) issued a ruling that invalidated CAIR in its entirety, including its
cap-and-trade program.
As a
result of this decision, in 2008, PPL determined that all of the annual nitrogen
oxide allowances purchased by PPL EnergyPlus pursuant to CAIR were no longer
required, had no value and, therefore, recorded a pre-tax impairment charge of
$33 million ($20 million after tax). Further, PPL EnergyPlus recorded
in the third quarter 2008 an additional charge and corresponding reserve of $12
million pre-tax ($7 million after tax) related to its sale of certain annual
nitrogen oxide allowance put options. These charges, recorded in PPL
and PPL Energy Supply's Supply segment, are included in "Other operation and
maintenance" expense on the Statement of Income. The U.S. Circuit
Court's decision did not impact PPL EnergyPlus' seasonal nitrogen oxide
allowances.
In
December 2008, the U.S. Circuit Court remanded CAIR to the EPA without vacating
the cap-and-trade program, effectively reinstating, at least temporarily, CAIR
and its requirements for annual-reduction of nitrogen oxides beginning in 2009
and for further reduction in sulfur dioxide by requiring the surrender of two
acid rain allowances for every ton of sulfur dioxide emitted beginning in
2010. As a result of this December 2008 ruling and associated
delivery of allowances under other option contracts that were not in dispute,
the reserve recorded in the third quarter of 2008 of $12 million pre-tax ($7
million after-tax) related to certain annual nitrogen oxide allowance put
options was revised in the fourth quarter of 2008 to $9 million pre-tax
($5 million after tax).
See Note
17 for information on impairments recorded in 2009 related to sulfur dioxide
emission allowances.
To
continue meeting the sulfur dioxide reduction requirements under the acid rain
provisions of the Clean Air Act, and the reductions required by CAIR (remanded
by the U.S. Circuit Court, but currently in place), PPL installed and is
operating scrubbers at its Montour and Brunner Island plants. In
addition, with respect to compliance with annual and ozone season nitrogen oxide
reduction requirements, PPL utilizes SCRs and combustion controls at Montour
Units 1 and 2, and combustion controls at Brunner Island Units 1, 2 and
3. Additional emission allowances, when needed, are purchased in the
open market.
The
ultimate disposition of CAIR's cap-and-trade program and the value of annual
nitrogen oxide allowances, as well as sulfur dioxide allowances, remain
uncertain. If the EPA revises CAIR to require more stringent emission
reductions or revises CAIR to eliminate or limit the regional cap-and-trade
program, the costs of compliance are not now determinable, but could be
significant.
Further
reductions in sulfur dioxide and nitrogen oxide emissions, beyond those required
by CAIR, could be required as a result of more stringent national ambient air
quality standards for ozone, nitrogen dioxide, sulfur dioxide and fine
particulates. If additional reductions were to be required, the costs
are not now determinable, but could be significant.
Mercury
and other Hazardous Air Pollutants
Citing
its authority under the Clean Air Act, in May 2005, the EPA issued the Clean Air
Act Mercury Regulations (CAMR) affecting coal-fired power
plants. These regulations establish a cap-and-trade program to take
effect in two phases, with the first phase to begin in January 2010, and the
second, more stringent, phase to begin in January 2018. Because of a
February 2008 decision by the U.S. Circuit Court of Appeals overturning CAMR,
the EPA is proceeding to develop standards imposing MACT for mercury emissions
and other hazardous air pollutants from electric generating
units. Under a recent proposed settlement, the EPA is planning to
issue final MACT standards by November 2011. In order to develop
these standards, the EPA is collecting information from coal-and-oil-fired
electric utility steam generating units. The costs of complying with
the final MACT standards are not now determinable, but could be
significant.
Pennsylvania
adopted mercury emission standards more stringent than CAMR. However,
PPL challenged those rules under the provisions of the Pennsylvania Air
Pollution Control Act in light of the federal court decision overturning CAMR,
and in December 2009, the Pennsylvania Supreme Court declared the Pennsylvania
mercury rules invalid and unenforceable.
In 2006,
Montana finalized its mercury emission rules that require, by 2010, every
coal-fired generating plant in Montana to achieve reductions more stringent than
CAMR's 2018 requirements. PPL has installed chemical injection
systems to meet these requirements.
Regional
Haze and Visibility
The Clean
Air Visibility Rule was issued by the EPA in June 2005, to address regional haze
or regionally-impaired visibility caused by multiple sources over a wide
area. The rule requires Best Available Retrofit Technology (BART) for
certain electric generating units. Under the BART rule, PPL submitted
to the Pennsylvania DEP its analyses of the visibility impacts of particulate
matter emissions from Martins Creek Units 3 and 4, Brunner Island Units 2 and 3
and Montour Units 1 and 2. No analysis was submitted for sulfur
dioxide or nitrogen oxides because the EPA determined that meeting the
requirements for CAIR also meets the BART requirements for those
pollutants. PPL's analyses have shown that because PPL had already
upgraded its particulate emissions controls at Montour Units 1 and 2 and Brunner
Island Units 2 and 3 further controls are not justified as there would be little
corresponding visibility improvement. PPL has not received comments
from the Pennsylvania DEP on these submissions.
Also
under the BART rule, PPL submitted to the EPA its analyses of the visibility
impacts of sulfur dioxide, nitrogen oxides and particulate matter emissions for
Colstrip Units 1 and 2 and Corette. PPL's analyses concluded that
further reductions are not needed. The EPA responded to PPL's reports
for Colstrip and Corette and requested further information and
analysis. PPL completed further analysis and submitted addendums to
its initial reports for Colstrip and Corette. In February 2009, PPL
received an information request for additional data related to the Colstrip
generating station non-BART affected emission sources. PPL responded
to this request in March 2009. PPL has not received comments from the
EPA on these submissions.
PPL
cannot predict whether any additional reductions will be required in
Pennsylvania or Montana. If additional reductions are required, the
costs are not now determinable, but could be significant.
New
Source Review (NSR)
The EPA
has reinitiated its NSR enforcement efforts. This initiative targets
older, coal-fired power plants. The EPA has asserted that
modification to these plants has increased their emissions and consequently they
are subject to more stringent NSR requirements under the Clean Air
Act. In April 2009, PPL received EPA information requests for its
Montour and Brunner Island plants. PPL has met with the EPA and
exchanged information regarding this matter. The requests are similar
to those that PPL received several years ago for its Colstrip, Corette and
Martins Creek plants. PPL's response to the request for Montour and
Brunner Island is currently on hold pending further discussions with the
EPA. PPL cannot predict the outcome of this matter.
In
January 2009, PPL and other companies that own or operate the Keystone plant
received a notice of violation from the EPA alleging that certain projects were
undertaken without proper NSR compliance. PPL cannot predict the
outcome of this matter.
States
and environmental groups also have initiated enforcement actions and litigation
alleging violations of the NSR regulations by coal-fired plants, and PPL is
unable to predict whether such actions will be brought against any of PPL's
plants.
If PPL is
found to have violated NSR regulations, PPL would, among other things, be
required to install best available control technology for any pollutant found to
have significantly increased due to a major plant modification. The
costs to install and operate such technology are not now determinable, but could
be significant.
Pursuant
to the 2007 U.S. Supreme Court decision on global climate change, as discussed
below, the EPA is expected to regulate carbon dioxide emissions in
2010. Such regulation would subject carbon dioxide emissions to NSR
regulations. As a result, in October 2009, the EPA published its
proposal to require large industrial facilities that annually emit at least
25,000 tons of greenhouse gases, including carbon dioxide, to obtain
construction and operating permits covering significant increases in these
emissions if the facility undergoes any major modification or during initial
construction. If the modifications result in emissions increases
exceeding certain thresholds, which the EPA has not yet established, the plant
will need to conduct an analysis of, and possibly implement, best available
control technology for carbon dioxide emissions. To date, the EPA has
not provided official guidance, but has indicated that it may look at efficiency
projects as possible Best Available Control Technology for carbon dioxide
emissions. The implications of these developments are uncertain and
any associated costs are not now determinable, but could be
significant.
Opacity
From time
to time environmental concerns are raised with respect to visible opacity of
emissions from our power plants. PPL addresses these issues on a case
by case basis. If it is determined that actions must be taken to
address visible opacity issues, such actions could result in costs that are not
now determinable, but could be significant.
Global
Climate Change
There is
concern nationally and internationally about global climate change and the
possible contribution of greenhouse gas emissions including, most significantly,
carbon dioxide from the combustion of fossil fuels. This has resulted
in increased demands for carbon dioxide emission reductions by investors,
environmental organizations, government agencies and the international
community. These demands and concerns have led to increased federal
legislative proposals, actions at regional, state and local levels, as well as
litigation relating to greenhouse gas emissions. Of particular note,
in April 2007, the U.S. Supreme Court held that the EPA has the authority to
regulate greenhouse gas emissions from new motor vehicles under the Clean Air
Act. More recently, in September 2009, the U.S. Court of Appeals for
the Second Circuit reversed a federal district court's decision and ruled that
several states and public interest groups, as well as the City of New York,
could sue five electric utility companies under federal common law for allegedly
causing a public nuisance as a result of their emissions of greenhouse
gases. Additional litigation in federal and state courts over these
issues is continuing.
As a
result of the 2007 Supreme Court's decision, in 2008, the EPA issued an "Advance
Notice of Proposed Rulemaking," proposing alternative approaches to regulate
carbon dioxide emissions. The EPA is moving forward with regulation
of greenhouse gas emissions under the Clean Air Act. In 2009, the EPA
also issued a rule, effective January 1, 2010, requiring economy-wide reporting
of greenhouse gas emissions and in December 2009, issued a final endangerment
finding that greenhouse gases contribute to air pollution and may endanger
public health or welfare. The EPA's proposed light-duty vehicle
emissions standards are expected to be finalized by March 31, 2010,
leading to regulation of greenhouse gas emissions under the New Source Review
provisions of the Clean Air Act. Accordingly, unless Congress acts
sooner, it appears likely that greenhouse gas emissions will be regulated by the
EPA.
In June
2009, the U.S. House of Representatives passed H.R. 2454, the American Clean
Energy and Security Act of 2009. A key element affecting PPL includes
a declining cap on carbon emissions beginning in 2012, which requires a three
percent reduction in greenhouse gas emissions (below 2005 levels) by 2012,
increasing to 83% by 2050. The legislation also would require that
electric utilities meet a mandatory 20% renewable energy supply and energy
efficiency requirement by 2020. In September 2009, S. 1733, the Clean
Energy, Jobs and American Power Act, a comprehensive climate change bill, was
introduced in the U.S. Senate. The Senate Committee on Environment
and Public Works approved S.1733 in November 2009. Debate on climate
legislation continues in Congress; however, given other competing legislative
priorities, the timing and elements of any future legislation addressing
greenhouse gas emission reductions and renewable energy requirements are
uncertain.
Renewable
electricity standards are currently included in a separate Senate bill, S.1462,
the American Clean Energy Leadership Act of 2009, which passed in the Senate
Energy Committee in June 2009. Under this bill, electric utilities
would be required by 2021 to meet a 15% standard through renewable sources of
energy and energy efficiency.
At the
regional level, ten northeastern states signed a Memorandum of Understanding
(MOU) agreeing to establish a greenhouse gas emission cap-and-trade program,
called the Regional Greenhouse Gas Initiative (RGGI). The program
commenced in January 2009 and calls for stabilization of carbon dioxide
emissions, at base levels established in 2005, from electric power plants with
capacity greater than 25 MW. The MOU also provides for a 10%
reduction in carbon dioxide emissions from base levels by 2019.
Pennsylvania
has not stated an intention to join RGGI, but has enacted the Pennsylvania
Climate Change Act of 2008 (PCCA). The PCCA established a Climate
Change Advisory Committee to advise the DEP on the development of a Climate
Change Action Plan. In December 2009, the Advisory Committee
finalized its Climate Change Action Report which identifies specific actions
that could result in reducing greenhouse gas emissions by 30% by
2020. Some of the proposed actions, such as a mandatory 5% efficiency
improvement at power plants, could be technically unachievable. In
addition, legislation has been introduced in the Pennsylvania House of
Representatives that would, if enacted, significantly increase renewable and
solar supply requirements.
In the
Western U.S., 11 states, including Montana, and Canadian provinces are members
of the Western Climate Initiative (WCI). The WCI has established a
goal of reducing carbon dioxide emissions 15% below 2005 levels by 2020 and is
currently developing greenhouse gas emission allocations, offsets, and reporting
recommendations.
PPL has
conducted an inventory of its carbon dioxide emissions and is continuing to
evaluate options for reducing, avoiding, off-setting or sequestering its carbon
dioxide emissions. In 2009, PPL's power plants emitted in excess of
approximately 25 million tons of carbon dioxide (based on PPL's equity share of
these assets).
PPL
understands there are financial, regulatory and logistical uncertainties related
to greenhouse gas reductions and the implementation of renewable energy
mandates. These will need to be resolved before the impact of such
requirements on PPL can be meaningfully estimated. Such
uncertainties, among others, include the need to provide back-up supply to
augment intermittent renewable generation, potential generation oversupply that
could result from such renewable generation and back-up, impacts to the PJM
capacity market and the need for substantial changes to transmission and
distribution systems to accommodate renewable energy; which uncertainties are
not directly addressed by the proposed legislation. PPL cannot
predict at this time the effect on its future competitive position, results of
operation, cash flows and financial position, of any greenhouse gas emission,
renewable energy mandate or other global climate change requirements that may be
adopted, although the costs to implement and comply with any such requirements
could be significant.
Water/Waste
(PPL and PPL Energy
Supply)
Martins
Creek Fly Ash Release
In 2005,
there was a release of approximately 100 million gallons of water containing fly
ash from a disposal basin at the Martins Creek plant used in connection with the
operation of the two 150 MW coal-fired generating units at the
plant. This resulted in ash being deposited onto adjacent roadways
and fields, and into a nearby creek and the Delaware River. The leak
was stopped, and PPL determined that the release was caused by a failure in the
disposal basin's discharge structure. PPL conducted extensive
clean-up and completed studies, in conjunction with a group of natural resource
trustees and the Delaware River Basin Commission, evaluating the effects of the
release on the river's sediment, water quality and ecosystem.
The
Pennsylvania DEP filed a complaint in Pennsylvania Commonwealth Court against
PPL Martins Creek and PPL Generation, alleging violations of various state laws
and regulations and seeking penalties and injunctive relief. PPL and
the Pennsylvania DEP have settled this matter. The settlement
required a payment of $1.5 million in penalties and reimbursement of the DEP's
costs. PPL made this payment in the second quarter of
2008. The settlement also requires PPL to submit a report on the
completed studies of possible natural resource damages. PPL submitted
the assessment report to the Pennsylvania and New Jersey regulatory
agencies in 2007 and has continued discussing potential natural resource damages
with the agencies.
Through
December 31, 2009, PPL Energy Supply has spent $28 million for remediation
and related costs and an immaterial remediation liability
remained. PPL and PPL Energy Supply cannot be certain of the outcome
of the natural resource damage assessment or the associated costs, the outcome
of any lawsuit that may be brought by citizens or businesses or the exact nature
of any other regulatory or other legal actions that may be initiated against
PPL, PPL Energy Supply or their subsidiaries as a result of the disposal basin
release.
Basin
Seepage - Pennsylvania
Seepages
have been detected at active and retired wastewater basins at various PPL
plants, including the Montour and Brunner Island generating
facilities. PPL has completed an assessment of some of the seepages
at the Montour and Brunner Island facilities and is working with the
Pennsylvania DEP to implement abatement measures for those
seepages. PPL continues to assess other seepages at the Brunner
Island facility. PPL currently plans to spend up to $64 million to
upgrade and/or replace certain wastewater facilities in response to the seepages
and for other facility changes. The potential additional cost to
address the identified seepages or other seepages at all of PPL's Pennsylvania
plants is not now determinable, but could be significant.
Basin
Seepage - Montana
In May
2003, approximately 50 plaintiffs brought an action against PPL Montana and the
other owners of the Colstrip plant alleging property damage from seepage from
the freshwater and wastewater ponds at Colstrip. In July 2008, the
plaintiffs and the owner-defendants remaining after dismissal of NorthWestern,
due to its bankruptcy, executed a settlement agreement. PPL Montana's
share of the settlement was approximately $8 million. In 2008, PPL
Montana recorded an insignificant reserve for its share of potential additional
settlements with three property owners living near the original plaintiffs but
who were not parties to the lawsuit. In the fourth quarter of 2009,
PPL Montana settled with two of these property owners. PPL Montana
may incur additional costs related to the potential claims, including additional
groundwater investigations and any related remedial measures, which are not now
determinable, but could be significant.
In 2007,
six plaintiffs filed a separate lawsuit in the Montana Sixteenth Judicial
District Court against the Colstrip plant owners asserting similar property
damage claims as were asserted by the plaintiffs in the May 2003
complaint. The lawsuit is in its initial stages of discovery and
investigation, and PPL Montana is unable to predict the outcome of these
proceedings. PPL Montana has undertaken certain groundwater
investigations and remediation at the Colstrip plant to address groundwater
contamination alleged by the plaintiffs, as well as other groundwater
contamination at the plant. PPL Montana may incur further costs based
on the outcome of this lawsuit and its additional groundwater investigations and
any related remedial measures, which are not now determinable, but could be
significant.
Other
Issues
In 2006,
the EPA significantly decreased to 10 parts per billion (ppb), the drinking
water standard related to arsenic. In Pennsylvania and Montana, this
arsenic standard has been incorporated into the states' water quality standards
and could result in more stringent limits to PPL's NPDES permits for its
Pennsylvania and Montana plants. Recently, the EPA developed a draft
risk assessment of arsenic that increases the cancer risk exposure by more than
20 times, which would lower the current standard from 10 ppb to 0.1
ppb. If the lower standard became effective, very expensive treatment
would be required to attempt to meet the standard and, at this time, there is no
assurance that it could be achieved.
The EPA
finalized requirements in 2004 for new or modified cooling water intake
structures. These requirements affect where generating facilities are
built, establish intake design standards and could lead to requirements for
cooling towers at new and modified power plants. Another rule,
finalized in 2004, that addressed existing structures was withdrawn following a
2007 decision by the U.S. Court of Appeals for the Second Circuit. In
2008, however, the U.S. Supreme Court ruled that the EPA has discretion to use
cost-benefit analysis in determining the best technology available for
minimizing adverse environmental impact. The EPA is developing a new
rule which is expected to be finalized in 2012. How the cost-benefit
analysis will be employed, if incorporated, as well as other issues raised by
the Second Circuit Court (not reviewed by the U.S. Supreme Court) and actions
the states may take on their own could result in stricter standards for existing
structures that could impose significant costs on PPL subsidiaries.
In
October 2009, the EPA released its Final Detailed Study of the Steam Electric
Power Generating effluent limitations guidelines and standards. Draft
regulations that would include revisions to the effluent limitations guidelines
are expected to be published in September 2011, with final regulations to be
effective September 2013.
PPL
expects the revised guidelines and standards to be more stringent than the
current standards, which could result in more stringent discharge permit
limits.
PPL has
signed a consent order with the Pennsylvania DEP under which it will take
further actions to minimize the possibility of fish kills at its Brunner Island
plant. Fish are attracted to warm water in power plant discharge
channels, especially during cold weather. In the past, fish kills
have occurred at Brunner Island when debris at intake pumps resulted in a unit
trip or reduction in load, causing a sudden change in water temperature in the
discharge channel when fish were present. In 2008, PPL paid a nominal
penalty to the DEP for fish kills at Brunner Island that occurred in 2008 and
2007.
PPL has
committed to construct a barrier to prevent debris from entering the intake
area. PPL expects to construct the debris barrier in 2010 at a cost
of approximately $4 million. PPL has also committed to
investigate alternatives to exclude fish from the discharge area. PPL
will need to implement one of these fish exclusion alternatives if a fish kill
occurs after the cooling towers become operational at Brunner Island in
2010.
The EPA
is considering establishing regulations under the Resource Conservation and
Recovery Act (RCRA) that could impact the disposal and management of coal
combustion products (CCPs), including ash and scrubber wastes and other
by-products. Following the large ash release at a Tennessee Valley
Authority site in Tennessee in December 2008 and subsequent widespread media
coverage, the EPA, under pressure from certain environmental groups and
legislators, has committed to proposing CCP regulations. Draft
regulations are expected in 2010. The EPA has been seeking
information from the power industry as it considers whether or not to regulate
CCPs as hazardous waste, and PPL has responded to the EPA's
requests. The EPA conducted a follow-up inspection of PPL Montana's
Colstrip plant and PPL's Martins Creek plant. PPL is implementing
certain actions in response to recommendations from these
inspections. In June 2009, the EPA's Office of Enforcement and
Compliance Assurance issued a much broader information request to Colstrip and
18 other non-affiliated plants, seeking information under the RCRA, the Clean
Water Act and the Emergency Planning and Community Right-to-Know
Act. PPL responded to the EPA's broader information
request. Although the EPA's enforcement office issued the request,
the EPA has not necessarily concluded that the plants are in violation of any
EPA requirements. The EPA conducted a multi-media inspection at
Colstrip in August 2009 and has not yet issued a report from that
inspection. PPL cannot predict at this time the outcome of these
matters or the requirements of the EPA's regulations and what impact, if any,
they would have on PPL's facilities, but the costs to PPL could be
significant.
Superfund and Other
Remediation
(PPL,
PPL Energy Supply and PPL Electric)
PPL
Electric is a potentially responsible party at several sites listed by the EPA
under the federal Superfund program, including the Columbia Gas Plant Site, the
Metal Bank site and the Ward Transformer site. Clean-up actions have
been or are being undertaken at all of these sites, the costs of which have not
been significant to PPL. However, should the EPA require different or
additional measures in the future, or should PPL's share of costs at multi-party
sites increase significantly more than currently expected, the costs to PPL
could be significant.
PPL
Electric has been remediating several sites that were not being addressed under
another regulatory program such as Superfund, but for which PPL Electric may be
liable for remediation. These include a number of coal gas
manufacturing facilities formerly owned or operated by a predecessor to PPL
Electric.
Depending
on the outcome of investigations at sites where investigations have not begun or
have not been completed, the costs of remediation and other liabilities could be
substantial. PPL and its subsidiaries also could incur other
non-remediation costs at sites included in the consent orders or other
contaminated sites, the costs of which are not now determinable, but could be
significant.
The EPA
is evaluating the risks associated with naphthalene, a chemical by-product of
coal gas manufacturing. As a result of the EPA's evaluation,
individual states may establish stricter standards for water quality and soil
cleanup. This could require several PPL subsidiaries to take more
extensive assessment and remedial actions at former coal gas manufacturing
facilities. The costs to PPL of complying with any such requirements
are not now determinable, but could be significant.
(PPL
and PPL Energy Supply)
Under the
Pennsylvania Clean Streams Law, subsidiaries of PPL Generation are obligated to
remediate acid mine drainage at former mine sites and may be required to take
additional steps to prevent potential acid mine drainage at previously capped
refuse piles. One PPL Generation subsidiary is pumping mine water at
two mine sites and treating water at one of these sites. Another PPL
Generation subsidiary has installed a passive wetlands treatment system at a
third site. At December 31, 2009, PPL Energy Supply had accrued
a discounted liability of $24 million to cover the costs of pumping and treating
groundwater at the two mine sites for 50 years and for operating and maintaining
passive wetlands treatment at the third site. PPL Energy Supply
discounted this liability based on risk-free rates at the time of the mine
closures. The weighted average rate used was
8.04%. Expected undiscounted payments are estimated at $1 million for
each of the years from 2010 through 2014, and $144 million for work after
2014.
(PPL,
PPL Energy Supply and PPL Electric)
Future
cleanup or remediation work at sites currently under review, or at sites not
currently identified, may result in material additional operating costs for PPL
subsidiaries that cannot be estimated at this time.
Electric
and Magnetic Fields
(PPL, PPL Energy Supply and PPL
Electric)
Concerns
have been expressed by some members of the public regarding potential health
effects of power frequency EMFs, which are emitted by all devices carrying
electricity, including electric transmission and distribution lines and
substation equipment. Government officials in the U.S. and the U.K.
have reviewed this issue. The U.S. National Institute of
Environmental Health Sciences concluded in 2002 that, for most health outcomes,
there is no evidence that EMFs cause adverse effects. The agency
further noted that there is some epidemiological evidence of an association with
childhood leukemia, but that the evidence is difficult to interpret without
supporting laboratory evidence. The U.K. National Radiological
Protection Board (part of the U.K. Health Protection Agency) concluded in 2004
that, while the research on EMFs does not provide a basis to find that EMFs
cause any illness, there is a basis to consider precautionary measures beyond
existing exposure guidelines. In April 2007, the Stakeholder Group on
Extremely Low Frequency EMF, set up by the U.K. Government, issued its interim
assessment which describes a number of options for reducing public exposure to
EMFs. The U.K. Government responded to this assessment in October 2009, agreeing
to some of the proposals, including a proposed voluntary code to optimally phase
132 kilovolt overhead lines to reduce public exposure to EMF where it is
cost effective to do so. PPL and its subsidiaries believe the current
efforts to determine whether EMFs cause adverse health effects should continue
and are taking steps to reduce EMFs, where practical, in the design of new
transmission and distribution facilities. PPL and its subsidiaries
are unable to predict what effect, if any, the EMF issue might have on their
operations and facilities either in the U.S. or the U.K., and the associated
cost, or what, if any, liabilities they might incur related to the EMF
issue.
Environmental Matters - WPD
(PPL
and PPL Energy Supply)
WPD's
distribution businesses are subject to environmental regulatory and statutory
requirements. PPL believes that WPD has taken and continues to take
measures to comply with the applicable laws and governmental regulations for the
protection of the environment.
The U.K.
government has implemented a project to determine the impact of flooding on the
U.K. utility infrastructure, including major electricity
substations. WPD has agreed with the Ofgem to spend $28 million on
flood prevention, which will be recovered through rates during the 5-year period
commencing April 2010.
U.K.
legislation has been passed that imposes a duty on certain companies including
WPD to report on climate change adaptation. It is expected that the
first "Direction to Report" will be issued early in 2010 with reports due for
submission at the end of the year.
There are
no other material legal or administrative proceedings pending against or related
to WPD with respect to environmental matters. See "Environmental
Matters - Domestic - Superfund and Other Remediation - Electric and
Magnetic Fields" for a discussion of EMFs.
Other
Labor
Unions
(PPL, PPL Energy Supply and PPL
Electric)
At
December 31, 2009, the breakdown of the total workforce that is represented by
unions was:
|
Number
of Employees
|
Percent
of Total Workforce
|
||||||||
|
PPL
|
6,840
|
65%
|
|||||||
|
PPL
Energy Supply
|
4,850
|
69%
|
|||||||
|
PPL
Electric
|
1,570
|
72%
|
|||||||
In May
2010, PPL's bargaining agreement with its largest IBEW local
expires. The agreement covers the following:
|
Number
of Employees
|
Percent
of Total Workforce
|
||||||||
|
PPL
|
3,200
|
31%
|
|||||||
|
PPL
Energy Supply
|
1,210
|
17%
|
|||||||
|
PPL
Electric
|
1,570
|
72%
|
|||||||
Negotiations
commenced in February 2010. PPL cannot predict the outcome of the
collective labor bargaining negotiations.
Nuclear
Insurance
(PPL and PPL Energy
Supply)
PPL
Susquehanna is a member of certain insurance programs that provide coverage for
property damage to members' nuclear generating stations. Facilities
at the Susquehanna station are insured against property damage losses up to
$2.75 billion under these programs. PPL Susquehanna is also a member
of an insurance program that provides insurance coverage for the cost of
replacement power during prolonged outages of nuclear units caused by certain
specified conditions. Under the property and replacement power
insurance programs, PPL Susquehanna could be assessed retroactive premiums in
the event of the insurers' adverse loss experience. At December 31,
2009, this maximum assessment was $37 million.
In the
event of a nuclear incident at the Susquehanna station, PPL Susquehanna's public
liability for claims resulting from such incident would be limited to $12.6
billion under provisions of The Price-Anderson Act Amendments under the Energy
Policy Act of 2005. PPL Susquehanna is protected against this
liability by a combination of commercial insurance and an industry assessment
program. In the event of a nuclear incident at any of the reactors
covered by The Price-Anderson Act Amendments under the Energy Policy Act of
2005, PPL Susquehanna could be assessed up to $235 million per incident, payable
at $35 million per year.
At
December 31, 2009, the property, replacement power and nuclear incident
insurers maintained an A.M. Best financial strength rating of A
("Excellent").
Guarantees and Other
Assurances
(PPL,
PPL Energy Supply and PPL Electric)
In the
normal course of business, PPL, PPL Energy Supply and PPL Electric enter into
agreements that provide financial performance assurance to third parties on
behalf of certain subsidiaries. Such agreements include, for example,
guarantees, stand-by letters of credit issued by financial institutions and
surety bonds issued by insurance companies. These agreements are
entered into primarily to support or enhance the creditworthiness attributed to
a subsidiary on a stand-alone basis or to facilitate the commercial activities
in which these subsidiaries enter.
(PPL)
PPL fully
and unconditionally guarantees all of the debt securities of PPL Capital
Funding.
(PPL,
PPL Energy Supply and PPL Electric)
The table
below details guarantees provided as of December 31, 2009. The
total recorded liability at December 31, 2009 and 2008 was $3 million and $4
million. Other than as noted in the description for "WPD guarantee of
pension and other obligations of unconsolidated entities," the probability of
expected payment/performance under each of these guarantees is
remote.
|
Exposure
at December 31,
2009
(a)
|
Expiration
Date
|
Description
|
||||||||
|
PPL
|
||||||||||
|
Indemnifications
for sale of PPL Gas Utilities
|
$
|
300
|
PPL
has provided indemnification to the purchaser of PPL Gas Utilities and
Penn Fuel Propane, LLC for damages arising out of any breach of the
representations, warranties and covenants under the related transaction
agreement and for damages arising out of certain other matters, including
certain pre-closing unknown environmental liabilities relating to former
manufactured gas plant properties or off-site disposal sites, if any,
outside of Pennsylvania. The indemnification provisions for
most representations and warranties, including tax and environmental
matters, are capped at 15% of the purchase price ($45 million), in the
aggregate, and are triggered (i) only if the individual claim exceeds
$50,000, and (ii) only if, and only to the extent that, in the aggregate,
total claims exceed 1.5% of the purchase price ($4.5
million). The indemnification provisions for most
representations and warranties expired on September 30, 2009 without any
claims having been made. Certain representations and
warranties, including those having to do with transaction authorization
and title, survive indefinitely, are capped at the purchase price and are
not subject to the above threshold or deductible. The
indemnification provision for the tax matters representations survives for
the duration of the applicable statute of limitations, and the
indemnification provision for the environmental matters representations
survives for a period of three years after the transaction
closing. The indemnification relating to unknown environmental
liabilities for manufactured gas plants and disposal sites outside of
Pennsylvania could survive more than three years, but only with respect to
applicable property or sites identified by the purchaser prior to the
third anniversary of the transaction closing. The
indemnification for covenants survives until the applicable covenant is
performed and is not subject to any cap.
|
|||||||
|
PPL Energy
Supply
(b)
|
||||||||||
|
Letters
of credit issued on behalf of affiliates
|
17
|
2010
to 2011
|
Standby
letter of credit arrangements under PPL Energy Supply's credit facilities
for the purposes of protecting various third parties against
nonperformance by PPL. This is not a guarantee by PPL on a
consolidated basis.
|
|||||||
|
Retroactive
premiums under nuclear insurance programs
|
37
|
PPL
Susquehanna is contingently obligated to pay this amount related to
potential retroactive premiums that could be assessed under its nuclear
insurance programs. See "Nuclear Insurance" for additional
information.
|
||||||||
|
Nuclear
claims under The Price-Anderson Act Amendments under The Energy Policy Act
of 2005
|
235
|
This
is the maximum amount PPL Susquehanna could be assessed for each incident
at any of the nuclear reactors covered by this Act. See
"Nuclear Insurance" for additional information.
|
||||||||
|
Indemnifications
for entities in liquidation and sales of assets
|
186
|
2010
to 2012
|
PPL
Energy Supply's maximum exposure with respect to certain indemnifications
and the expiration of the indemnifications cannot be estimated because, in
the case of certain indemnification provisions, the maximum potential
liability is not capped by the transaction documents and the expiration
date is based on the applicable statute of limitations. The
exposure and expiration dates noted are only for those cases in which the
agreements provide for specific limits.
In
connection with the liquidation of wholly owned subsidiaries that have
been deconsolidated upon turning the entities over to the liquidators,
certain affiliates of PPL Global have agreed to indemnify the liquidators,
directors and/or the entities themselves for any liabilities or expenses
arising during the liquidation process, including liabilities and expenses
of the entities placed into liquidation. In some cases, the
indemnifications are limited to a maximum amount that is based on
distributions made from the subsidiary to its parent either prior or
subsequent to being placed into liquidation. In other cases,
the maximum amount of the indemnifications is not explicitly stated in the
agreements. The indemnifications generally expire two to seven
years subsequent to the date of dissolution of the
entities. The exposure noted only includes those cases in which
the agreements provide for a specific limit on the amount of the
indemnification, and the expiration date was based on an estimate of the
dissolution date of the entities. In 2009, $212 million of
previously disclosed exposure expired.
|
|||||||
|
In
connection with their sales of various businesses, WPD and its affiliates
have provided the purchasers with indemnifications that are standard for
such transactions, including indemnifications for certain pre-existing
liabilities and environmental and tax matters. In addition, in
connection with certain of these sales, WPD and its affiliates have agreed
to continue their obligations under existing third-party guarantees,
either for a set period of time following the transactions or upon the
condition that the purchasers make reasonable efforts to terminate the
guarantees. Finally, WPD and its affiliates remain secondarily
responsible for lease payments under certain leases that they have
assigned to third parties.
|
||||||||||
|
A
subsidiary of PPL Energy Supply has agreed to provide indemnification to
the purchaser of the six Maine hydroelectric facilities for damages
arising out of any breach of the representations, warranties and covenants
under the related transaction agreement and for damages arising out of
certain other matters, including liabilities of the PPL Energy Supply
subsidiary relating to the pre-closing ownership or operation of those
hydroelectric facilities or relating to other assets of the PPL Energy
Supply subsidiary that were not included in that sale. The
indemnification obligations are subject to certain customary limitations,
including thresholds for allowable claims, caps on aggregate liability,
and time limitations for claims arising out of breaches of representations
and warranties.
|
||||||||||
|
PPL
Energy Supply has provided indemnification to the purchaser of a
generating facility for losses arising out of any breach of the
representations, warranties and covenants under the related transaction
documents and for losses arising with respect to liabilities not
specifically assumed by the purchaser, including certain pre-closing
environmental and tort liabilities. The indemnification other
than for pre-closing environmental and tort liabilities is triggered only
if the purchaser's losses reach $1 million in the aggregate, capped at 50%
of the purchase price (or $95 million), and either expired in May 2007 or
will expire pursuant to applicable statutes of limitations. The
indemnification provision for unknown environmental and tort liabilities
related to periods prior to PPL Energy Supply's ownership of the real
property on which the facility is located is capped at $4 million in the
aggregate and survives for a maximum period of five years after the
transaction closing.
|
||||||||||
|
Indemnification
to operators of jointly owned facilities
|
6
|
In
December 2007, a subsidiary of PPL Energy Supply executed revised owners
agreements for two jointly owned facilities, the Keystone and Conemaugh
generating stations. The agreements require that in the event
of any default by an owner, the other owners fund contributions for the
operation of the generating stations, based upon their ownership
percentages. The maximum obligation among all owners, for each
station, is currently $20 million. The non-defaulting owners,
who make up the defaulting owner's obligations, are entitled to the
generation entitlement of the defaulting owner, based upon their ownership
percentage. The agreements do not have an expiration
date.
|
||||||||
|
WPD
guarantee of pension and other obligations of unconsolidated
entities
|
31
|
2017
|
As
a result of the privatization of the utility industry in the U.K., certain
electric associations' roles and responsibilities were discontinued or
modified. As a result, certain obligations, primarily
pension-related, associated with these organizations have been guaranteed
by the participating members. Costs are allocated to the
members based on predetermined percentages as outlined in specific
agreements. However, if a member becomes insolvent, costs can
be reallocated to and are guaranteed by the remaining
members. At December 31, 2009, WPD has recorded an estimated
discounted liability based on its current allocated percentage of the
total expected costs for which the expected payment/performance is
probable. Neither the expiration date nor the maximum amount of
potential payments for certain obligations is explicitly stated in the
related agreements. Therefore, they have been estimated based
on the types of obligations.
|
|||||||
|
Tax
indemnification related to unconsolidated WPD affiliates
|
8
|
2012
|
Two
WPD unconsolidated affiliates were refinanced during
2005. Under the terms of the refinancing, WPD has indemnified
the lender against certain tax and other liabilities.
|
|||||||
|
Guarantee
of a portion of an unconsolidated entity's debt
|
22
|
2018
|
Reflects
principal payments only.
|
|||||||
|
(a)
|
Represents
the estimated maximum potential amount of future payments that could be
required to be made under the guarantee.
|
|
|
(b)
|
Other
than the letters of credit, all guarantees of PPL Energy Supply, on a
consolidated basis, also apply to PPL on a consolidated
basis. Neither PPL nor PPL Energy Supply is liable for
obligations under guarantees provided by WPD, as the beneficiaries of the
guarantees do not have recourse to such
entities.
|
PPL, PPL
Energy Supply and PPL Electric and their subsidiaries provide other
miscellaneous guarantees through contracts entered into in the normal course of
business. These guarantees are primarily in the form of
indemnification or warranties related to services or equipment and vary in
duration. The amounts of these guarantees often are not explicitly
stated, and the overall maximum amount of the obligation under such guarantees
cannot be reasonably estimated. Historically, PPL, PPL Energy Supply
and PPL Electric and their subsidiaries have not made any significant payments
with respect to these types of guarantees and the probability of
payment/performance under these guarantees is remote.
PPL, on
behalf of itself and certain of its subsidiaries, maintains insurance that
covers liability assumed under contract for bodily injury and property
damage. The coverage requires a $4 million deductible per occurrence
and provides maximum aggregate coverage of $150 million. This
insurance may be applicable to obligations under certain of these contractual
arrangements.
Affiliate
Trust
(PPL and PPL Energy
Supply)
In
February 2007, WPD LLP redeemed all of the 8.23% Subordinated Debentures
maturing in February 2027 that were held by SIUK Capital Trust
I. Upon redemption, WPD LLP paid a premium of 4.115%, or
approximately $3 million, on the principal amount of $85 million of subordinated
debentures. Payment of $29 million was also made to settle related
cross-currency swaps and is included on the Statement of Cash Flows as a
component of "Retirement of long-term debt." Interest expense on this
obligation was $2 million for 2007. The redemption resulted in a
recorded loss of $2 million during 2007. This interest expense and
loss are both reflected in "Interest Expense" for PPL and PPL Energy Supply on
the Statement of Income.
PLR
Contracts
(PPL Energy Supply and PPL
Electric)
PPL
Electric had power purchase agreements with PPL EnergyPlus, effective July 2000
and January 2002, under which PPL EnergyPlus supplied PPL Electric's entire PLR
load. These contracts expired December 31, 2009. Under
these contracts, PPL EnergyPlus provided electricity at the predetermined capped
prices that PPL Electric was authorized to charge its PLR
customers. These purchases totaled $1.8 billion in 2009, 2008 and
2007. These purchases include nuclear decommissioning recovery and
amortization of an up-front contract payment and are included in the Statements
of Income as "Wholesale energy marketing to affiliate" by PPL Energy Supply, and
as "Energy purchases from affiliate" by PPL Electric.
Under one
of the PLR contracts, PPL Electric was required to make performance assurance
deposits with PPL EnergyPlus when the market price of electricity was less than
the contract price by more than its contract collateral
threshold. Conversely, PPL EnergyPlus was required to make
performance assurance deposits with PPL Electric when the market price of
electricity was greater than the contract price by more than its contract
collateral threshold. At December 31, 2008, PPL Energy Supply
was required to provide PPL Electric with performance assurance of $300
million. PPL Electric paid interest equal to the one-month LIBOR plus
0.5% on this deposit, which is included in "Interest Expense with Affiliate" on
the Statements of Income. PPL Energy Supply recorded the receipt of
the interest as affiliated interest income, which is included in "Interest
Income from Affiliates" on the Statements of Income. Interest related
to the required deposits was $2 million, $10 million and $17 million for 2009,
2008 and 2007.
PPL
Electric has held competitive solicitations for generation supply in 2010 and
2011. PPL EnergyPlus was one of the successful bidders in the first
competitive solicitation process and has entered into an agreement with PPL
Electric to supply up to 671 MW of total peak load in 2010, at an average price
of $91.42 per MWh.
Under the
standard Supply Master Agreement for the bid solicitation process, PPL Electric
requires all suppliers to post collateral once credit exposures exceed defined
credit limits. In no instance is PPL Electric required to post
collateral to suppliers under these supply contracts. With respect
with its agreement with PPL Electric, PPL EnergyPlus is required to post
collateral with PPL Electric: (a) when the market price of
electricity to be delivered by PPL EnergyPlus exceeds the contract price for the
forecasted quantity of electricity to be delivered and (b) this market price
exposure exceeds a contractual credit limit. Based on the current
credit rating of PPL Energy Supply, as guarantor, this credit limit is $35
million.
PPL
Energy Supply has credit exposure to PPL Electric under certain energy supply
contracts. See Note 17 for additional information on this credit
exposure.
NUG
Purchases
(PPL Energy Supply and PPL
Electric)
PPL
Electric has a reciprocal contract with PPL EnergyPlus to sell electricity
purchased under contracts with NUGs. PPL Electric purchases
electricity from the NUGs at contractual rates and then sells the electricity at
the same price to PPL EnergyPlus. These purchases totaled $70 million
in 2009, $108 million in 2008 and $156 million in 2007. These amounts
are included in the Statements of Income as "Wholesale electric to affiliate" by
PPL Electric, and as "Energy purchases from affiliate" by PPL Energy
Supply.
Allocations of Corporate Service
Costs
(PPL
Energy Supply and PPL Electric)
PPL
Services provides corporate functions such as financial, legal, human resources
and information services. PPL Services charges the respective PPL
subsidiaries for the cost of such services when they can be specifically
identified. The cost of these services that is not directly charged
to PPL subsidiaries is allocated to certain of the subsidiaries based on an
average of the subsidiaries' relative invested capital, operation and
maintenance expenses, and number of employees. PPL Services allocated
the following amounts, which PPL management believes are reasonable, to PPL
Energy Supply and PPL Electric, including amounts applied to accounts that are
further distributed between capital and expense.
|
2009
(a)
|
2008
|
2007
|
||||||||||
|
PPL
Energy Supply
|
$
|
214
|
$
|
209
|
$
|
230
|
||||||
|
PPL
Electric
|
121
|
116
|
112
|
|||||||||
|
(a)
|
Excludes
allocated costs associated with the February 2009 workforce
reduction. See Note 12 for additional
information.
|
Intercompany
Borrowings
(PPL
Energy Supply)
A PPL
Energy Supply subsidiary has an $800 million demand note to an
affiliate. There was no balance outstanding at December 31, 2009
and 2008. In 2009, interest was due monthly at a rate equal to
1-month LIBOR plus 1%. Interest earned on this note is included in
"Interest Income from Affiliates" on the Statements of Income. While
balances were outstanding, interest earned was $4 million and $12 million for
2008 and 2007. Interest was not significant for 2009.
(
PPL Electric)
A PPL
Electric subsidiary has a $300 million demand note to an
affiliate. There was no outstanding balance at December 31, 2009
and a $300 million balance outstanding at December 31, 2008. The
interest rate was equal to 3-month LIBOR plus 3.50% and 3-month LIBOR plus 1.00%
at December 31, 2009 and 2008. This note is shown on the Balance
Sheet as "Note receivable from affiliate." Interest earned on the
note is included in "Interest Income from Affiliate" on the Statements of
Income, and was $4 million, $9 million and $19 million for 2009, 2008 and
2007.
Intercompany Derivatives
(PPL
Energy Supply)
In 2009,
2008 and 2007, PPL Energy Supply entered into a combination of average rate
forwards and average rate options with PPL to sell British pounds
sterling. These hedging instruments have terms identical to average
rate forwards and average rate options entered into by PPL with third parties to
protect the translation of expected income denominated in British pounds
sterling to U.S. dollars. Gains and losses, both realized and
unrealized, on these types of hedging instruments are included in "Other Income
- net" on the Statements of Income. PPL Energy Supply recorded a net
loss of $9 million during 2009, a net gain of $9 million during 2008 and a net
loss of $4 million during 2007 related to average rate forwards and average rate
options. Contracts outstanding at December 31, 2009 hedge a total
exposure of £48 million related to the translation of expected income for
2010. The fair value of these positions was a net asset of $2
million, which is reflected in "Current Assets - Price risk management assets"
on the Balance Sheet. No similar hedging instruments were outstanding
at December 31, 2008.
In 2007,
PPL Energy Supply entered into forward contracts with PPL to sell Chilean
pesos. These hedging instruments had terms identical to forward sales
contracts entered into by PPL with third parties to protect the value of its net
investment in Emel, as well as a portion of the proceeds in excess of its net
investment expected from the then-anticipated sale of Emel. These
contracts were terminated in 2007 in connection with the sale of
Emel. For 2007, PPL Energy Supply's Statement of Income reflects
losses of $7 million in "Other income - net" and $23 million in Discontinued
Operations related to these contracts.
PPL
Energy Supply is also party to forward contracts with PPL to sell British pounds
sterling to protect the value of a portion of its net investment in
WPD. These hedging instruments have terms identical to forward sales
contracts entered into by PPL with third parties. The total notional
amount of the contracts outstanding at December 31, 2009 and 2008 was £40
million (approximately $78 million based on contracted rates) and £68 million
(approximately $134 million based on contracted rates). The fair
value of these positions was an asset of $13 million and $34 million at
December 31, 2009 and 2008, which is included in the foreign currency
translation adjustment component of AOCI on the Balance
Sheets. Additionally, $8 million and $16 million were included in
"Current Assets - Price risk management assets" on the Balance Sheets at
December 31, 2009 and 2008 and $5 million and $18 million were included in
"Other Noncurrent Assets - Price risk management assets" on the Balance Sheets
at December 31, 2009 and 2008.
Trademark
Royalties
(PPL Energy
Supply)
A PPL
subsidiary owns PPL trademarks and bills certain affiliates for their
use. PPL Energy Supply was allocated $40 million of license fees in
2009, $48 million in 2008 and $39 million in 2007. These allocations
are primarily included in "Other operation and maintenance" on the Statements of
Income.
Transmission
(PPL, PPL Energy Supply
and PPL Electric)
PPL
Energy Supply owns no domestic transmission or distribution facilities, other
than facilities to interconnect its generation with the electric transmission
system. Therefore, PPL EnergyPlus and other PPL Generation
subsidiaries must pay PJM, the operator of the transmission system, to deliver
the energy these subsidiaries supply to retail and wholesale customers in PPL
Electric's franchised territory in eastern and central
Pennsylvania. PJM in turn pays PPL Electric for the use of its
transmission system. PPL eliminates the impact of these revenues and
expenses on its Statements of Income.
Other
(PPL, PPL Energy Supply
and PPL Electric)
See Note
1 for discussions regarding the intercompany tax sharing policy and intercompany
allocations of stock-based compensation expense. See Note 7 for a
discussion regarding capital transactions between PPL and its
affiliates. See Note 12 for discussions regarding intercompany
allocations of defined benefits.
(PPL,
PPL Energy Supply and PPL Electric)
The
breakdown of "Other Income - net" was:
|
2009
|
2008
|
2007
|
||||||||||
|
PPL
|
||||||||||||
|
Other
Income
|
||||||||||||
|
Gains
related to the extinguishment of notes (Note 7)
|
$
|
29
|
||||||||||
|
Earnings
on securities in the NDT funds
|
20
|
$
|
10
|
$
|
16
|
|||||||
|
Interest
income
|
14
|
33
|
61
|
|||||||||
|
Mine
remediation liability adjustment
|
11
|
(2
|
)
|
|||||||||
|
Hyder
liquidation distributions
|
3
|
6
|
||||||||||
|
Gain
(loss) on sales of PP&E
|
(1
|
)
|
12
|
|||||||||
|
Miscellaneous
- Domestic
|
11
|
7
|
12
|
|||||||||
|
Miscellaneous
- International
|
1
|
1
|
9
|
|||||||||
|
Total
|
75
|
64
|
114
|
|||||||||
|
Other
Deductions
|
||||||||||||
|
Economic
foreign currency hedges
|
9
|
(9
|
)
|
8
|
||||||||
|
Charitable
contributions
|
6
|
5
|
6
|
|||||||||
|
Miscellaneous
- Domestic
|
7
|
7
|
||||||||||
|
Miscellaneous
- International
|
4
|
6
|
3
|
|||||||||
|
Other
Income - net
|
$
|
49
|
$
|
55
|
$
|
97
|
||||||
|
PPL Energy
Supply
|
||||||||||||
|
Other
Income
|
||||||||||||
|
Gains
related to the extinguishment of notes (Note 7)
|
$
|
25
|
||||||||||
|
Earnings
on securities in the NDT funds
|
20
|
$
|
10
|
$
|
16
|
|||||||
|
Interest
income
|
6
|
23
|
48
|
|||||||||
|
Mine
remediation liability adjustment
|
11
|
(2
|
)
|
|||||||||
|
Hyder
liquidation distributions
|
3
|
6
|
||||||||||
|
Gain
(loss) on sales of PP&E
|
1
|
8
|
||||||||||
|
Miscellaneous
- Domestic
|
5
|
6
|
8
|
|||||||||
|
Miscellaneous
- International
|
1
|
1
|
9
|
|||||||||
|
Total
|
57
|
55
|
93
|
|||||||||
|
Other
Deductions
|
||||||||||||
|
Economic
foreign currency hedges
|
9
|
(9
|
)
|
8
|
||||||||
|
Miscellaneous
- Domestic
|
9
|
10
|
2
|
|||||||||
|
Miscellaneous
- International
|
4
|
6
|
3
|
|||||||||
|
Other
Income - net
|
$
|
35
|
$
|
48
|
$
|
80
|
||||||
|
PPL
Electric
|
||||||||||||
|
Other
Income
|
||||||||||||
|
Interest
income
|
$
|
8
|
$
|
7
|
$
|
9
|
||||||
|
Gain
on sales of PP&E
|
4
|
|||||||||||
|
Miscellaneous
|
1
|
|||||||||||
|
Total
|
8
|
7
|
14
|
|||||||||
|
Other
Deductions
|
2
|
2
|
2
|
|||||||||
|
Other
Income - net
|
$
|
6
|
$
|
5
|
$
|
12
|
(PPL,
PPL Energy Supply and PPL Electric)
Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date (an exit price). Fair value guidance establishes a
fair value hierarchy that prioritizes the inputs used to measure fair value into
three broad levels. See Note 1 for additional information on fair
value measurements. See Note 12 for more information regarding the
fair value and related valuation techniques for retirement and postretirement
benefit plan assets.
Recurring
Fair Value Measurements
The
assets and liabilities measured at fair value were:
|
December 31,
2009
|
December 31,
2008
|
|||||||||||||||||||||||||||||||
|
Fair
Value Measurements Using
|
Fair
Value Measurements Using
|
|||||||||||||||||||||||||||||||
|
Total
|
Level
1
|
Level
2
|
Level
3
|
Total
|
Level
1
|
Level
2
|
Level
3
|
|||||||||||||||||||||||||
|
PPL
|
||||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
801
|
$
|
801
|
$
|
1,100
|
$
|
1,100
|
||||||||||||||||||||||||
|
Short-term
investments - municipal debt securities
|
150
|
150
|
||||||||||||||||||||||||||||||
|
Restricted
cash and cash equivalents
|
129
|
129
|
347
|
347
|
||||||||||||||||||||||||||||
|
Price
risk management assets:
|
||||||||||||||||||||||||||||||||
|
Energy
commodities
|
3,354
|
3
|
$
|
3,234
|
$
|
117
|
2,460
|
19
|
$
|
2,143
|
$
|
298
|
||||||||||||||||||||
|
Interest
rate/foreign currency exchange
|
77
|
77
|
156
|
152
|
4
|
|||||||||||||||||||||||||||
|
3,431
|
3
|
3,311
|
117
|
2,616
|
19
|
2,295
|
302
|
|||||||||||||||||||||||||
|
NDT
funds:
|
||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
7
|
7
|
4
|
4
|
||||||||||||||||||||||||||||
|
Equity
securities:
|
||||||||||||||||||||||||||||||||
|
U.S.
large-cap
|
259
|
176
|
83
|
182
|
116
|
66
|
||||||||||||||||||||||||||
|
U.S.
mid/small-cap
|
101
|
75
|
26
|
69
|
50
|
19
|
||||||||||||||||||||||||||
|
Debt
securities:
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
74
|
74
|
77
|
77
|
||||||||||||||||||||||||||||
|
U.S.
government agency
|
9
|
9
|
14
|
14
|
||||||||||||||||||||||||||||
|
Municipality
|
65
|
65
|
61
|
61
|
||||||||||||||||||||||||||||
|
Investment-grade
corporate
|
29
|
29
|
33
|
33
|
||||||||||||||||||||||||||||
|
Residential
mortgage-backed securities
|
1
|
1
|
2
|
2
|
||||||||||||||||||||||||||||
|
Other
|
1
|
1
|
||||||||||||||||||||||||||||||
|
Receivables/payables,
net
|
3
|
3
|
3
|
3
|
||||||||||||||||||||||||||||
|
548
|
332
|
216
|
446
|
247
|
199
|
|||||||||||||||||||||||||||
|
Auction
rate securities
|
25
|
25
|
24
|
24
|
||||||||||||||||||||||||||||
|
$
|
4,934
|
$
|
1,265
|
$
|
3,527
|
$
|
142
|
$
|
4,683
|
$
|
1,863
|
$
|
2,494
|
$
|
326
|
|||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Price
risk management liabilities:
|
||||||||||||||||||||||||||||||||
|
Energy
commodities
|
$
|
2,080
|
$
|
2
|
$
|
2,068
|
$
|
10
|
$
|
2,133
|
$
|
15
|
$
|
2,008
|
$
|
110
|
||||||||||||||||
|
Interest
rate/foreign currency exchange
|
4
|
4
|
27
|
27
|
||||||||||||||||||||||||||||
|
$
|
2,084
|
$
|
2
|
$
|
2,072
|
$
|
10
|
$
|
2,160
|
$
|
15
|
$
|
2,035
|
$
|
110
|
|||||||||||||||||
|
PPL Energy
Supply
|
||||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
245
|
$
|
245
|
$
|
464
|
$
|
464
|
||||||||||||||||||||||||
|
Short-term
investments - municipal debt securities
|
150
|
150
|
||||||||||||||||||||||||||||||
|
Restricted
cash and cash equivalents
|
111
|
111
|
328
|
328
|
||||||||||||||||||||||||||||
|
Price
risk management assets:
|
||||||||||||||||||||||||||||||||
|
Energy
commodities
|
3,354
|
3
|
$
|
3,234
|
$
|
117
|
2,460
|
19
|
$
|
2,143
|
$
|
298
|
||||||||||||||||||||
|
Interest
rate/foreign currency exchange
|
27
|
27
|
107
|
103
|
4
|
|||||||||||||||||||||||||||
|
3,381
|
3
|
3,261
|
117
|
2,567
|
19
|
2,246
|
302
|
|||||||||||||||||||||||||
|
NDT
funds:
|
||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
7
|
7
|
4
|
4
|
||||||||||||||||||||||||||||
|
Equity
securities:
|
||||||||||||||||||||||||||||||||
|
U.S.
large-cap
|
259
|
176
|
83
|
182
|
116
|
66
|
||||||||||||||||||||||||||
|
U.S.
mid/small-cap
|
101
|
75
|
26
|
69
|
50
|
19
|
||||||||||||||||||||||||||
|
Debt
securities:
|
||||||||||||||||||||||||||||||||
|
U.S.
Treasury
|
74
|
74
|
77
|
77
|
||||||||||||||||||||||||||||
|
U.S.
government agency
|
9
|
9
|
14
|
14
|
||||||||||||||||||||||||||||
|
Municipality
|
65
|
65
|
61
|
61
|
||||||||||||||||||||||||||||
|
Investment-grade
corporate
|
29
|
29
|
33
|
33
|
||||||||||||||||||||||||||||
|
Residential
mortgage-backed securities
|
1
|
1
|
2
|
2
|
||||||||||||||||||||||||||||
|
Other
|
1
|
1
|
||||||||||||||||||||||||||||||
|
Receivables/payables,
net
|
3
|
3
|
3
|
3
|
||||||||||||||||||||||||||||
|
548
|
332
|
216
|
446
|
247
|
199
|
|||||||||||||||||||||||||||
|
Auction
rate securities
|
20
|
20
|
19
|
19
|
||||||||||||||||||||||||||||
|
$
|
4,305
|
$
|
691
|
$
|
3,477
|
$
|
137
|
$
|
3,974
|
$
|
1,208
|
$
|
2,445
|
$
|
321
|
|||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Price
risk management liabilities:
|
||||||||||||||||||||||||||||||||
|
Energy
commodities
|
$
|
2,080
|
$
|
2
|
$
|
2,068
|
$
|
10
|
$
|
2,133
|
$
|
15
|
$
|
2,008
|
$
|
110
|
||||||||||||||||
|
Interest
rate/foreign currency exchange
|
4
|
4
|
16
|
16
|
||||||||||||||||||||||||||||
|
$
|
2,084
|
$
|
2
|
$
|
2,072
|
$
|
10
|
$
|
2,149
|
$
|
15
|
$
|
2,024
|
$
|
110
|
|||||||||||||||||
|
PPL
Electric
|
||||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
485
|
$
|
485
|
$
|
483
|
$
|
483
|
||||||||||||||||||||||||
|
Restricted
cash and cash equivalents
|
14
|
14
|
15
|
15
|
||||||||||||||||||||||||||||
|
$
|
499
|
$
|
499
|
$
|
498
|
$
|
498
|
A
reconciliation of net assets and liabilities classified as Level 3 is as
follows.
|
Fair
Value Measurements Using Significant Unobservable Inputs (Level
3)
|
||||||||||||||||||||||||||||||||
|
December 31,
2009
|
December 31,
2008
|
|||||||||||||||||||||||||||||||
|
Energy
Commodities, net
|
Interest
Rate/ Foreign Currency Exchange
|
Auction
Rate Securities
|
Total
|
Energy
Commodities, net
|
Interest
Rate/ Foreign Currency Exchange
|
Auction
Rate Securities
|
Total
|
|||||||||||||||||||||||||
|
PPL
|
||||||||||||||||||||||||||||||||
|
Balance
at beginning of period
|
$
|
188
|
$
|
4
|
$
|
24
|
$
|
216
|
$
|
134
|
$
|
134
|
||||||||||||||||||||
|
Total
realized/unrealized gains (losses)
|
||||||||||||||||||||||||||||||||
|
Included
in earnings
|
(136
|
)
|
(136
|
)
|
2
|
2
|
||||||||||||||||||||||||||
|
Included
in OCI
|
18
|
(28
|
)
|
5
|
(5
|
)
|
11
|
$
|
(5
|
)
|
6
|
|||||||||||||||||||||
|
Purchases,
sales, issuances and settlements, net
|
104
|
(4
|
)
|
100
|
2
|
(11
|
)
|
(9
|
)
|
|||||||||||||||||||||||
|
Transfers
(out of) and/or into Level 3
|
(67
|
)
|
24
|
(43
|
)
|
39
|
$
|
4
|
40
|
83
|
||||||||||||||||||||||
|
Balance
at end of period
|
$
|
107
|
$
|
$
|
25
|
$
|
132
|
$
|
188
|
$
|
4
|
$
|
24
|
$
|
216
|
|||||||||||||||||
|
PPL Energy
Supply
|
||||||||||||||||||||||||||||||||
|
Balance
at beginning of period
|
$
|
188
|
$
|
4
|
$
|
19
|
$
|
211
|
$
|
134
|
$
|
134
|
||||||||||||||||||||
|
Total
realized/unrealized gains (losses)
|
||||||||||||||||||||||||||||||||
|
Included
in earnings
|
(136
|
)
|
(136
|
)
|
2
|
2
|
||||||||||||||||||||||||||
|
Included
in OCI
|
18
|
(28
|
)
|
5
|
(5
|
)
|
11
|
$
|
(5
|
)
|
6
|
|||||||||||||||||||||
|
Purchases,
sales, issuances and settlements, net
|
104
|
(4
|
)
|
100
|
2
|
(11
|
)
|
(9
|
)
|
|||||||||||||||||||||||
|
Transfers
(out of) and/or into Level 3
|
(67
|
)
|
24
|
(43
|
)
|
39
|
$
|
4
|
35
|
78
|
||||||||||||||||||||||
|
Balance
at end of period
|
$
|
107
|
$
|
$
|
20
|
$
|
127
|
$
|
188
|
$
|
4
|
$
|
19
|
$
|
211
|
|||||||||||||||||
Net gains
and losses on assets and liabilities classified as Level 3 and included in
earnings are reported in the Statements of Income as follows.
|
December 31,
2009
|
December 31,
2008
|
|||||||||||||||||||||||||||
|
Energy
Commodities, net
|
Energy
Commodities, net
|
|||||||||||||||||||||||||||
|
Wholesale
Energy Marketing
|
Net
Energy Trading Margins
|
Energy
Purchases
|
Unregulated
Retail Electric and Gas
|
Net
Energy Trading Margins
|
Energy
Purchases
|
Unregulated
Retail Electric and Gas
|
||||||||||||||||||||||
|
PPL and PPL Energy
Supply
|
||||||||||||||||||||||||||||
|
Total
gains (losses) included in earnings for the period
|
$
|
22
|
$
|
(16
|
)
|
$
|
(155
|
)
|
$
|
13
|
$
|
(1
|
)
|
$
|
(3
|
)
|
$
|
6
|
||||||||||
|
Change
in unrealized gains (losses) relating to positions still held at the
reporting date
|
12
|
1
|
(83
|
)
|
8
|
1
|
(3
|
)
|
5
|
|||||||||||||||||||
Cash and Cash Equivalents,
Short-term Investments, and Restricted Cash and Cash
Equivalents
The fair
value of cash and cash equivalents and restricted cash and cash equivalents is
based on the amount on deposit. The fair value measurements of
short-term investments are based on quoted prices.
Price Risk Management
Assets/Liabilities - Energy Commodities
The only
energy commodity contracts classified as Level 1 are exchange-traded derivative
gas and oil contracts. When observable inputs are used to measure all
or most of the value of a contract, the contract is classified as Level
2. Over-the-counter (OTC) contracts are valued by traders using
quotes obtained from an exchange, binding and non-binding broker quotes, prices
posted by ISOs or published tariff rates. PPL's risk management group
obtains quotes from the market to validate the forward price
curves. OTC contracts include forwards, swaps, options and structured
deals for electricity, gas, oil, and/or emission allowances and may be offset
with similar positions in exchange-traded markets. To the extent
possible, fair value measurements utilize various inputs that include quoted
prices for similar contracts or market-corroborated inputs. In
certain instances, these instruments may be valued using models, including
standard option valuation models and standard industry models. For
example, the fair value of a structured deal that delivers power to an illiquid
delivery point may be measured by valuing the nearest liquid trading point plus
the value of the basis between the two points. The basis input may be
from market quotes, FTR prices, or historical prices.
When
unobservable inputs are significant to the fair value measurement, a contract is
classified as Level 3. Additionally, Level 2 and Level 3 fair value
measurements include adjustments for credit risk based on PPL's own
creditworthiness (for net liabilities) and its counterparties' creditworthiness
(for net assets). PPL's credit department assesses all reasonably
available market information and uses probabilities of default to calculate the
credit adjustment. PPL assumes that observable market prices include
sufficient adjustments for liquidity and modeling risks, but for Level 3 fair
value measurements, PPL also assesses the need for additional adjustments for
liquidity or modeling risks. The contracts classified as Level 3
represent contracts for which the delivery dates are beyond the dates for which
independent prices are available or for certain power basis positions, which PPL
generally values using historical prices.
Price Risk Management
Assets/Liabilities -
Interest Rate/Foreign
Currency Exchange
To manage
its interest rate and foreign currency exchange risk, PPL and PPL Energy Supply
generally use interest rate contracts, such as forward-starting swaps and
fixed-to-floating swaps; foreign currency exchange contracts, such as forwards
and options; and cross-currency swaps that contain characteristics of both
interest rate and foreign currency exchange contracts. PPL and PPL
Energy Supply use an income approach to measure the fair value of these
contracts, utilizing both observable inputs, such as forward interest rates and
forward foreign currency exchange rates, and inputs that may not be observable,
such as credit valuation adjustments. In certain cases, PPL and PPL
Energy Supply cannot practicably obtain market information to value credit risk
and therefore rely on their own models. These models use projected
probabilities of default based on historical observances. When the
credit valuation adjustment is significant to the overall valuation, the
contracts are classified as Level 3.
NDT
Funds
PPL and
PPL Energy Supply generally use the market approach to measure the fair value of
the securities held in the NDT funds. The fair value measurements of
cash and cash equivalents are based on the amount on deposit. The
fair value measurements of equity securities are based on quoted prices in
active markets. The fair value measurements of commingled equity
index funds are based on firm quotes of net asset values per share, which are
not obtained from a quoted price in an active market. Equity
securities are classified as Level 1 and are comprised of securities that are
representative of the Wilshire 5000 index, which is invested in approximately
70% large-cap stocks and 30% mid/small-cap stocks. Investments in commingled
equity funds are classified as Level 2 and represent securities that track the
S&P 500 index and the Wilshire 4500 index. The fair value
measurements of debt securities are generally based on evaluated prices that
reflect observable market information, such as actual trade information for
identical securities or for similar securities, adjusted for observable
differences. When this information is not available, the fair value
of debt securities is measured using present value techniques, which incorporate
other observable inputs including interest rates for debt securities with credit
ratings and terms to maturity similar to the debt securities being
measured.
PPL and
PPL Energy Supply recorded impairments of $18 million in 2009, $36 million in
2008 and $3 million in 2007 for certain securities invested in the NDT
funds. These impairments are reflected on the Statements of Income in
"Other-Than-Temporary Impairments."
Auction Rate
Securities
Prior to
early 2008, auction rate securities had normally been remarketed on a short-term
basis with auction dates commonly set at seven-day, 28-day, 35-day or 49-day
intervals. Historically, an active market existed for such
investments, and the auctions provided an opportunity for investors either to
hold an investment at a periodically reset interest rate or to sell the
investment at its par value for immediate liquidity. In early 2008,
investor concerns about credit and liquidity in the financial markets,
generally, as well as investor concerns over specific insurers that guarantee
the credit of certain of the underlying securities, created uncertainty in the
auction rate securities market and these securities generally failed to be
remarketed through their established auction process. These auction
failures and the resulting illiquidity continue to impact PPL's and PPL Energy
Supply's auction rate securities. Despite failed auctions in 2008 and
2009, PPL and PPL Energy Supply continued to earn interest on these investments
at contractually prescribed interest rates.
PPL and
PPL Energy Supply estimates the fair value of auction rate securities based on
the following criteria: (i) the underlying structure and credit
quality of each security; (ii) the present value of future estimated interest
and principal payments discounted using interest rates for bonds with a credit
rating and remaining term to maturity similar to the stated maturity of the
auction rate securities; and (iii) consideration of the impact of auction
failures or redemption at par. The estimated fair value of these
securities could change significantly based on future market
conditions.
PPL's and
PPL Energy Supply's auction rate securities are recorded in "Other investments"
on the Balance Sheets. Based upon the evaluation of available
information, PPL and PPL Energy Supply believe these investments, which include
Federal Family Education Loan Program guaranteed student loan revenue bonds, as
well as various municipal bond issues, continue to be of high credit
quality. PPL and PPL Energy Supply do not have significant exposure
to realize losses on these securities. However, auction rate
securities are classified as Level 3 because failed auctions limit the amount of
observable market data that is available for measuring the fair value of these
securities.
At
December 31, 2008, the par value of auction rate securities totaled $29
million for PPL and $24 million for PPL Energy Supply. At
December 31, 2008, the fair value of auction rate securities was estimated
to be $24 million for PPL and $19 million for PPL Energy Supply and the $5
million temporary declines from par value were recorded to OCI.
In 2009,
PPL and PPL Energy Supply liquidated $4 million of securities at
par. At December 31, 2009, the fair value of auction rate securities
was estimated to be equal to par value, which was $25 million for PPL and $20
million for PPL Energy Supply, and the contractual maturities for these
securities was a weighted average of approximately 26 years. PPL and
PPL Energy Supply reversed $5 million of previously recorded temporary
impairments by crediting OCI.
Nonrecurring Fair Value
Measurements
(PPL
and PPL Energy Supply)
|
Fair
Value Measurements Using
|
||||||||||||||||
|
Total
|
Level
2
|
Level
3
|
Loss
|
|||||||||||||
|
Sulfur
dioxide emission allowances (a):
|
||||||||||||||||
|
March
31, 2009
|
$
|
15
|
$
|
15
|
$
|
(30
|
)
|
|||||||||
|
December
31, 2009
|
13
|
13
|
(7
|
)
|
||||||||||||
|
Long
Island generation business (b):
|
||||||||||||||||
|
June
30, 2009
|
138
|
$
|
138
|
(52
|
)
|
|||||||||||
|
September
30, 2009
|
133
|
133
|
(5
|
)
|
||||||||||||
|
December 31,
2009
|
128
|
128
|
(5
|
)
|
||||||||||||
|
(a)
|
Current
and long-term sulfur dioxide emission allowances are included in "Other
intangibles" in their respective areas on the Balance
Sheet.
|
|
|
(b)
|
Assets
of the Long Island generation business disposal group are included in
"Assets held for sale" on the Balance
Sheet.
|
Sulfur Dioxide Emission
Allowances
Due to a
significant decline in market prices at March 31, 2009, PPL Energy Supply
assessed the recoverability of sulfur dioxide emission allowances not expected
to be consumed. As a result, emission allowances with a carrying
amount of $45 million were written down to their estimated fair value of $15
million, resulting in an impairment charge of $30 million being recorded during
the first quarter of 2009. Due to a further decline in market prices
and the reassessment of the quantity of emission allowances not expected to be
consumed at December 31, 2009, PPL Energy Supply evaluated the recoverability of
those allowances. As a result, emission allowances with a carrying
amount of $20 million were written down to their estimated fair value of $13
million, resulting in an impairment charge of $7 million being recorded during
the fourth quarter of 2009. These charges, recorded in the Supply
segment for PPL and PPL Energy Supply, are included in "Other operation and
maintenance" on the Statement of Income.
When
available, observable market prices were used to value the sulfur dioxide
emission allowances. When observable market prices were not
available, fair value was modeled using prices from observable transactions and
appropriate discount rates. The modeled values were significant to
the overall fair value measurement.
Long Island Generation
Business
The Long
Island generation business met the held for sale criteria in the second quarter
of 2009. As a result, net assets held for sale with a carrying amount
of $189 million were written down to their estimated fair value (less cost to
sell) of $137 million at June 30, 2009. At both September 30 and
December 31, 2009, the fair value (less cost to sell) was remeasured and
additional impairments totaling $10 million were recorded. In
addition, $2 million of goodwill allocated to this business was written off in
2009. See Note 9 for additional information on the anticipated
sale.
The fair
values in the table above exclude $1 million of estimated costs to sell and were
based on the negotiated sales price (achieved through an active auction process)
adjusted for the additional anticipated cash flows from operations prior to and
following the anticipated sale date. The sales price is consistent
with and corroborated by fair values modeled internally using inputs obtained
from third parties and appropriate discount rates.
Financial Instruments Not Recorded at
Fair Value
(PPL,
PPL Energy Supply and PPL Electric)
NPNS
PPL and
PPL Energy Supply enter into full-requirement sales contracts, power purchase
agreements, certain retail energy and physical capacity
contracts. These contracts range in maturity through 2023 and qualify
for NPNS. PPL Electric has also entered into contracts that qualify
for NPNS. See "Energy Purchase Commitments" within Note 14 for
information about PPL Electric's competitive solicitations. All of
these contracts are accounted for using accrual accounting; therefore, there
were no amounts recorded on the Balance Sheets at December 31, 2009 and
2008. The estimated fair value of these contracts was:
|
Net
Asset (Liability)
|
||||||||
|
December 31,
2009
|
December 31,
2008
|
|||||||
|
PPL
|
$
|
122
|
$
|
136
|
||||
|
PPL
Energy Supply
|
334
|
239
|
||||||
|
PPL
Electric
|
(216
|
)
|
(103
|
)
|
||||
Other
Financial
instruments for which the carrying amount on the Balance Sheets and the
estimated fair value (based on quoted market prices for the securities where
available and estimates based on current rates where quoted market prices are
not available) are different, are set forth below. The carrying value
of "Collateral on PLR energy supply to/from affiliate" at December 31, 2008 and
"Short-term debt" at December 31, 2009 and 2008 on the Balance Sheets
represented or approximated fair value due to the liquid nature of the
instruments or variable interest rates associated with the financial
instruments.
|
December 31,
2009 (a)
|
December 31,
2008
|
|||||||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
|
PPL
|
||||||||||||||||
|
Long-term
debt
|
$
|
7,143
|
$
|
7,280
|
$
|
7,838
|
$
|
6,785
|
||||||||
|
PPL
Energy Supply
|
||||||||||||||||
|
Long-term
debt
|
5,031
|
5,180
|
5,196
|
4,507
|
||||||||||||
|
PPL
Electric
|
||||||||||||||||
|
Long-term
debt
|
1,472
|
1,567
|
1,769
|
1,682
|
||||||||||||
|
(a)
|
The
effect of third-party credit enhancements is not included in the fair
value measurement. See "New Accounting Guidance Adopted -
Issuer's Accounting for Liabilities Measured at Fair Value with a
Third-Party Credit Enhancement" within Note 1 for additional
information.
|
Credit
Concentration Associated with Financial Instruments
(PPL,
PPL Energy Supply and PPL Electric)
PPL and
its subsidiaries enter into contracts with many entities for the purchase and
sale of energy. Many of these contracts are considered a normal part
of doing business and, as such, the fair value of these contracts is not
reflected in the financial statements. However, the fair value of
these contracts is considered when committing to new business from a credit
perspective. See Note 18 for information on credit policies used by
PPL and its subsidiaries to manage credit risk, including master netting
arrangements and collateral requirements.
(PPL)
At
December 31, 2009, PPL had credit exposure of $3.6 billion to energy trading
partners, excluding the effects of netting arrangements and
collateral. As a result of netting arrangements and collateral, PPL's
credit exposure was reduced to $1.2 billion. One of the
counterparties accounted for 23% of this exposure, and no other individual
counterparty accounted for more than 13% of the exposure. Ten
counterparties accounted for $926 million, or 74%, of the net
exposure. Nine of these counterparties had an investment grade credit
rating from S&P and accounted for 97% of the top ten counterparty
exposures. The remaining counterparty has not been rated by S&P,
but is current on its obligations.
(PPL
Energy Supply)
At
December 31, 2009, PPL Energy Supply had credit exposure of $3.6 billion to
energy trading partners, excluding related parties and the effects of netting
arrangements and collateral. As a result of netting arrangements and
collateral, this credit exposure was reduced to $1.2 billion. One of
the counterparties accounted for 23% of this exposure, and no other individual
counterparty accounted for more than 13% of the exposure. Ten
counterparties accounted for $926 million, or 74%, of the net
exposure. Nine of these counterparties had an investment grade credit
rating from S&P and accounted for 97% of the top ten counterparty
exposures. The remaining counterparty has not been rated by S&P,
but is current on its obligations.
At
December 31, 2009, PPL Energy Supply's credit exposure under certain energy
supply contracts to PPL Electric was $203 million, excluding the effects of
netting arrangements. As a result of netting arrangements, this
credit exposure was unchanged.
(PPL
Electric)
At
December 31, 2009, PPL Electric had no credit exposure under energy supply
contracts (including its supply contracts with its affiliate PPL
EnergyPlus). All counterparties had an investment grade credit rating
from S&P.
Risk
Management Objectives
(PPL, PPL Energy Supply and PPL
Electric)
PPL has a
risk management policy approved by the Board of Directors to manage market risk
and counterparty credit risk. The RMC, comprised of senior management
and chaired by the Chief Risk Officer, oversees the risk management
function. Key risk control activities designed to ensure compliance
with the risk policy and detailed programs include, but are not limited to,
credit review and approval, validation of transactions and market prices,
verification of risk and transaction limits, VaR analyses, portfolio stress
tests, gross margin at risk analyses, sensitivity analyses, and daily portfolio
reporting, including open positions, determinations of fair value, and other
risk management metrics.
Market
risk is the potential loss PPL and its subsidiaries may incur as a result of
price changes associated with a particular financial or commodity
instrument.
PPL and
PPL Energy Supply are exposed to market risk from:
|
·
|
commodity
price basis and volumetric risks for energy and energy-related products
associated with the sale of electricity from its generating assets and
other electricity marketing activities and the purchase of fuel and
fuel-related commodities for generating assets, as well as for proprietary
trading activities;
|
|
·
|
interest
rate and price risk associated with debt used to finance operations, as
well as debt and equity securities in NDT funds and defined benefit plans;
and
|
|
·
|
foreign
currency exchange rate risk associated with investments in U.K.
affiliates, as well as purchases of equipment in currencies other than
U.S. dollars.
|
PPL and
PPL Energy Supply utilize forward contracts, futures contracts, options, swaps
and structured deals such as tolling agreements as part of the risk management
strategy to minimize unanticipated fluctuations in earnings caused by changes in
commodity prices, interest rates and foreign currency exchange
rates. All derivatives are recognized on the balance sheet at their
fair value, unless they qualify for NPNS.
PPL and
PPL Electric are exposed to market price and volumetric risks from PPL
Electric's obligation as the PLR to its customers. It has mitigated
that risk with the fixed-price PLR agreement with PPL EnergyPlus, which expired
at the end of 2009, and by entering into supply agreements for its customers for
2010 and 2011.
Credit
risk is the potential loss PPL and its subsidiaries may incur due to a
counterparty's non-performance, including defaults on payments and energy
commodity deliveries.
PPL and
PPL Energy Supply are exposed to credit risk from:
|
·
|
commodity
derivatives with its energy trading partners, which include other energy
companies, fuel suppliers, and financial institutions;
|
|
·
|
interest
rate derivatives with financial institutions; and
|
|
·
|
foreign
currency derivatives with financial
institutions.
|
PPL and
PPL Electric are exposed to credit risk from PPL Electric's supply agreements
for its customers for 2010 and 2011.
The
majority of the credit risk stems from PPL Energy Supply's and PPL Electric's
commodity derivatives for multi-year contracts for energy sales and
purchases. If the counterparties fail to perform their obligations
under such contracts and PPL and its subsidiaries could not replace the sales or
purchases at the same prices as those under the defaulted contracts, PPL would
incur financial losses. Those losses would be recognized immediately
or through lower revenues or higher costs in future years, depending on the
accounting treatment for the defaulted contracts.
PPL and
its subsidiaries have credit policies to manage their credit risk, including the
use of an established credit approval process, daily monitoring of counterparty
positions, and the use of master netting agreements. These agreements
generally include credit mitigation provisions, such as margin, prepayment or
collateral requirements. PPL and its subsidiaries may request the
additional credit assurance, in certain circumstances, in the event that the
counterparties' credit ratings fall below investment grade or their exposures
exceed an established credit limit. See Note 17 for credit
concentration associated with financial instruments.
PPL's and
PPL Energy Supply's obligation to return counterparty cash collateral under
master netting arrangements was $355 million and $22 million at
December 31, 2009 and 2008.
PPL
Electric had no obligation to return cash collateral to PPL Energy Supply under
master netting arrangements at December 31, 2009 and an obligation of $300
million at December 31, 2008. See Note 15 for additional
information.
At
December 31, 2009, PPL, PPL Energy Supply and PPL Electric had not posted any
cash collateral under master netting arrangements. At December 31,
2008, PPL and PPL Electric had not posted any cash collateral under master
netting arrangements and PPL Energy Supply only had posted the $300 million
noted above.
Commodity Price Risk (Non-trading)
(PPL
and PPL Energy Supply)
Commodity
price and basis risks are among PPL's and PPL Energy Supply's most significant
risks due to the level of investment that PPL and PPL Energy Supply maintain in
their generation assets, as well as the extent of their marketing and
proprietary trading activities. Several factors influence price
levels and volatilities. These factors include, but are not limited
to, seasonal changes in demand, weather conditions, available generating assets
within regions, transportation availability and reliability within and between
regions, market liquidity, and the nature and extent of current and potential
federal and state regulations.
To hedge
the impact of market price fluctuations on PPL's and PPL Energy Supply's
energy-related assets, liabilities and other contractual arrangements discussed
above, 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. Certain contracts
qualify for NPNS or are non-derivatives and are therefore not reflected in the
financial statements until delivery. See Note 17 for additional
information on NPNS. PPL and PPL Energy Supply segregate their
remaining non-trading activities into two categories: cash flow hedge
activity and economic activity.
Cash Flow
Hedges
PPL and
PPL Energy Supply enter into financial and physical derivative contracts,
including forwards, futures, swaps and options, to hedge the price risk
associated with electricity, gas, oil and other commodities. Many of
these contracts have qualified for hedge accounting. Contracts that
existed at December 31, 2009 range in maturity through 2014. At
December 31, 2009, the accumulated net unrealized after-tax gains on
qualifying derivatives that are expected to be reclassified into earnings during
the next 12 months were $233 million for both PPL and PPL Energy
Supply. Cash flow hedges are discontinued if it is no longer probable
that the original forecasted transaction will occur by the end of the originally
specified time periods and any amounts previously recorded in AOCI are
reclassified to earnings. For 2009, 2008 and 2007, such
reclassifications were an after-tax gain of $9 million, an after-tax loss of $8
million and an insignificant amount.
For 2009,
2008 and 2007, hedge ineffectiveness associated with energy derivatives was,
after tax, a loss of $174 million, a gain of $310 million and a loss of $3
million. Certain power and gas cash flow hedges failed 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 as a result of these reversals.
Economic
Activity
PPL
Energy Supply also uses derivative contracts to economically hedge the impact of
market price fluctuations on its energy-related assets, liabilities and other
contractual arrangements that do not receive hedge accounting
treatment. PPL Energy Supply refers to these transactions as economic
activity. The economic activity category includes energy derivative
transactions that have previously qualified or could potentially qualify for
hedge accounting; however, these transactions have either been disqualified from
hedge accounting or management has not elected to designate them as accounting
hedges. 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). These contracts range
in maturity through 2017. Additionally, premium amortization of $53
million associated with options classified as economic activity and the
ineffective portion of qualifying cash flow hedges, including the entire change
in fair value for certain cash flow hedges that failed effectiveness testing
during the current period as discussed in the preceding "Cash Flow Hedges"
section, are also included in economic activity.
Examples
of transactions represented in this category include certain purchase contracts
used to supply full-requirement sales contracts; FTRs or basis swaps used to
hedge basis risk associated with the sale of generation or supplying
full-requirement sales contracts; spark spreads (sale of electricity with the
simultaneous purchase of fuel); retail gas activities; and fuel oil swaps used
to hedge price escalation clauses in coal transportation and other fuel-related
contracts. PPL Energy Supply also uses options, which include the
sale of call options and the purchase of put options tied to a particular
generating unit. Since PPL Energy Supply owns the physical generating
capacity, its price exposure is limited to the cost of the particular generating
unit and does not expose PPL Energy Supply to uncovered market price
risk. PPL Energy Supply also purchases call options or sells put
options to create a net purchase position to cover an overall short position in
its non-trading portfolio.
The gains
(losses) for this activity are reflected in the Statements of Income as
follows.
|
Gains
(Losses)
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
Revenues
|
||||||||||||
|
Unregulated
retail electric and gas
|
$
|
6
|
$
|
5
|
||||||||
|
Wholesale
energy marketing
|
(280
|
)
|
1,056
|
$
|
(145
|
)
|
||||||
|
Operating
Expenses
|
||||||||||||
|
Fuel
|
49
|
(79
|
)
|
15
|
||||||||
|
Energy
purchases
|
(158
|
)
|
(553
|
)
|
185
|
|||||||
The net
gains (losses) recorded in "Wholesale energy marketing" resulted primarily from
certain full-requirement sales contracts in which PPL Energy Supply did not
elect NPNS and from hedge ineffectiveness, including hedges that failed
effectiveness testing, as discussed in the "Cash Flow Hedges" section
above. The net gains (losses) recorded in "Energy purchases" resulted
primarily from certain purchase contracts to supply the full-requirement sales
contracts noted above for which PPL Energy Supply did not elect hedge treatment
and from hedge ineffectiveness, including hedges that failed effectiveness
testing.
Commodity Price Risk (Trading)
(PPL
and PPL Energy Supply)
PPL
Energy Supply also executes energy contracts to take advantage of market
opportunities. As a result, PPL Energy Supply may at times create a
net open position in its portfolio that could result in significant losses if
prices do not move in the manner or direction anticipated. PPL Energy
Supply's trading activity is shown in "Net energy trading margins" on the
Statements of Income.
Commodity Volumetric Activity
(PPL
and PPL Energy Supply)
PPL
Energy Supply currently employs four primary strategies to maximize the value of
its wholesale energy portfolio. As further discussed below, these
strategies include the sales of baseload generation, optimization of
intermediate and peaking generation, marketing activities, and proprietary
trading activities.
Sales of Baseload
Generation
PPL
Energy Supply has a formal hedging program for its baseload generation fleet,
which includes 7,370 MW of generating capacity. The objective of this
program is to provide a reasonable level of near-term cash flow and earnings
certainty for the next three years while preserving upside potential of power
price increases over the medium term; however, in certain instances, PPL Energy
Supply will sell power and purchase fuel beyond this three-year
period. PPL Energy Supply sells its expected generation output on a
forward basis using both derivative and non-derivative
instruments. Both are included in the following tables.
The
following table presents the expected sales, in GWh, of baseload generation
based on current forecasted assumptions for 2010-2014. These expected
sales could be impacted by several factors, including plant
availability.
|
2010
|
2011
|
2012
|
2013
|
2014
|
||||||||||
|
52,114
|
52,087
|
56,130
|
55,184
|
55,504
|
||||||||||
The
following table presents the percentage of expected baseload generation sales
shown above that has been sold forward under fixed-price contracts and the
related percentage of fuel that has been purchased or committed at
December 31, 2009.
|
Derivative
|
Total
Power
|
Fuel
Purchases (c)
|
||||||||||||||
|
Year
|
Sales
(a)
|
Sales
(b)
|
Coal
|
Nuclear
|
||||||||||||
|
2010
|
91%
|
99%
|
99%
|
100%
|
||||||||||||
|
2011
|
80%
|
88%
|
89%
|
100%
|
||||||||||||
|
2012
|
48%
|
55%
|
70%
|
100%
|
||||||||||||
|
2013
|
6%
|
13%
|
57%
|
100%
|
||||||||||||
|
2014
|
1%
|
5%
|
51%
|
100%
|
||||||||||||
|
(a)
|
Excludes
non-derivative contracts and contracts that qualify for
NPNS. Volumes for option contracts factor in the probability of
an option being exercised and may be less than the notional amount of the
option. Percentages are based on fixed-price contracts
only.
|
|
|
(b)
|
Amount
represents derivative and non-derivative contracts. Volumes for
option contracts factor in the probability of an option being exercised
and may be less than the notional amount of the
option. Percentages are based on fixed-price contracts
only.
|
|
|
(c)
|
Coal
and nuclear contracts receive accrual accounting treatment, as they are
not derivative contracts. Percentages are based on both fixed-
and variable-priced contracts.
|
In
addition to the fuel purchases above, PPL Energy Supply attempts to economically
hedge the fuel price risk that is within its fuel-related contracts and coal
transportation contracts, which are tied to changes in crude oil or diesel
prices. The following table presents the volumes (in thousands of
barrels) of derivative contracts used in support of this strategy at
December 31, 2009.
|
Contract
Type
|
2010
|
2011
|
2012
|
|||||||
|
Oil
Swaps
|
420
|
408
|
180
|
|||||||
Optimization of Intermediate
and Peaking Generation
In
addition to its baseload generation activities, PPL Energy Supply attempts to
optimize the overall value of its intermediate and peaking fleet, which includes
4,349 MW of gas and oil-fired generation. PPL Energy Supply uses both
option and non-option contracts to support this strategy. The
following table presents the volumes of derivative contracts used in support of
this strategy at December 31, 2009.
|
Units
|
2010
|
||||||
|
Net
Power Sales:
|
|||||||
|
Options
(a)
|
GWh
|
507
|
|||||
|
Non-option
contracts (b)
|
GWh
|
1,156
|
|||||
|
Net
Fuel Sales:
|
|||||||
|
Non-option
contracts (c)
|
Barrels
|
145,000
|
|||||
|
Net
Power/Fuel Purchases:
|
|||||||
|
Non-option
contracts
|
Bcf
|
9.3
|
|||||
|
(a)
|
Volumes
for option contracts factor in the probability of an option being
exercised and may be less than the notional amount of the
option.
|
|
|
(b)
|
Included
in these volumes are exercised option contracts that converted to
non-option derivative contracts.
|
|
|
(c)
|
Represents
the forward sale of physical oil inventory with a January 2010
delivery.
|
Marketing
Activities
PPL
Energy Supply's marketing portfolio is comprised of full-requirement sales
contracts and their related supply contracts, retail gas and electricity sales
contracts and other marketing activities. The full-requirement sales
contracts and their related supply contracts make up a significant component of
the marketing portfolio. The obligations under the full-requirement
sales contracts include supplying a bundled product of energy, capacity, RECs,
and other ancillary products. PPL Energy Supply uses a variety of
strategies to hedge its full-requirement sales contracts, including purchasing
energy at a liquid trading hub or directly at the load delivery zone, purchasing
capacity and RECs in the market and supplying the energy, capacity and RECs with
its generation. RECs are not derivatives and are excluded from the
table below. The following table presents the volumes of
(sales)/purchase contracts, excluding FTRs, basis and capacity contracts, used
in support of these activities at December 31, 2009.
|
Units
|
2010
|
2011
|
2012
|
2013
|
2014
- 2019
|
|||||||||||||||||
|
Energy
sales contracts (a)
|
GWh
|
(32,866
|
)
|
(14,693
|
)
|
(4,364
|
)
|
(2,233
|
)
|
(10,122
|
)
|
|||||||||||
|
Related
energy supply contracts
|
||||||||||||||||||||||
|
Energy
purchases
|
GWh
|
28,919
|
12,353
|
2,207
|
92
|
|||||||||||||||||
|
Volumetric
hedges (b)
|
GWh
|
170
|
218
|
48
|
||||||||||||||||||
|
Volumetric
hedges (b)
|
Bcf
|
(0.6
|
)
|
|||||||||||||||||||
|
Generation
Supply
|
GWh
|
3,327
|
2,240
|
2,232
|
2,135
|
10,122
|
||||||||||||||||
|
(a)
|
The
majority of PPL Energy Supply's full-requirement sales contracts receive
accrual accounting as they qualify for NPNS or are not derivative
contracts. Also included in these volumes are the sales from
PPL EnergyPlus to PPL Electric to supply PPL Electric's 2010 PLR load
obligation.
|
|
|
(b)
|
PPL
Energy Supply uses power and gas options, swaps and futures to hedge the
volumetric risk associated with full-requirement sales contracts since the
demand for power varies hourly. Volumes for option contracts
factor in the probability of an option being exercised and may be less
than the notional amount of the
option.
|
As noted
above, PPL Energy Supply's marketing activities also include its retail gas
portfolios. PPL Energy Supply has sold a total of 8.2 Bcf of gas to
retail customers through 2012, all of which has been hedged with gas
purchases.
FTRs and Other Basis
Positions
PPL
Energy Supply buys and sells FTRs and other basis positions to mitigate the
basis risk between delivery points related to the sales of its generation, the
supply of its full-requirement sales contracts and retail contracts, as well as
for proprietary trading purposes. The following table presents the
volumes of derivative FTR and basis (sales)/purchase contracts at
December 31, 2009.
|
Commodity
|
Units
|
2010
|
2011
|
2012
|
|||||||||
|
FTRs
|
GWh
|
38,309
|
406
|
||||||||||
|
Power
Basis Positions
|
GWh
|
(19,086
|
)
|
(861
|
)
|
||||||||
|
Gas
Basis Positions
|
Bcf
|
3.2
|
0.1
|
(0.3
|
)
|
||||||||
Capacity
Positions
PPL
Energy Supply buys and sells capacity related to the sales of its generation and
the supply of its full-requirement sales contracts, as well as for proprietary
trading purposes. The following table presents the volumes of
derivative capacity (sales)/purchase contracts (in MW-months) at
December 31, 2009.
|
2010
|
2011
|
2012
|
2013
|
2014
- 2023 (a)
|
|||||||||
|
(90,960
|
)
|
(49,193
|
)
|
(11,894
|
)
|
1,626
|
2,720
|
||||||
|
(a)
|
2,972
MW-months deliver in the 2014 to 2016
period.
|
Proprietary Trading
Activity
At
December 31, 2009, PPL Energy Supply's proprietary trading positions,
excluding FTRs, basis and capacity contracts, were not significant.
Interest
Rate Risk
(PPL and PPL
Energy Supply)
PPL and
its subsidiaries have issued debt to finance its operations, which results in an
exposure to interest rate risk. PPL and its subsidiaries utilize
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 and its subsidiaries' debt portfolio due to changes
in benchmark interest rates.
Cash Flow
Hedges
Interest
rate risks include exposure to adverse interest rate movements for outstanding
variable rate debt and for future anticipated financings. PPL and PPL
Energy Supply may enter into financial interest rate swap contracts that qualify
as cash flow hedges to hedge floating interest rate risk associated with both
existing and anticipated debt issuances. For PPL, these interest rate
swap contracts range in maturity through 2041 and had a notional value of $425
million at December 31, 2009. For 2009, 2008 and 2007, hedge
ineffectiveness associated with these derivatives was not
significant. No contracts were outstanding at PPL Energy Supply at
December 31, 2009.
WPDH
Limited holds a net notional position in cross-currency swaps totaling $302
million 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. For 2009, 2008 and 2007, no amounts were recorded
related to hedge ineffectiveness.
Cash flow
hedges are discontinued if it is no longer probable that the original forecasted
transaction will occur by the end of the originally specified time periods and
any amounts previously recorded in AOCI are reclassified to
earnings. PPL reclassified a net after-tax gain of $1 million in 2009
and a net after-tax loss of $3 million in 2007. PPL had no such
reclassifications in 2008. PPL Energy Supply had no such
reclassifications in 2009, 2008 and 2007.
At
December 31, 2009, the accumulated net unrealized after-tax losses on
qualifying derivatives that are expected to be reclassified into earnings during
the next 12 months were $1 million for PPL and insignificant for PPL Energy
Supply. Amounts are reclassified as the hedged interest payments are
made.
Fair Value
Hedges
PPL and
PPL Energy Supply are exposed to changes in the fair value of their domestic and
international debt portfolios. To manage this risk, PPL and PPL
Energy Supply may enter into financial contracts to hedge fluctuations in the
fair value of existing debt issuances due to changes in benchmark interest
rates. At December 31, 2009, PPL held contracts that range in
maturity through 2047 and had a notional value of $750 million. PPL
Energy Supply did not hold any such contracts at December 31,
2009. PPL and PPL Energy Supply did not recognize any gains or losses
resulting from the ineffective portion of fair value hedges or from a portion of
the hedging instrument being excluded from the assessment of hedge effectiveness
for 2009, 2008 and 2007. Additionally, PPL recognized a net after-tax
gain of $4 million from hedges of debt issuances that no longer qualified as
fair value hedges for 2009, while the amounts were not significant for 2008 and
2007. PPL Energy Supply did not recognize any gains or losses
resulting from hedges of debt issuances that no longer qualified as fair value
hedges for 2009, 2008 and 2007.
Foreign
Currency Risk
(PPL and
PPL Energy Supply)
PPL and
PPL Energy Supply are exposed to foreign currency risk, primarily through
investments in U.K. affiliates. In addition, PPL's and PPL Energy
Supply's domestic operations may make purchases of equipment in currencies other
than U.S. dollars.
PPL and
PPL Energy Supply have adopted a foreign currency risk management program
designed to hedge certain foreign currency exposures, including firm
commitments, recognized assets or liabilities, anticipated transactions and net
investments. In addition, PPL and PPL Energy Supply enter into
financial instruments to protect against foreign currency translation risk of
expected earnings.
Cash Flow
Hedges
PPL and
PPL Energy Supply may enter into foreign currency derivatives associated with
foreign currency-denominated debt and the exchange rate associated with firm
commitments denominated in foreign currencies; however, at December 31,
2009, there were no existing contracts of this nature. Amounts
previously classified in AOCI are reclassified as the hedged interest payments
are made and as the related equipment is depreciated.
Cash flow
hedges are discontinued if it is no longer probable that the original forecasted
transaction will occur by the end of the originally specified time periods and
any amounts previously recorded in AOCI are reclassified to
earnings. There were no such reclassifications during 2009, 2008 and
2007.
Fair Value
Hedges
PPL and
PPL Energy Supply enter into foreign currency forward contracts to hedge the
exchange rates associated with firm commitments denominated in foreign
currencies; however, at December 31, 2009, there were no existing contracts
of this nature. PPL and PPL Energy Supply did not recognize any gains
or losses resulting from the ineffective portion of fair value hedges or from a
portion of the hedging instrument being excluded from the assessment of hedge
effectiveness for 2009, 2008 and 2007. Additionally, PPL and PPL
Energy Supply did not recognize any gains or losses resulting from hedges of
firm commitments that no longer qualified as fair value hedges for 2009, 2008
and 2007.
Net Investment
Hedges
PPL and
PPL Energy Supply may enter into foreign currency contracts to protect the value
of a portion of their net investment in WPD. The total notional
amount of the contracts outstanding at December 31, 2009 was £40 million
(approximately $78 million based on contracted rates). The settlement
dates of these contracts range from March 2010 through June 2011. At
December 31, 2009, the fair value of these positions was a net asset of $13
million. For 2009, 2008 and 2007, PPL and PPL Energy Supply
recognized after tax net investment hedge losses of $5 million, gains of $20
million and $2 million in the foreign currency translation adjustment component
of OCI. At December 31, 2009, PPL and PPL Energy Supply had $11
million of accumulated net investment hedge gains, after tax, that were included
in the foreign currency translation adjustment component of AOCI compared with
$16 million of gains at December 31, 2008. See Note 15 for
additional information.
Economic
Activity
PPL and
PPL Energy Supply may enter into foreign currency contracts as an economic hedge
of anticipated earnings denominated in British pounds sterling. At
December 31, 2009, the total exposure hedged was £48 million and the net
fair value of these positions was a net asset of $2 million. These
contracts had termination dates ranging from January 2010 to June
2010. No similar hedging instruments were outstanding at
December 31, 2008. Gains and losses, both realized and
unrealized, on these contracts are included in "Other Income - net" on the
Statements of Income. For 2009, PPL and PPL Energy Supply recorded
net losses of $9 million. For 2008 and 2007, PPL and PPL Energy
Supply recorded net gains of $9 million and net losses of $4 million related to
similar average rate forwards and average rate options. See Note 15
for additional information.
Accounting
and Reporting
(PPL,
PPL Energy Supply and PPL Electric)
All
derivative instruments are recorded at fair value on the balance sheet as an
asset or liability (unless they qualify for NPNS), and changes in the
derivatives' fair value are recognized currently in earnings unless specific
hedge accounting criteria are met. See Note 17 for additional
information on NPNS.
PPL and
its subsidiaries have elected not to offset net derivative positions in the
financial statements. Accordingly, PPL and its subsidiaries do not
offset such derivative positions against the fair value of amounts (or amounts
that approximate fair value) recognized for the right to reclaim cash collateral
(a receivable) or the obligation to return cash collateral (a payable) under
master netting arrangements.
Gains and
losses associated with non-trading bilateral sales of electricity at major
market delivery points are netted with purchases that offset the sales at those
same delivery points. A major market delivery point is any delivery
point with liquid pricing available.
PPL and
PPL Energy Supply reflect their net realized and unrealized gains and losses
associated with all derivatives that are held for trading purposes in the "Net
energy trading margins" line on the Statements of Income.
The
circumstances and intent existing at the time that derivative contracts are
entered into are used to determine their accounting designation, which is
subsequently verified by an independent internal group on a daily
basis. The following summarizes the guidelines that have been
provided to the marketers who are responsible for contract designation for
derivative energy contracts.
|
·
|
Any
wholesale and retail contracts to sell electricity and the related
capacity that do not meet the definition of a derivative receive accrual
accounting.
|
|
·
|
Physical
electricity-only transactions can receive cash flow hedge treatment if all
of the qualifications are met.
|
|
·
|
Physical
capacity-only transactions to sell excess capacity from PPL's and PPL
Energy Supply's generation qualify for NPNS. The forward value
of these transactions is not recorded in the financial statements and has
no earnings impact until delivery.
|
|
·
|
Any
physical energy sale or purchase not intended to hedge an economic
exposure is considered speculative, with unrealized gains or losses
recorded immediately through earnings.
|
|
·
|
Financial
transactions that can be settled in cash do not qualify for NPNS because
they do not require physical delivery. These transactions can
receive cash flow hedge treatment if they lock in the cash flows PPL and
PPL Energy Supply will receive or pay for energy expected to be sold or
purchased in the spot market.
|
|
·
|
PPL
and PPL Energy Supply purchase FTRs for both proprietary trading
activities and hedging purposes. FTRs, although economically
effective as electricity basis hedges, do not currently qualify for hedge
accounting treatment. Unrealized and realized gains and losses
from FTRs that were entered into for trading purposes are recorded in "Net
energy trading margins" on the Statements of Income. Unrealized
and realized gains and losses from FTRs that were entered into for hedging
purposes are recorded in "Energy purchases" on the Statements of
Income.
|
|
·
|
Physical
and financial transactions for gas and oil to meet fuel and retail
requirements can receive cash flow hedge treatment if they lock in the
price PPL and PPL Energy Supply will pay and meet the definition of a
derivative.
|
|
·
|
Certain
option contracts may receive hedge accounting treatment. Those
that are not eligible are marked to fair value through
earnings.
|
Unrealized
gains or losses on cash flow hedges are recorded in OCI, excluding
ineffectiveness that is recognized immediately in earnings. These
unrealized gains and losses become realized when the contracts settle and are
recognized in earnings when the hedged transactions occur.
The
following is a summary of certain guidelines that have been provided to PPL's
Finance Department, which is responsible for contract designation for interest
rate and foreign currency derivatives.
|
·
|
Transactions
to lock in an interest rate prior to a debt issuance can be designated as
cash flow hedges. Any unrealized gains or losses on
transactions receiving cash flow hedge treatment are recorded in OCI and
are amortized as a component of interest expense when the hedged
transactions occur.
|
|
·
|
Transactions
entered into to hedge fluctuations in the fair value of existing debt can
be designated as fair value hedges. To the extent that the
change in the fair value of the derivative offsets the change in the fair
value of the existing debt, there is no earnings impact, as both changes
are reflected in interest expense. Realized gains and losses
over the life of the hedge are reflected in interest
expense.
|
|
·
|
Transactions
entered into to hedge the value of a net investment of foreign operations
can be designated as net investment hedges. To the extent that
the derivatives are highly effective at hedging the value of the net
investment, gains and losses are recorded in the foreign currency
translation adjustment component of OCI and will not be recorded in
earnings until the investment is substantially
liquidated.
|
|
·
|
Derivative
transactions that do not qualify for hedge accounting treatment are marked
to fair value through earnings. These transactions generally
include hedges of earnings translation risk associated with subsidiaries
that report their financial statements in a currency other than the U.S.
dollar. As such, these transactions eliminate earnings
volatility due solely to changes in foreign currency exchange
rates.
|
(PPL
and PPL Energy Supply)
The
following tables present the fair value and location of derivative instruments
recorded on the Balance Sheets at December 31, 2009.
|
PPL
|
PPL
Energy Supply
|
|||||||||||||||||||||||||||||||
|
Derivatives
designated as hedging instruments
|
Derivatives
not designated as hedging instruments (a)
|
Derivatives
designated as hedging instruments
|
Derivatives
not designated as hedging instruments (a)
|
|||||||||||||||||||||||||||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||||||||||||||
|
Current:
|
||||||||||||||||||||||||||||||||
|
Price
Risk Management Assets/Liabilities (b)
|
||||||||||||||||||||||||||||||||
|
Interest
rate swaps
|
$
|
10
|
||||||||||||||||||||||||||||||
|
Cross-currency
swaps contracts
|
1
|
$
|
4
|
$
|
1
|
$
|
4
|
|||||||||||||||||||||||||
|
Foreign
currency exchange contracts
|
8
|
$
|
2
|
8
|
$
|
2
|
||||||||||||||||||||||||||
|
Commodity
contracts
|
741
|
219
|
1,395
|
$
|
1,279
|
741
|
219
|
1,395
|
$
|
1,279
|
||||||||||||||||||||||
|
760
|
223
|
1,397
|
1,279
|
750
|
223
|
1,397
|
1,279
|
|||||||||||||||||||||||||
|
Noncurrent:
|
||||||||||||||||||||||||||||||||
|
Price
Risk Management Assets/Liabilities (b)
|
||||||||||||||||||||||||||||||||
|
Interest
rate swaps
|
40
|
|||||||||||||||||||||||||||||||
|
Cross-currency
swaps contracts
|
11
|
11
|
||||||||||||||||||||||||||||||
|
Foreign
currency exchange contracts
|
5
|
5
|
||||||||||||||||||||||||||||||
|
Commodity
contracts
|
578
|
118
|
640
|
464
|
578
|
118
|
640
|
464
|
||||||||||||||||||||||||
|
634
|
118
|
640
|
464
|
594
|
118
|
640
|
464
|
|||||||||||||||||||||||||
|
Total
derivatives
|
$
|
1,394
|
$
|
341
|
$
|
2,037
|
$
|
1,743
|
$
|
1,344
|
$
|
341
|
$
|
2,037
|
$
|
1,743
|
||||||||||||||||
|
(a)
|
$375
million of net gains associated with derivatives that were no longer
designated as hedging instruments are recorded in AOCI at
December 31, 2009.
|
|
|
(b)
|
Represents
the location on the balance sheet.
|
The
after-tax balances of accumulated net gains (losses) (excluding net investment
hedges) in AOCI were:
|
2009
|
2008
|
2007
|
|||||||||||
|
PPL
|
$
|
602
|
$
|
(21
|
)
|
$
|
(192
|
)
|
|||||
|
PPL
Energy Supply
|
573
|
(12
|
)
|
(188
|
)
|
||||||||
(PPL)
The
following tables present the pre-tax effect of derivative instruments recognized
in income or OCI in 2009.
|
Derivatives
in Fair Value Hedging Relationships
|
Hedged
Items in Fair Value Hedging Relationships
|
Location
of Gains (Losses) Recognized in Income
|
Gain
(Loss) Recognized in Income on Derivative
|
Gain
(Loss) Recognized in
Income
on Related Item
|
||||||||
|
Interest
rate swaps
|
Fixed
rate debt
|
Interest
expense
|
$
|
12
|
$
|
29
|
||||||
|
Other
income-net
|
7
|
|||||||||||
|
Derivative
Relationships
|
Derivative
Gain (Loss) Recognized in OCI (Effective Portion)
|
Location
of Gains (Losses) Recognized in Income
|
Gain
(Loss) Reclassified from AOCI into Income (Effective
Portion)
|
Gain
(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount
Excluded from Effectiveness Testing)
|
||||||||||
|
Cash
Flow Hedges:
|
||||||||||||||
|
Interest
rate swaps
|
$
|
64
|
Interest
expense
|
$
|
(2
|
)
|
||||||||
|
Other
income - net
|
1
|
|||||||||||||
|
Cross-currency
swaps
|
(45
|
)
|
Interest
expense
|
2
|
||||||||||
|
Other
income - net
|
(20
|
)
|
||||||||||||
|
Commodity
contracts
|
829
|
Wholesale
energy marketing
|
358
|
$
|
(296
|
)
|
||||||||
|
Fuel
|
(20
|
)
|
2
|
|||||||||||
|
Energy
purchases
|
(544
|
)
|
(7
|
)
|
||||||||||
|
Other
operation and maintenance
|
1
|
|||||||||||||
|
Depreciation
|
1
|
|||||||||||||
|
$
|
848
|
$
|
(223
|
)
|
$
|
(301
|
)
|
|||||||
|
Net
Investment Hedges:
|
||||||||||||||
|
Foreign
currency exchange contracts
|
$
|
(9
|
)
|
|||||||||||
|
Derivatives
Not Designated as Hedging Instruments:
|
Location
of Gains (Losses) Recognized in Income on Derivatives
|
2009
|
||||
|
Foreign
currency exchange contracts
|
Other
income - net
|
$
|
(9
|
)
|
||
|
Commodity
contracts
|
Unregulated
retail electric and gas
|
13
|
||||
|
Wholesale
energy marketing
|
588
|
|||||
|
Net
energy trading margins (a)
|
||||||
|
Fuel
|
12
|
|||||
|
Energy
purchases
|
(808
|
)
|
||||
|
$
|
(204
|
)
|
||||
|
(a)
|
Differs
from statement of income due to intra-month transactions that PPL defines
as spot activity, which is not accounted for as a
derivative.
|
(PPL
Energy Supply)
The
following tables present the pre-tax effect of derivative instruments recognized
in income or OCI in 2009.
|
Derivatives
in Fair Value Hedging Relationships
|
Hedged
Items in Fair Value Hedging Relationships
|
Location
of Gains (Losses) Recognized in Income
|
Gain
(Loss) Recognized in Income on Derivative
|
Gain
(Loss) Recognized in
Income
on Related Item
|
||||||||
|
Interest
rate swaps
|
Fixed
rate debt
|
Interest
expense
|
$
|
1
|
||||||||
|
Derivative
Relationships
|
Derivative
Gain (Loss) Recognized in OCI (Effective Portion)
|
Location
of Gains (Losses) Recognized in Income
|
Gain
(Loss) Reclassified from AOCI into Income (Effective
Portion)
|
Gain
(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount
Excluded from Effectiveness Testing)
|
||||||||||
|
Cash
Flow Hedges:
|
||||||||||||||
|
Interest
rate swaps
|
Interest
expense
|
|||||||||||||
|
Other
income - net
|
||||||||||||||
|
Cross-currency
swaps
|
$
|
(45
|
)
|
Interest
expense
|
$
|
2
|
||||||||
|
Other
income - net
|
(20
|
)
|
||||||||||||
|
Commodity
contracts
|
829
|
Wholesale
energy marketing
|
358
|
$
|
(296
|
)
|
||||||||
|
Fuel
|
(20
|
)
|
2
|
|||||||||||
|
Energy
purchases
|
(544
|
)
|
(7
|
)
|
||||||||||
|
Other
operation and maintenance
|
1
|
|||||||||||||
|
Depreciation
|
1
|
|||||||||||||
|
$
|
784
|
$
|
(222
|
)
|
$
|
(301
|
)
|
|||||||
|
Net
Investment Hedges:
|
||||||||||||||
|
Foreign
currency exchange contracts
|
$
|
(9
|
)
|
|||||||||||
|
Derivatives
Not Designated as Hedging Instruments:
|
Location
of Gains (Losses) Recognized in Income on Derivatives
|
2009
|
||||
|
Foreign
currency exchange contracts
|
Other
income - net
|
$
|
(9
|
)
|
||
|
Commodity
contracts
|
Unregulated
retail electric and gas
|
13
|
||||
|
Wholesale
energy marketing
|
588
|
|||||
|
Net
energy trading margins (a)
|
||||||
|
Fuel
|
12
|
|||||
|
Energy
purchases
|
(808
|
)
|
||||
|
$
|
(204
|
)
|
||||
|
(a)
|
Differs
from statement of income due to intra-month transactions that PPL Energy
Supply defines as spot activity, which is not accounted for as a
derivative.
|
Credit Risk-Related Contingent
Features
(PPL
and PPL Energy Supply)
Certain
of PPL's and PPL Energy Supply's derivative contracts contain credit contingent
provisions which would permit the counterparties with which PPL or PPL Energy
Supply is in a net liability position to require the transfer of additional
collateral upon a decrease in PPL's or PPL Energy Supply's credit
rating. Most of these provisions would require PPL or PPL Energy
Supply to transfer 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. Some of these provisions also would allow the
counterparty to require additional collateral upon each decrease in the credit
rating at levels that remain above investment grade. In either case,
if PPL's or PPL Energy Supply's credit rating were to fall below investment
grade (i.e., below BBB- for S&P or Fitch, or Baa3 for Moody's), and assuming
no assignment to an investment grade affiliate were allowed, most of these
credit contingent provisions require either immediate payment of the net
liability as a termination payment or immediate and ongoing full
collateralization by PPL or PPL Energy Supply on derivative instruments in net
liability positions.
Additionally,
certain of PPL's and PPL Energy Supply's derivative contracts contain credit
contingent provisions that require PPL or PPL Energy Supply to provide "adequate
assurance" of performance if the other party has reasonable grounds for
insecurity regarding PPL's or PPL Energy Supply's performance of its obligation
under the contract. A counterparty demanding adequate assurance could
require a transfer of additional collateral or other security, including letters
of credit, cash and guarantees from a creditworthy entity. This would
typically involve negotiations among the parties. However, amounts
disclosed below represent assumed immediate payment or immediate and ongoing
full collateralization for derivative instruments in net liability positions
with "adequate assurance" provisions.
To
determine net liability positions, PPL and PPL Energy Supply use the fair value
of each agreement. The aggregate fair value of all derivative
instruments with the credit contingent provisions described above that were in a
net liability position at December 31, 2009 was $197 million for both PPL
and PPL Energy Supply, of which both had posted collateral of $163 million in
the normal course of business. At December 31, 2009, if the
credit contingent provisions underlying these derivative instruments were
triggered due to a credit downgrade below investment grade, PPL and PPL Energy
Supply would have been required to post an additional $131 million of collateral
to their counterparties.
Goodwill
(PPL and PPL Energy
Supply)
The
changes in the carrying amount of goodwill by segment were:
|
Supply
|
International
Delivery
|
Total
|
||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
|
Balance
at beginning of period (a)
|
$
|
94
|
$
|
94
|
$
|
669
|
$
|
897
|
$
|
763
|
$
|
991
|
||||||||||||
|
Allocation
to discontinued operations (b)
|
(3
|
)
|
(3
|
)
|
||||||||||||||||||||
|
Effect
of foreign currency exchange rates
|
46
|
(228
|
)
|
46
|
(228
|
)
|
||||||||||||||||||
|
Balance
at end of period
|
$
|
91
|
$
|
94
|
$
|
715
|
$
|
669
|
$
|
806
|
$
|
763
|
||||||||||||
|
(a)
|
There
were no accumulated impairment losses related to goodwill recorded at
January 1, 2008.
|
|
|
(b)
|
Allocated
to the Long Island and the majority of the Maine hydroelectric generation
businesses and written off.
|
Other
Intangibles
(PPL)
The gross
carrying amount and the accumulated amortization of other intangible assets
were:
|
December 31,
2009
|
December 31,
2008
|
|||||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||||||
|
Subject
to amortization:
|
||||||||||||||||
|
Land
and transmission rights
|
$
|
272
|
$
|
114
|
$
|
244
|
$
|
110
|
||||||||
|
Emission
allowances/
RECs (a) (b)
|
56
|
88
|
||||||||||||||
|
Lease
arrangement and other (c)
|
375
|
41
|
372
|
23
|
||||||||||||
|
Not
subject to amortization due to indefinite life:
|
||||||||||||||||
|
Land
and transmission rights
|
16
|
16
|
||||||||||||||
|
Easements
|
76
|
67
|
||||||||||||||
|
$
|
795
|
$
|
155
|
$
|
787
|
$
|
133
|
|||||||||
|
(a)
|
Removed
from the Balance Sheets and expensed when consumed or
sold. Consumption expense was $32 million, $25 million, and
$108 million in 2009, 2008, and 2007. Consumption expense is
estimated at $26 million for 2010, $8 million for 2011, $2 million for
2012 and $1 million for 2013 and 2014.
|
|
|
(b)
|
During
2009, PPL recorded $37 million of impairment charges. See Note
17 for additional information.
|
|
|
(c)
|
"Other"
includes costs for the development of licenses, the most significant of
which is the COLA. Amortization of these costs begins when the
related asset is placed in service. See Note 8 for additional
information on the COLA.
|
Current
intangible assets and long-term intangible assets are included in "Other
intangibles" in their respective areas on the Balance Sheets.
Amortization
expense, excluding consumption of emission allowances/RECs, was $22 million, $13
million and $7 million in 2009, 2008 and 2007, and is estimated to be $23
million per year for 2010 through 2014.
(PPL
Energy Supply)
The gross
carrying amount and the accumulated amortization of other intangible assets
were:
|
December 31,
2009
|
December 31,
2008
|
|||||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||||||
|
Subject
to amortization:
|
||||||||||||||||
|
Land
and transmission rights
|
$
|
59
|
$
|
23
|
$
|
42
|
$
|
22
|
||||||||
|
Emission
allowances/
RECs
(a) (b)
|
56
|
88
|
||||||||||||||
|
Lease
arrangement and other (c)
|
375
|
41
|
372
|
23
|
||||||||||||
|
Not
subject to amortization due to indefinite life:
|
||||||||||||||||
|
Easements
|
76
|
67
|
||||||||||||||
|
$
|
566
|
$
|
64
|
$
|
569
|
$
|
45
|
|||||||||
|
(a)
|
Removed
from the Balance Sheets and expensed when consumed or
sold. Consumption expense was $32 million, $25 million, and
$108 million in 2009, 2008, and 2007. Consumption expense is
estimated at $26 million for 2010, $8 million for 2011, $2 million for
2012 and $1 million for 2013 and 2014.
|
|
|
(b)
|
During
2009, PPL Energy Supply recorded $37 million of impairment
charges. See Note 17 for additional
information.
|
|
|
(c)
|
"Other"
includes costs for the development of licenses, the most significant of
which is the COLA. Amortization of these costs begins when the
related asset is placed in service. See Note 8 for additional
information on the COLA.
|
Current
intangible assets and long-term intangible assets are presented as "Other
intangibles" in their respective areas on the Balance Sheets.
Amortization
expense, excluding consumption of emission allowances/RECs, was $19 million, $10
million and $4 million in 2009, 2008 and 2007, and is estimated to be $20
million per year for 2010 through 2014.
(PPL
Electric)
The gross
carrying amount and the accumulated amortization of intangible assets
were:
|
December 31,
2009
|
December 31,
2008
|
|||||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
|||||||||||||
|
Subject
to amortization:
|
||||||||||||||||
|
Land
and transmission rights
|
$
|
214
|
$
|
91
|
$
|
203
|
$
|
89
|
||||||||
|
Not
subject to amortization due to indefinite life:
|
||||||||||||||||
|
Land
and transmission rights
|
16
|
16
|
||||||||||||||
|
$
|
230
|
$
|
91
|
$
|
219
|
$
|
89
|
|||||||||
Intangible
assets are shown as "Intangibles" on the Balance Sheets.
Amortization
expense was $3 million for 2009 and 2008 and $2 million for 2007, and is
estimated to be $3 million per year for 2010 through 2014.
(PPL,
PPL Energy Supply and PPL Electric)
The
annual provisions for amortization have been computed principally in accordance
with the following weighted-average asset lives (in years):
|
Weighted-Average
Life
|
||||
|
Land
and transmission rights
|
67
|
|||
|
Emission
allowances/RECs (a)
|
||||
|
Lease
arrangement and other
|
21
|
|
(a)
|
Expensed
when consumed or sold.
|
Following
are the weighted-average rates of amortization at December 31.
|
2009
|
2008
|
|||||||
|
Land
and transmission rights
|
1.23%
|
1.28%
|
||||||
|
Emission
allowances/RECs (a)
|
||||||||
|
Lease
arrangement and other
|
6.09%
|
6.10%
|
||||||
|
(a)
|
Expensed
when consumed or sold.
|
(PPL
and PPL Energy Supply)
In
November 2009, the NRC approved PPL Susquehanna's application for 20-year
license renewals for each of the Susquehanna nuclear units. Costs of
$17 million were capitalized related to these license renewals. The
weighted-average period prior to the next PPL Susquehanna license renewal is 34
years. See Note 8 for additional information.
(PPL
and PPL Energy Supply)
PPL and
PPL Energy Supply recognized, as liabilities in the financial statements,
various legal obligations associated with the retirement of long-lived assets,
the largest of which relates to the decommissioning of the Susquehanna
plant. Other AROs recorded relate to significant interim retirements
at the Susquehanna plant and various environmental requirements for coal piles,
ash basins and other waste basin retirements.
PPL and
PPL Energy Supply have recorded several conditional AROs, the most significant
of which related to the removal and disposal of asbestos-containing
material.
In
addition to the AROs that were recorded for asbestos-containing material, PPL
and PPL Energy Supply identified other asbestos-related obligations, but were
unable to reasonably estimate their fair values. These retirement
obligations could not be reasonably estimated due to indeterminable settlement
dates. The generation plants, where significant amounts of
asbestos-containing material are located, have been well maintained and large
capital and environmental investments are being made at these
plants. During the previous five years, the useful lives of the
plants had been reviewed and in most cases significantly
extended. Due to these circumstances, PPL management was unable to
reasonably estimate a settlement date or range of settlement dates for the
remediation of all of the asbestos-containing material at the generation
plants. If economic events or other circumstances change that enable
PPL and PPL Energy Supply to reasonably estimate the fair value of these
retirement obligations, they will be recorded at that time.
Other
conditional AROs that were recorded related to treated wood poles, gas-filled
switchgear and fluid-filled cables. These obligations, required by
U.K. law, had an insignificant impact on the financial statements.
PPL and
PPL Energy Supply also identified legal retirement obligations associated with
the retirement of a reservoir and certain transmission assets that could not be
reasonably estimated due to indeterminable settlement dates.
Current
AROs are included in "Other current liabilities" and long-term AROs are included
in "Asset retirement obligations" on the Balance Sheets. The changes
in the carrying amounts of AROs were:
|
2009
|
2008
|
|||||||
|
ARO
at beginning of period
|
$
|
389
|
$
|
376
|
||||
|
Accretion
expense
|
31
|
29
|
||||||
|
New
obligations incurred
|
9
|
12
|
||||||
|
Change
in estimated cash flow or settlement date
|
16
|
(4
|
)
|
|||||
|
Change
in foreign currency exchange rates
|
(2
|
)
|
||||||
|
Obligations
settled
|
(19
|
)
|
(22
|
)
|
||||
|
ARO
at end of period
|
$
|
426
|
$
|
389
|
||||
Changes
in ARO costs and settlement dates, which affect the carrying value of various
AROs, are reviewed periodically to ensure that any material changes are
incorporated into the latest estimates of the obligation. In 2009,
PPL Energy Supply revised cost estimates for several AROs and recognized
additional asbestos liabilities at several plants, the most significant being
the asbestos AROs at the Montour plant. In 2008, PPL Energy Supply
revised estimated settlement dates and cost estimates for remediating several
AROs, the most significant being the ash basins at the Montour and Brunner
Island plants. In addition, PPL Energy Supply recognized additional
liabilities for asbestos-containing material at several plants. The
effect of these new and revised liabilities was to increase the ARO liability
and related plant balances by $25 million in 2009 and $8 million in
2008. The 2009 and 2008 income statement impact of these changes was
insignificant.
The most
significant ARO recorded by PPL and PPL Energy Supply relates to the
decommissioning of the Susquehanna nuclear plant. The expected cost
to decommission the Susquehanna plant is based on a 2002 site-specific study
that estimated the cost to dismantle and decommission each unit immediately
following final shutdown. PPL Susquehanna's 90% share of the total
estimated cost of decommissioning the Susquehanna plant was approximately $936
million measured in 2002 dollars. This estimate includes
decommissioning the radiological portions of the station and the cost of removal
of non-radiological structures and materials. In 2010, PPL Energy
Supply plans to perform a site-specific study to estimate the cost to
decommission each unit. The impact of this study on the recorded ARO
is not now determinable, but could be significant.
The
accrued nuclear decommissioning obligation was $348 million and $322 million at
December 31, 2009 and 2008, and is included in "Asset retirement
obligations" on the Balance Sheets. The fair value of investments
that are legally restricted for the decommissioning of the Susquehanna nuclear
plant was $548 million and $446 million at December 31, 2009 and 2008, and
is included in "Nuclear plant decommissioning trust funds" on the Balance
Sheets. See Notes 17 and 21 for additional information on the nuclear
decommissioning trust funds. Accretion expense, associated with the
obligation, was $26 million in 2009, $24 million in 2008 and $22 million in
2007, and is included in "Other operation and maintenance" on the Statements of
Income.
(PPL
and PPL Electric)
PPL
Electric has identified legal retirement obligations for the retirement of
certain transmission assets that could not be reasonably estimated due to
indeterminable settlement dates. These assets are located on
rights-of-way that allow the grantor to require PPL Electric to relocate or
remove the assets. Since this option is at the discretion of the
grantor of the right-of-way, PPL Electric is unable to determine when these
events may occur.
(PPL,
PPL Energy Supply and PPL Electric)
PPL and
its subsidiaries classify auction rate securities, certain short-term
investments and securities held by the NDT funds as
available-for-sale. Available-for-sale securities are carried on the
balance sheet at fair value. Unrealized gains and losses on these
securities are reported, net of tax, in OCI or are recognized currently in
earnings when a decline in fair value is determined to be
other-than-temporary.
(PPL
and PPL Energy Supply)
The
following table shows the amortized cost of available-for-sale securities and
the gross unrealized gains and losses recorded in AOCI at December
31. See Note 17 for information regarding the fair value of these
securities.
|
2009
|
2008
|
|||||||||||||||||||||||
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross Unrealized
Losses
(a)
|
|||||||||||||||||||
|
PPL
|
||||||||||||||||||||||||
|
Short-term
investments – municipal debt securities
|
$
|
150
|
||||||||||||||||||||||
|
NDT
funds:
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
7
|
4
|
|||||||||||||||||||||
|
Equity
securities:
|
||||||||||||||||||||||||
|
U.S.
large-cap
|
170
|
$
|
89
|
160
|
$
|
22
|
||||||||||||||||||
|
U.S.
mid/small-cap
|
65
|
36
|
60
|
9
|
||||||||||||||||||||
|
Debt
securities:
|
||||||||||||||||||||||||
|
U.S.
Treasury
|
72
|
2
|
67
|
10
|
||||||||||||||||||||
|
U.S.
government agency
|
9
|
13
|
1
|
|||||||||||||||||||||
|
Municipality
|
63
|
2
|
59
|
2
|
||||||||||||||||||||
|
Investment-grade
corporate
|
28
|
1
|
31
|
2
|
||||||||||||||||||||
|
Residential
mortgage-backed securities
|
1
|
2
|
||||||||||||||||||||||
|
Other
|
1
|
|||||||||||||||||||||||
|
Receivables/Payables,
net
|
3
|
3
|
||||||||||||||||||||||
|
418
|
130
|
400
|
46
|
|||||||||||||||||||||
|
Auction
rate securities
|
25
|
29
|
$
|
(5
|
)
|
|||||||||||||||||||
|
Total
PPL
|
$
|
443
|
$
|
130
|
$
|
579
|
$
|
46
|
$
|
(5
|
)
|
|||||||||||||
|
PPL Energy
Supply
|
||||||||||||||||||||||||
|
Short-term
investments – municipal debt securities
|
$
|
150
|
||||||||||||||||||||||
|
NDT
funds:
|
||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$
|
7
|
4
|
|||||||||||||||||||||
|
Equity
securities:
|
||||||||||||||||||||||||
|
U.S.
large-cap
|
170
|
$
|
89
|
160
|
$
|
22
|
||||||||||||||||||
|
U.S.
mid/small-cap
|
65
|
36
|
60
|
9
|
||||||||||||||||||||
|
Debt
securities:
|
||||||||||||||||||||||||
|
U.S.
Treasury
|
72
|
2
|
67
|
10
|
||||||||||||||||||||
|
U.S.
government agency
|
9
|
13
|
1
|
|||||||||||||||||||||
|
Municipality
|
63
|
2
|
59
|
2
|
||||||||||||||||||||
|
Investment-grade
corporate
|
28
|
1
|
31
|
2
|
||||||||||||||||||||
|
Residential
mortgage-backed securities
|
1
|
2
|
||||||||||||||||||||||
|
Other
|
1
|
|||||||||||||||||||||||
|
Receivables/Payables,
net
|
3
|
3
|
||||||||||||||||||||||
|
418
|
130
|
400
|
46
|
|||||||||||||||||||||
|
Auction
rate securities
|
20
|
24
|
$
|
(5
|
)
|
|||||||||||||||||||
|
Total
PPL Energy Supply
|
$
|
438
|
$
|
130
|
$
|
574
|
$
|
46
|
$
|
(5
|
)
|
|||||||||||||
|
(a)
|
Prior
to the April 1, 2009 adoption of accounting guidance addressing
other-than-temporary impairments, there were no unrealized losses recorded
in AOCI on debt securities in the NDT funds. See "New
Accounting Guidance Adopted - Recognition and Presentation of
Other-Than-Temporary Impairments" in Note 1 for additional
information.
|
There
were no securities with gross unrealized losses not recognized in earnings at
December 31, 2009. At December 31, 2008, the fair value of PPL's and
PPL Energy Supply's auction rate securities in an unrealized loss position for
less than 12 months was $21 million and $19 million. The gross
unrealized losses on these securities were $5 million for PPL and PPL Energy
Supply.
The
following table shows the scheduled maturity dates of debt securities held at
December 31, 2009.
|
Maturity
Less
Than
1
Year
|
Maturity
1-5
Years
|
Maturity
5-10
Years
|
Maturity
in
Excess
of
10 Years
|
Total
|
||||||||||||||||
|
PPL
|
||||||||||||||||||||
|
Amortized
Cost
|
$
|
7
|
$
|
79
|
$
|
49
|
$
|
63
|
$
|
198
|
||||||||||
|
Fair
Value
|
7
|
81
|
51
|
64
|
203
|
|||||||||||||||
|
PPL Energy
Supply
|
||||||||||||||||||||
|
Amortized
Cost
|
$
|
7
|
$
|
79
|
$
|
49
|
$
|
58
|
$
|
193
|
||||||||||
|
Fair
Value
|
7
|
81
|
51
|
59
|
198
|
|||||||||||||||
The
following table shows proceeds from and realized gains (losses) on sales of
available-for-sale securities.
|
2009
|
2008
|
2007
|
||||||||||
|
PPL
|
||||||||||||
|
Proceeds
from sales of NDT securities (a)
|
$
|
201
|
$
|
197
|
$
|
175
|
||||||
|
Other
proceeds from sales
|
154
|
126
|
648
|
|||||||||
|
Gross
realized gains (b)
|
27
|
19
|
15
|
|||||||||
|
Gross
realized losses (b)
|
(20
|
)
|
(23
|
)
|
(10
|
)
|
||||||
|
PPL Energy
Supply
|
||||||||||||
|
Proceeds
from sales of NDT securities (a)
|
$
|
201
|
$
|
197
|
$
|
175
|
||||||
|
Other
proceeds from sales
|
154
|
33
|
584
|
|||||||||
|
Gross
realized gains (b)
|
27
|
19
|
15
|
|||||||||
|
Gross
realized losses (b)
|
(20
|
)
|
(23
|
)
|
(10
|
)
|
||||||
|
(a)
|
These
proceeds, along with deposits of amounts collected from customers, are
used to pay income taxes and fees related to managing the
trust. Remaining proceeds are reinvested in the
trust.
|
|
|
(b)
|
Excludes
the impact of other-than-temporary impairment charges recognized in the
Statements of Income.
|
NDT
Funds
Beginning
in January 1999 and ending in December 2009, in accordance with the PUC Final
Order, approximately $130 million of decommissioning costs were recovered from
PPL Electric's customers through the CTC over the 11-year life of the CTC rather
than the remaining life of the Susquehanna nuclear plant. The
recovery included a return on unamortized decommissioning
costs. 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.
Amounts
collected from PPL Electric's customers for decommissioning, less applicable
taxes, are deposited in external trust funds for investment and can only be used
for future decommissioning costs. To the extent that the actual costs
for decommissioning exceed the amounts in the nuclear decommissioning trust
funds, PPL Susquehanna would be obligated to fund 90% of the
shortfall.
When the
fair value of a security is less than amortized cost, PPL and PPL Energy Supply
must make certain assertions to avoid recording an other-than-temporary
impairment that requires a current period charge to earnings. The NRC
requires that nuclear decommissioning trusts be managed by independent
investment managers, with discretion to buy and sell securities in the
trusts. As a result, PPL and PPL Energy Supply have been unable to
demonstrate the ability to hold an impaired security until it recovers its
value; therefore, unrealized losses on debt securities through March 31, 2009
and unrealized losses on equity securities for all periods presented,
represented other-than-temporary impairments that required a current period
charge to earnings.
As
described in "New Accounting Guidance Adopted - Recognition and Presentation of
Other-Than-Temporary Impairments" in Note 1, effective April 1, 2009, when PPL
and PPL Energy Supply intend to sell a debt security or more likely than not
will be required to sell a debt security before recovery, then the
other-than-temporary impairment recognized in earnings will equal the entire
difference between the security's amortized cost basis and its fair
value. However, if there is no intent to sell a debt security and it
is not more likely than not that they will be required to sell the security
before recovery, but the security has suffered a credit loss, 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. Temporary
impairments of debt securities and unrealized gains on both debt and equity
securities are recorded to OCI. There were no credit losses on debt
securities held in the NDT funds at December 31, 2009.
Auction Rate
Securities
At
December 31, 2009 and 2008, auction rate securities were recorded in "Other
investments" on the Balance Sheets. Historically, the fair value of
auction rate securities approximated their par value due to the frequent
resetting of the interest rates through the auction process. The
auctions for these outstanding securities failed in 2008 and
2009. Based upon the evaluation of available information, PPL and PPL
Energy Supply believe these investments continue to be of high credit quality
and they do not have significant exposure to realize losses on these
securities. PPL and PPL Energy Supply continue to earn interest on
these investments at contractually prescribed interest rates. PPL and
PPL Energy Supply have no current plans to sell these securities until they can
be liquidated at par value and do not anticipate having to sell these securities
in order to fund operations or for any other purpose. As such, the
decline in fair value noted below was deemed temporary due to general market
conditions.
At
December 31, 2008, the estimated fair value of the auction rate securities
was $5 million lower than par value for PPL and PPL Energy Supply. In
2008, unrealized losses of $5 million for both PPL and PPL Energy Supply were
recorded to OCI. During 2009, PPL Energy Supply liquidated $4 million
of these securities at par. At December 31, 2009, the estimated fair
value was determined to approximate par value. As such, PPL and PPL
Energy Supply reversed $5 million of previously recorded temporary
impairments. See Note 17 for additional information on these
securities, including fair value.
Short-term
Investments
(PPL
and PPL Energy Supply)
In
December 2008, the PEDFA issued $150 million aggregate principal amount of
Exempt Facilities Revenue Bonds, Series 2008A and 2008B due 2038 (Series 2008
Bonds) on behalf of PPL Energy Supply. PPL Investment Corp. acted as
the initial purchaser of the Series 2008 Bonds upon issuance. At
December 31, 2008, these investments were reflected in "Short-term
investments" on the Balance Sheet. In April 2009, PPL Investment
Corp. received $150 million for its investment in the Series 2008 bonds when
they were refunded by the PEDFA. See "Long-term Debt" in Note 7 for
more information on the refundings. No realized or unrealized gains
(losses) were recorded on these securities, as the difference between carrying
value and fair value was insignificant.
(PPL
and PPL Electric)
In
October 2008, the PEDFA issued $90 million aggregate principal amount of
Pollution Control Revenue Refunding Bonds, Series 2008 (PPL Electric Utilities
Corporation Project) due 2023 (PPL Electric Series 2008 Bonds) on behalf of PPL
Electric. PPL Electric acted as the initial purchaser of the PPL
Electric Series 2008 Bonds upon issuance. PPL Electric remarketed the
PPL Electric Series 2008 Bonds to unaffiliated investors in November
2008. No realized or unrealized gains (losses) were recorded in 2008
related to these securities, as the difference between carrying value and fair
value was insignificant.
(PPL,
PPL Energy Supply and PPL Electric)
Accounting
for Transfers of Financial Assets
Effective
January 1, 2010, PPL and its subsidiaries will adopt accounting guidance that
was issued to revise the accounting for transfers of financial
assets. This guidance:
|
·
|
eliminates
the concept of a qualifying special-purpose entity (QSPE); therefore,
QSPEs will be subject to consolidation guidance;
|
|
·
|
changes
the requirements for the derecognition of financial
assets;
|
|
·
|
establishes
new criteria for reporting the transfer of a portion of a financial asset
as a sale;
|
|
·
|
requires
transferors to initially recognize, at fair value, assets obtained and
liabilities incurred as a result of a transfer accounted for as a sale;
and
|
|
·
|
requires
enhanced disclosures to improve the transparency around transfers of
financial assets and a transferor's continuing
involvement.
|
Early
adoption is prohibited. This guidance will be applied prospectively
to new transfers of financial assets. Disclosures will be required
for all transfers, including those entered into before the effective
date. Comparative disclosures are encouraged, but not required, for
periods in which these disclosures were not previously required. The
January 1, 2010 adoption is not expected to have a significant impact on PPL and
its subsidiaries; however, the impact in future periods could be
material.
Consolidation
of Variable Interest Entities
Effective
January 1, 2010, PPL and its subsidiaries will adopt accounting guidance that
was issued to replace the quantitative-based risks and rewards calculation for
determining which entity, if any, has a controlling financial interest in a
variable interest entity (VIE) and is the primary beneficiary. The
primary beneficiary must consolidate the VIE. This
guidance:
|
·
|
prescribes
a qualitative approach focused on identifying which entity has the power
to direct the activities of a VIE that most significantly impact the VIE's
economic performance and the obligation to absorb losses of or the right
to receive benefits from the VIE that could potentially be significant to
the VIE;
|
|
·
|
requires
ongoing assessments of whether an entity is the primary beneficiary of a
VIE;
|
|
·
|
requires
enhanced disclosures to improve the transparency of an entity's
involvement in a VIE;
|
|
·
|
requires
that all previous consolidation conclusions be reconsidered;
and
|
|
·
|
requires
that QSPEs be evaluated for consolidation (resulting from the elimination
of the QSPE concept in the guidance addressing accounting for transfers of
financial assets).
|
If the
initial application results in consolidation of a VIE, the assets, liabilities
and noncontrolling interests of the VIE will be measured at their carrying
amounts as if this guidance had been applied from the point in time the entity
became the primary beneficiary of the VIE (unless the fair value option is
elected). Any difference between the net amounts required to be
recognized and the amount of any previously recognized interest will be
reflected as a cumulative-effect adjustment to retained earnings. If
initial application results in deconsolidation of a VIE, any retained interest
in the VIE will be measured at its carrying value as if this guidance had been
applied from the inception of the VIE.
Early
adoption is prohibited. Comparative disclosures are not required for
periods in which these disclosures were not previously required. PPL
and its subsidiaries are assessing the potential impact of adoption to the
financial statements. The January 1, 2010 adoption is not expected to
have a significant impact on PPL and its subsidiaries; however, the impact in
future periods could be material.
Improving
Disclosures about Fair Value Measurements
Effective
January 1, 2010, PPL and its subsidiaries will prospectively adopt accounting
guidance that was issued to improve disclosures about fair value
measurements. This guidance:
|
·
|
requires
disclosures be provided for each class of assets and liabilities, with
class determined on the basis of the nature and risks of the assets and
liabilities;
|
|
·
|
for
recurring fair value measurements, requires disclosure of significant
transfers between Levels 1 and 2 and transfers into and out of Level 3 and
the reasons for those transfers; and
|
|
·
|
clarifies
that a description of valuation techniques and inputs used to measure fair
value is required for Level 2 and Level 3 recurring and nonrecurring fair
value measurements.
|
Effective
January 1, 2011, PPL and its subsidiaries will adopt provisions of this guidance
that require Level 3 activity of purchases, sales, issuances and settlements be
provided on a gross basis.
This
guidance makes corresponding amendments to employers' disclosures about pensions
and other postretirement benefits.
Early
adoption is permitted. Comparative disclosures are required only for
periods ending after initial adoption. PPL and its subsidiaries are
assessing the potential impact of adoption. The adoption could have a
significant impact on required disclosures.
Subsequent
Measurement - Cash Flow Hedges
Effective
April 1, 2010, PPL and its subsidiaries will prospectively adopt accounting
guidance that was issued to clarify how an entity should reflect the subsequent
measurement of cash flow hedges in AOCI if, during a prior period, hedge
accounting was not permitted. This situation may arise if an entity's
retrospective assessment of hedge effectiveness indicated that the hedging
relationship had not been highly effective in a period, but the prospective
assessment of hedge effectiveness showed an expectation that the hedging
relationship would be highly effective in the future; therefore, the hedging
relationship continued even though hedge accounting was not permitted for a
certain period. This guidance:
|
·
|
requires
that the cumulative gain or loss on the derivative that is used to
determine the maximum amount of gain or loss that may be reflected in AOCI
exclude the gains or losses that occurred during the period when hedge
accounting was not permitted; and
|
|
·
|
requires
that the cumulative change in the expected future cash flows on the hedged
transaction exclude the changes related to the period when hedge
accounting was not applied.
|
PPL and
its subsidiaries are assessing the potential impact of adoption. The
potential impact of adoption is not yet determinable but could be
material.
|
|
||||||||||||||||
|
PPL
Corporation and Subsidiaries
|
||||||||||||||||
|
(Millions
of Dollars, except per share data)
|
||||||||||||||||
|
For
the Quarters Ended (a)
|
||||||||||||||||
|
March
31
|
June
30
|
Sept.
30
|
Dec.
31
|
|||||||||||||
|
2009
|
||||||||||||||||
|
Operating
revenues as previously reported
|
$
|
2,359
|
||||||||||||||
|
Reclassification
of discontinued operations (b)
|
(8
|
)
|
||||||||||||||
|
Operating
revenues
|
2,351
|
$
|
1,673
|
$
|
1,805
|
$
|
1,727
|
|||||||||
|
Operating
income as previously reported
|
417
|
|||||||||||||||
|
Reclassification
of discontinued operations (b)
|
(5
|
)
|
||||||||||||||
|
Operating
income
|
412
|
104
|
181
|
264
|
||||||||||||
|
Income
from continuing operations after income taxes as previously
reported
|
246
|
|||||||||||||||
|
Reclassification
of discontinued operations (b)
|
(3
|
)
|
||||||||||||||
|
Income
from continuing operations after income taxes
|
243
|
29
|
50
|
144
|
||||||||||||
|
Income
(loss) from discontinued operations as previously reported
|
||||||||||||||||
|
Reclassification
of discontinued operations (b)
|
3
|
|||||||||||||||
|
Income
(loss) from discontinued operations
|
3
|
(32
|
)
|
(24
|
)
|
13
|
||||||||||
|
Net
income (loss)
|
246
|
(3
|
)
|
26
|
157
|
|||||||||||
|
Net
income attributable to PPL
|
241
|
(7
|
)
|
20
|
153
|
|||||||||||
|
Income
from continuing operations after income taxes available to PPL common
shareowners: (c)
|
||||||||||||||||
|
Basic
EPS
|
0.64
|
0.07
|
0.12
|
0.37
|
||||||||||||
|
Diluted
EPS
|
0.64
|
0.07
|
0.12
|
0.37
|
||||||||||||
|
Net
income available to PPL common shareowners: (c)
|
||||||||||||||||
|
Basic
EPS
|
0.64
|
(0.02
|
)
|
0.05
|
0.40
|
|||||||||||
|
Diluted
EPS
|
0.64
|
(0.02
|
)
|
0.05
|
0.40
|
|||||||||||
|
Dividends
declared per share of common stock (d)
|
0.345
|
0.345
|
0.345
|
0.345
|
||||||||||||
|
Price
per common share:
|
||||||||||||||||
|
High
|
$
|
33.54
|
$
|
34.42
|
$
|
34.21
|
$
|
33.05
|
||||||||
|
Low
|
24.25
|
27.40
|
28.27
|
28.82
|
||||||||||||
|
2008
|
||||||||||||||||
|
Operating
revenues
|
$
|
1,516
|
$
|
1,014
|
$
|
2,971
|
$
|
2,506
|
||||||||
|
Operating
income
|
473
|
385
|
384
|
551
|
||||||||||||
|
Income
from continuing operations after income taxes
|
247
|
189
|
210
|
281
|
||||||||||||
|
Income
(loss) from discontinued operations
|
18
|
6
|
(2
|
)
|
1
|
|||||||||||
|
Net
income
|
265
|
195
|
208
|
282
|
||||||||||||
|
Net
income attributable to PPL
|
260
|
190
|
203
|
277
|
||||||||||||
|
Income
from continuing operations after income taxes available to PPL common
shareowners: (c)
|
||||||||||||||||
|
Basic
EPS
|
0.64
|
0.49
|
0.54
|
0.73
|
||||||||||||
|
Diluted
EPS
|
0.64
|
0.49
|
0.54
|
0.73
|
||||||||||||
|
Net
income available to PPL common shareowners: (c)
|
||||||||||||||||
|
Basic
EPS
|
0.69
|
0.50
|
0.54
|
0.74
|
||||||||||||
|
Diluted
EPS
|
0.69
|
0.50
|
0.54
|
0.74
|
||||||||||||
|
Dividends
declared per share of common stock (d)
|
0.335
|
0.335
|
0.335
|
0.335
|
||||||||||||
|
Price
per common share:
|
||||||||||||||||
|
High
|
$
|
55.23
|
$
|
54.00
|
$
|
53.78
|
$
|
37.88
|
||||||||
|
Low
|
44.72
|
46.04
|
34.95
|
26.84
|
||||||||||||
|
(a)
|
Quarterly
results can vary depending on, among other things, weather and the forward
pricing of power. In addition, earnings in 2009 and 2008 were
affected by special items. Accordingly, comparisons among
quarters of a year may not be indicative of overall trends and changes in
operations. These special items include $24 million of tax
expense recorded in the third quarter of 2009 for the correction to the
previously computed tax bases of the Latin American businesses that were
sold in 2007. See Note 9 to the Financial Statements for
additional information.
|
|
|
(b)
|
In
2009, PPL Generation signed a definitive agreement to sell its Long Island
generation business and PPL Maine sold the majority of its hydroelectric
generation business. See Note 9 to the Financial Statements for
additional information on these transactions and other completed
sales.
|
|
|
(c)
|
The
sum of the quarterly amounts may not equal annual earnings per share due
to changes in the number of common shares outstanding during the year or
rounding.
|
|
|
(d)
|
PPL
has paid quarterly cash dividends on its common stock in every year since
1946. Future dividends, declared at the discretion of the Board
of Directors, will be dependent upon future earnings, cash flows,
financial requirements and other
factors.
|
|
PPL
Energy Supply, LLC and Subsidiaries
|
||||||||||||||||
|
(
Millions of
Dollars)
|
||||||||||||||||
|
For
the Quarters Ended (a)
|
||||||||||||||||
|
March
31
|
June
30
|
Sept.
30
|
Dec.
31
|
|||||||||||||
|
2009
|
||||||||||||||||
|
Operating
revenues as previously reported
|
$
|
1,964
|
||||||||||||||
|
Reclassification
of discontinued operations (b)
|
(8
|
)
|
||||||||||||||
|
Operating
revenues
|
1,956
|
$
|
1,356
|
$
|
1,456
|
$
|
1,364
|
|||||||||
|
Operating
income as previously reported
|
300
|
|||||||||||||||
|
Reclassification
of discontinued operations (b)
|
(5
|
)
|
||||||||||||||
|
Operating
income
|
295
|
34
|
91
|
167
|
||||||||||||
|
Income
from continuing operations after income taxes as previously
reported
|
191
|
|||||||||||||||
|
Reclassification
of discontinued operations (b)
|
(3
|
)
|
||||||||||||||
|
Income
from continuing operations after income taxes
|
188
|
1
|
9
|
89
|
||||||||||||
|
Income
(loss) from discontinued operations as previously reported
|
||||||||||||||||
|
Reclassification
of discontinued operations (b)
|
3
|
|||||||||||||||
|
Income
(loss) from discontinued operations
|
3
|
(32
|
)
|
(24
|
)
|
13
|
||||||||||
|
Net
income (loss)
|
191
|
(31
|
)
|
(15
|
)
|
102
|
||||||||||
|
Net
income (loss) attributable to PPL Energy Supply
|
191
|
(31
|
)
|
(16
|
)
|
102
|
||||||||||
|
2008
|
||||||||||||||||
|
Operating
revenues
|
$
|
1,124
|
$
|
670
|
$
|
2,610
|
$
|
2,131
|
||||||||
|
Operating
income
|
357
|
300
|
274
|
441
|
||||||||||||
|
Income
from continuing operations after income taxes
|
195
|
153
|
158
|
244
|
||||||||||||
|
Income
(loss) from discontinued operations
|
9
|
5
|
3
|
3
|
||||||||||||
|
Net
income
|
204
|
158
|
161
|
247
|
||||||||||||
|
Net
income attributable to PPL Energy Supply
|
204
|
157
|
161
|
246
|
||||||||||||
|
(a)
|
Quarterly
results can vary depending on, among other things, weather and the forward
pricing of power. In addition, earnings in 2009 and 2008 were
affected by special items. Accordingly, comparisons among
quarters of a year may not be indicative of overall trends and changes in
operations. These special items include $24 million of tax
expense recorded in the third quarter of 2009 by for the correction to the
previously computed tax bases of the Latin American businesses that were
sold in 2007. See Note 9 to the Financial Statements for
additional information.
|
|
|
(b)
|
In
2009, PPL Generation signed a definitive agreement to sell its Long Island
generation business and PPL Maine sold the majority of its hydroelectric
generation business. See Note 9 to the Financial Statements for
additional information on these transactions and other completed
sales.
|
|
PPL
Electric Utilities Corporation and Subsidiaries
|
||||||||||||||||
|
(Millions
of Dollars)
|
||||||||||||||||
|
For
the Quarters Ended (a)
|
||||||||||||||||
|
March
31
|
June
30
|
Sept.
30
|
Dec.
31
|
|||||||||||||
|
2009
(b)
|
||||||||||||||||
|
Operating
revenues
|
$
|
910
|
$
|
747
|
$
|
809
|
$
|
826
|
||||||||
|
Operating
income
|
106
|
61
|
78
|
84
|
||||||||||||
|
Net
income
|
54
|
21
|
32
|
35
|
||||||||||||
|
Income
available to PPL
|
49
|
17
|
27
|
31
|
||||||||||||
|
2008
|
||||||||||||||||
|
Operating
revenues
|
$
|
908
|
$
|
800
|
$
|
842
|
$
|
851
|
||||||||
|
Operating
income
|
111
|
78
|
87
|
99
|
||||||||||||
|
Net
income
|
56
|
36
|
41
|
43
|
||||||||||||
|
Income
available to PPL
|
51
|
32
|
36
|
39
|
||||||||||||
|
(a)
|
PPL
Electric's business is seasonal in nature, with peak sales periods
generally occurring in the winter and summer months. In
addition, earnings in 2009 were affected by special
items. Accordingly, comparisons among quarters of a year may
not be indicative of overall trends and changes in
operations.
|
|
|
(b)
|
During
the second quarter of 2009, PPL Electric recorded an $8 million reduction
to operating revenues and a $5 million reduction to net income and income
available to PPL as a result of a true-up for the FERC formula-based
transmission revenues for 2008 and the first quarter of
2009.
|
ON ACCOUNTING AND FINANCIAL
DISCLOSURE
PPL
Corporation, PPL Energy Supply, LLC and PPL Electric Utilities
Corporation
None.
|
PPL
Corporation, PPL Energy Supply, LLC and PPL Electric Utilities
Corporation
|
||
|
(a)
|
Evaluation
of disclosure controls and procedures.
|
|
|
The
registrants' principal executive officers and principal financial
officers, based on their evaluation of the registrants' disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934) have concluded that, as of
December 31, 2009, the registrants' disclosure controls and
procedures are effective to ensure that material information relating to
the registrants and their consolidated subsidiaries is recorded,
processed, summarized and reported within the time periods specified by
the SEC's rules and forms, particularly during the period for which this
annual report has been prepared. The aforementioned principal
officers have concluded that the disclosure controls and procedures are
also effective to ensure that information required to be disclosed in
reports filed under the Exchange Act is accumulated and communicated to
management, including the principal executive and principal financial
officers, to allow for timely decisions regarding required
disclosure.
|
||
|
(b)
|
Changes
in internal control over financial reporting.
|
|
|
The
registrants' principal executive officers and principal financial officers
have concluded that there were no changes in the registrants' internal
control over financial reporting during the registrants' fourth fiscal
quarter that have materially affected, or are reasonably likely to
materially affect, the registrants' internal control over financial
reporting.
|
||
|
Management's
Report on Internal Control over Financial Reporting
|
||
|
PPL
Corporation
|
||
|
PPL's
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). PPL's internal control over financial
reporting is a process designed to provide reasonable assurance to PPL's
management and Board of Directors regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements.
Under
the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our evaluation under the
framework in "Internal Control - Integrated Framework," our management
concluded that our internal control over financial reporting was effective
as of December 31, 2009. The effectiveness of our internal
control over financial reporting has been audited by Ernst & Young
LLP, an independent registered public accounting firm, as stated in their
report contained on page 90.
|
||
|
PPL
Energy Supply, LLC and PPL Electric Utilities
Corporation
|
||
|
Management
of PPL's non-accelerated filer companies, PPL Energy Supply and PPL
Electric, is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). PPL's internal control over financial
reporting is a process designed to provide reasonable assurance to PPL's
management and Board of Directors regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements.
Under
the supervision and with the participation of our management, including
our principal executive officers and principal financial officers, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on our evaluation under the
framework in "Internal Control - Integrated Framework," our management
concluded that our internal control over financial reporting was effective
as of December 31, 2009. This annual report does not
include an attestation report of Ernst & Young LLP, the companies'
independent registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject
to attestation by the companies' registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the companies to provide only management's report in this annual
report.
|
|
PPL
Corporation, PPL Energy Supply, LLC and PPL Electric Utilities
Corporation
|
|
None.
|
PPL
Corporation
Additional
information for this item will be set forth in the sections entitled "Nominees
for Directors," "Directors Continuing in Office," "Board Committees - Audit
Committee" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
PPL's 2010 Notice of Annual Meeting and Proxy Statement, which will be filed
with the SEC not later than 120 days after December 31, 2009, and which
information is incorporated herein by reference. There have been no
changes to the procedures by which shareowners may recommend nominees to PPL's
board of directors since the filing with the SEC of PPL's 2009 Notice of Annual
Meeting and Proxy Statement. Information required by this item
concerning the executive officers of PPL is set forth at the end of Part I of
this report.
PPL has
adopted a code of ethics entitled "Standards of Conduct and Integrity" that
applies to all directors, managers, trustees, officers (including the principal
executive officers, principal financial officers and principal accounting
officers (each, a "principal officer")), employees and agents of PPL and PPL's
subsidiaries for which it has operating control (including PPL Energy Supply and
PPL Electric). The "Standards of Conduct and Integrity" are posted on
PPL's Internet Web site:
www.pplweb.com/about/corporate+governance
. A
description of any amendment to the "Standards of Conduct and Integrity" (other
than a technical, administrative or other non-substantive amendment) will be
posted on PPL's Internet Web site within four business days following the date
of the amendment. In addition, if a waiver constituting a material
departure from a provision of the "Standards of Conduct and Integrity" is
granted to one of the principal officers, a description of the nature of the
waiver, the name of the person to whom the waiver was granted and the date of
the waiver will be posted on PPL's Internet Web site within four business days
following the date of the waiver.
PPL also
has adopted its "Guidelines for Corporate Governance," which address, among
other things, director qualification standards and director and board committee
responsibilities. These guidelines, and the charters of each of the
committees of PPL's board of directors, are posted on PPL's Internet Web site:
www.pplweb.com/about/corporate+governance
.
PPL
Energy Supply, LLC
PPL
Electric Utilities Corporation
Additional
information for this item will be set forth in the sections entitled
"Nominees for Directors," "Board Committees," and "Section 16(a) Beneficial
Ownership Reporting Compliance" in PPL Electric's 2010 Notice of Annual
Meeting
and Information Statement, which will be filed with the SEC not later than 120
days after December 31, 2009, and which information is incorporated herein
by reference.
PPL Electric's parent, PPL, has adopted a code of
ethics entitled "Standards of Conduct and Integrity," which applies to all
directors, managers, officers (including the principal executive officers,
principal financial officers and principal accounting officers), employees and
agents of PPL Electric and its subsidiaries. The full text of the
"Standards of Conduct and Integrity"
is posted in the
Corporate Governance section of PPL's Internet Web site:
www.pplweb.com/about/corporate+governance
.
Information
required by this item concerning the executive officers of PPL Electric is set
forth at the end of Part I of this report.
PPL
Corporation
Information
for this item will be set forth in the sections entitled "Compensation of
Directors," "Compensation Committee Interlocks and Insider Participation" and
"Executive Compensation" in PPL's 2010 Notice of Annual Meeting and Proxy
Statement, which will be filed with the SEC not later than 120 days after
December 31, 2009, and which information is incorporated herein by
reference.
PPL
Energy Supply, LLC
PPL
Electric Utilities Corporation
Information
for this item will be set forth in the sections entitled "Compensation of
Directors" and "Executive Compensation" in PPL Electric's 2010 Notice of Annual
Meeting and Information Statement, which will be filed with the SEC not later
than 120 days after December 31, 2009, and which information is
incorporated herein by reference.
AND RELATED STOCKHOLDER
MATTERS
PPL
Corporation
Information
for this item will be set forth in the section entitled "Stock Ownership" in
PPL's 2010 Notice of Annual Meeting and Proxy Statement, which will be filed
with the SEC not later than 120 days after December 31, 2009, and which
information is incorporated herein by reference. In addition,
provided below in tabular format is information as of December 31, 2009,
with respect to compensation plans (including individual compensation
arrangements) under which equity securities of PPL are authorized for
issuance.
Equity Compensation Plan
Information
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(3)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(3)
|
Number
of securities remaining available for future issuance under equity
compensation plans
(4)
|
|
|
Equity
compensation plans approved by security holders
(1)
|
2,778,235
- ICP
1,823,806
-
ICPKE
4,602,041
- Total
|
$33.03
- ICP
$31.92
- ICPKE
$32.59
- Combined
|
3,458,171
- ICP
9,840,240
- ICPKE
14,578,022
-
DDCP
27,876,433
- Total
|
|
Equity
compensation plans not approved by security holders
(2)
|
|
(1)
|
Includes
(a) the Amended and Restated Incentive Compensation Plan (ICP), under
which stock options, restricted stock, restricted stock units, performance
units, dividend equivalents and other stock-based awards may be awarded to
executive officers of PPL; (b) the Amended and Restated Incentive
Compensation Plan for Key Employees (ICPKE), under which stock options,
restricted stock, restricted stock units, performance units, dividend
equivalents and other stock-based awards may be awarded to non-executive
key employees of PPL and its subsidiaries; and (c) the Directors Deferred
Compensation Plan (DDCP), under which stock units may be awarded to
directors of PPL. See Note 11 to the financial statements for
additional information.
|
|
|
(2)
|
All
of PPL's current compensation plans under which equity securities of PPL
are authorized for issuance have been approved by PPL's
shareowners.
|
|
(3)
|
Relates
to common stock issuable upon the exercise of stock options awarded under
the ICP and ICPKE as of December 31, 2009. In addition, as
of December 31, 2009, the following other securities had been awarded
and are outstanding under the ICP, ICPKE and DDCP: 45,400
shares of restricted stock, 416,840 restricted stock units and 101,139
performance units under the ICP; 24,600 shares of restricted stock,
921,202 restricted stock units and 65,324 performance units under the
ICPKE; and 406,584 stock units under the DDCP.
|
|
|
(4)
|
Based
upon the following aggregate award limitations under the ICP, ICPKE and
DDCP: (a) under the ICP, 15,769,430 awards (i.e., 5% of the total PPL
common stock outstanding as of April 23, 1999) granted after April 23,
1999; (b) under the ICPKE, 16,573,608 awards (i.e., 5% of the total PPL
common stock outstanding as of January 1, 2003) granted after April 25,
2003, reduced by outstanding awards for which common stock was not yet
issued as of such date of 2,373,812 resulting in a limit of 14,199,796;
and (c) under the DDCP, 15,052,856 securities. In addition,
each of the ICP and ICPKE includes an annual award limitation of 2% of
total PPL common stock outstanding as of January 1 of each
year.
|
PPL
Energy Supply, LLC
PPL
Electric Utilities Corporation
Information
for this item will be set forth in the section entitled "Stock Ownership" in PPL
Electric's 2010 Notice of Annual Meeting and Information Statement, which will
be filed with the SEC not later than 120 days after December 31, 2009, and
which information is incorporated herein by reference.
PPL
Corporation
Information
for this item will be set forth in the sections entitled "Transactions with
Related Persons" and "Independence of Directors" in PPL's 2010 Notice
of Annual Meeting and Proxy Statement, which will be filed with the SEC not
later than 120 days after December 31, 2009, and is incorporated herein by
reference.
PPL
Energy Supply, LLC
PPL
Electric Utilities Corporation
Information
for this item will be set forth in the sections entitled "Transactions with
Related Persons" and "Nominations" in PPL Electric's 2010 Notice of Annual
Meeting and Information Statement, which will be filed with the SEC not later
than 120 days after December 31, 2009, and is incorporated herein by
reference.
PPL
Corporation
Information
for this item will be set forth in the section entitled "Fees to Independent
Auditor for 2009 and 2008" in PPL's 2010 Notice of Annual Meeting and Proxy
Statement, which will be filed with the SEC not later than 120 days after
December 31, 2009, and which information is incorporated herein by
reference.
PPL
Energy Supply, LLC
The
following table presents an allocation of fees billed, including expenses, by
Ernst & Young LLP (EY) to PPL for the fiscal years ended December 31,
2009 and 2008, for professional services rendered for the audit of PPL Energy
Supply's annual financial statements and for fees billed for other services
rendered by EY.
|
2009
|
2008
|
|||||
|
(in
thousands)
|
||||||
|
Audit
fees (a)
|
$
|
2,621
|
$
|
3,031
|
||
|
Audit-related
fees (b)
|
31
|
111
|
||||
|
Tax
fees (c)
|
||||||
|
All
other fees (d)
|
8
|
64
|
||||
|
(a)
|
Includes
estimated fees for audit of annual financial statements and review of
financial statements included in PPL Energy Supply's Quarterly Reports on
Form 10-Q and for services in connection with statutory and regulatory
filings or engagements, including comfort letters and consents for
financings and filings made with the SEC.
|
|
|
(b)
|
Fees
for due diligence work, a review of eXtensible Business Reporting Language
tags assigned to financial statement line items and for consultation to
ensure appropriate accounting and reporting in connection with various
business and financing transactions.
|
|
|
(c)
|
The
independent auditor did not provide tax services to PPL Energy Supply or
any of its affiliates.
|
|
|
(d)
|
Fees
related to access to an EY online accounting research tool, an audit of
grant applications relating to network connections, consultation with
outside counsel regarding U.K. GAAP and miscellaneous regulatory
consulting services.
|
Approval of Fees
The Audit Committee of
PPL has procedures for pre-approving audit and non-audit services to be provided
by the independent auditor. These procedures are designed to ensure
the continued independence of the independent auditor. More
specifically, the use of the independent auditor to perform either audit or
non-audit services is prohibited unless specifically approved in advance by the
Audit Committee of PPL. As a result of this approval process, the
Audit Committee of PPL has established specific categories of services and
authorization levels. All services outside of the specified
categories and all amounts exceeding the authorization levels are reviewed by
the Chair of the Audit Committee of PPL, who serves as the Committee designee to
review and approve audit and non-audit related services during the
year. A listing of the approved audit and non-audit services is
reviewed with the full Audit Committee of PPL no later than its next
meeting.
The Audit
Committee of PPL approved 100% of the 2009 and 2008 services provided by
EY.
PPL
Electric Utilities Corporation
Information
for this item will be set forth in the section entitled "Fees to Independent
Auditor for 2009 and 2008" in PPL Electric's 2010 Notice of Annual Meeting and
Information Statement, which will be filed with the SEC not later than 120 days
after December 31, 2009, and which information is incorporated herein by
reference.
|
PPL
Corporation, PPL Energy Supply, LLC and PPL Electric Utilities
Corporation
|
||
|
(a) The
following documents are filed as part of this report:
|
||
|
1.
|
Financial
Statements - Refer to the "Index to Item 8. Financial Statements and
Supplementary Data" for an index of the financial statements included in
this report.
|
|
|
2.
|
Supplementary
Data and Supplemental Financial Statement Schedule - included in response
to Item 8.
|
|
|
All
supplemental financial statement schedules are omitted because of the
absence of the conditions under which they are required or because the
required information is included in the financial statements or notes
thereto.
|
||
|
3.
|
Exhibits
|
|
|
See
Exhibit Index immediately following the signature
pages.
|
||
Annual
Meetings
:
The 2010 annual
meeting of shareowners of PPL will be held on Wednesday, May 19, 2010, at the
Holiday Inn in Fogelsville, Pennsylvania, in Lehigh County. The 2010
meeting for PPL Electric will be held on Thursday, May 20, 2010, at the offices
of the company at Two North Ninth Street, Allentown, Pennsylvania.
Proxy
and Information Statement Material
:
A proxy statement
or information statement, and notice of PPL's and PPL Electric's annual meetings
are mailed to all shareowners of record as of February 26, 2010.
PPL
Annual Report
:
The
report is published and mailed in the beginning of April to all shareowners of
record. The latest annual report can be accessed at
www.pplweb.com. If you have more than one account, or if there is
more than one investor in your household, you may call the PPL Shareowner
Information Line to request that only one annual report be delivered to your
address. Please provide account numbers for all duplicate
mailings.
Dividends
:
Subject to the
declaration of dividends on PPL common stock by the PPL Board of Directors or
its Executive Committee and PPL Electric preferred stock and preference stock by
the PPL Electric Board of Directors, dividends are paid on the first business
day of April, July, October and January. The 2010 record dates for
dividends are expected to be March 10, June 10, September 10, and
December 10.
Direct
Deposit of Dividends:
Shareowners may choose
to have their dividend checks deposited directly into their checking or savings
account.
PPL
Shareowner Information
Line
(1-800-345-3085):
Shareowners can get
detailed corporate and financial information 24 hours a day using the PPL
Shareowner Information Line. They can hear timely recorded messages
about earnings, dividends and other company news releases; request information
by fax; and request printed materials in the mail. Other PPL
publications, such as the annual and quarterly reports to the Securities and
Exchange Commission (Forms 10-K and 10-Q), will be mailed upon request, or write
to:
Manager -
PPL Investor Services
Two North
Ninth Street (GENTW13)
Allentown,
PA 18101
FAX: 610-774-5106
Via
email: invserv@pplweb.com
PPL's
Web Site
(www.pplweb.com):
Shareowners
can access PPL Securities and Exchange Commission filings, corporate governance
materials, news releases, stock quotes and historical
performance. Visitors to our Web site can provide their email address
and indicate their desire to receive future earnings or news releases
automatically.
Shareowner
Inquiries
:
PPL
Shareowner Services
Wells
Fargo Bank, N.A.
161 North
Concord Exchange
South St.
Paul, MN 55075-1139
Toll
Free: 1-800-345-3085
Outside
U.S.: 651-453-2129
FAX: 651-450-4085
www.wellsfargo.com/shareownerservices
Online
Account Access
:
Registered
shareowners can access account information by visiting
www.shareowneronline.com.
Dividend
Reinvestment Plan:
Shareowners may choose
to have dividends on their PPL common stock or PPL Electric preferred and
preference stock reinvested in PPL common stock instead of receiving the
dividend by check. Participants in PPL's Dividend Reinvestment Plan may choose
to have their common stock certificates deposited into their Plan
account.
Direct
Registration System:
PPL and PPL Electric participate in the
Direct Registration System (DRS). Shareowners may choose to have
their common or preferred stock certificates deposited into the
DRS.
Listed
Securities:
New
York Stock Exchange
PPL
Corporation:
Common Stock
(Code: PPL)
PPL Energy
Supply, LLC:
7.0% Senior
Unsecured Notes due 2046
(Code: PLS)
PPL Electric
Utilities Corporation:
4-1/2%
Preferred Stock
(Code: PPLPRB)
4.40% Series
Preferred Stock
(Code: PPLPRA)
PPL Capital
Funding, Inc.:
2007 Series A
Junior Subordinated Notes due 2067
(Code: PPL/67)
6.85% Senior
Notes due 2047
(Code: PLV)
Fiscal
Agents:
Stock
Transfer Agent and Registrar;
Dividend
Reinvestment Plan Agent
Wells
Fargo Bank, N.A.
Shareowner
Services
161 North
Concord Exchange
South St.
Paul, MN 55075-1139
Toll
Free: 1-800-345-3085
Outside
U.S.: 651-453-2129
Dividend
Disbursing Office
PPL
Investor Services
Two North
Ninth Street (GENTW13)
Allentown,
PA 18101
FAX: 610-774-5106
Via
email: invserv@pplweb.com
Or call
the PPL Shareowner Information Line
Toll
Free: 1-800-345-3085
Mortgage
Bond Trustee
Transfer
and Bond Interest Paying Agent
Deutsche
Bank Trust Company Americas
648
Grassmere Park Road
Nashville,
TN 37211
Toll
Free: 1-800-735-7777
FAX: 615-835-2727
Indenture
Trustee
The Bank
of New York Mellon
101
Barclay Street
New York,
NY 10286
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PPL
Corporation
(Registrant)
|
By /s/
James H. Miller
|
||||
|
James
H. Miller -
|
||||
|
Chairman,
President and
|
||||
|
Chief
Executive Officer
|
||||
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
|
||||
|
TITLE
|
||||
|
By /s/
James H. Miller
|
Principal
Executive Officer and Director
|
|||
|
James
H. Miller -
|
||||
|
Chairman,
President and
|
||||
|
Chief
Executive Officer
|
||||
|
By /s/
Paul A. Farr
|
Principal
Financial Officer
|
|||
|
Paul
A. Farr -
|
||||
|
Executive
Vice President and
|
||||
|
Chief
Financial Officer
|
||||
|
By /s/
J. Matt Simmons, Jr.
|
Principal
Accounting Officer
|
|||
|
J.
Matt Simmons, Jr. -
|
||||
|
Vice
President and Controller
|
||||
|
Directors:
|
||||
|
Frederick
M. Bernthal
|
Stuart
Heydt
|
|||
|
John
W. Conway
|
Craig
A. Rogerson
|
|||
|
E.
Allen Deaver
|
W.
Keith Smith
|
|||
|
Louise
K. Goeser
|
Natica
von Althann
|
|||
|
Stuart
E. Graham
|
Keith
H. Williamson
|
|||
|
By /s/
James H. Miller
|
||||
|
James
H. Miller, Attorney-in-fact
|
Date: February
25, 2010
|
|||
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PPL Energy Supply,
LLC
(Registrant)
|
By /s/
James H. Miller
|
||||
|
James
H. Miller -
|
||||
|
President
|
||||
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
|
||||
|
TITLE
|
||||
|
By /s/
James H. Miller
|
Principal
Executive Officer and Manager
|
|||
|
James
H. Miller -
|
||||
|
President
|
||||
|
By /s/
Paul A. Farr
|
Principal
Financial Officer and Manager
|
|||
|
Paul
A. Farr -
|
||||
|
Executive
Vice President
|
||||
|
By /s/
J. Matt Simmons, Jr.
|
Principal
Accounting Officer
|
|||
|
J.
Matt Simmons, Jr. -
|
||||
|
Vice
President and Controller
|
||||
|
Managers:
|
||||
|
/s/
Robert J. Grey
|
||||
|
Robert
J. Grey
|
||||
|
/s/
William H. Spence
|
||||
|
William
H. Spence
|
||||
|
/s/
James E. Abel
|
||||
|
James
E. Abel
|
||||
|
Date: February
25, 2010
|
||||
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PPL Electric Utilities
Corporation
(Registrant)
|
By /s/
David G. DeCampli
|
||||
|
David
G. DeCampli -
|
||||
|
President
|
||||
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
|
||||
|
TITLE
|
||||
|
By /s/
David G. DeCampli
|
Principal
Executive Officer and Director
|
|||
|
David
G. DeCampli -
|
||||
|
President
|
||||
|
By /s/
J. Matt Simmons, Jr.
|
Principal
Financial Officer and
|
|||
|
J.
Matt Simmons, Jr. -
|
Principal
Accounting Officer
|
|||
|
Vice
President and Controller
|
||||
|
Directors:
|
||||
|
/s/
James H. Miller
|
/s/
William H. Spence
|
|||
|
James
H. Miller
|
William
H. Spence
|
|||
|
/s/
Paul A. Farr
|
/s/
Dean A. Christiansen
|
|||
|
Paul
A. Farr
|
Dean
A. Christiansen
|
|||
|
/s/
Robert J. Grey
|
||||
|
Robert
J. Grey
|
||||
|
Date: February
25, 2010
|
The
following Exhibits indicated by an asterisk preceding the Exhibit number are
filed herewith. The balance of the Exhibits have heretofore been
filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein
by reference. Exhibits indicated by a [_] are filed or listed
pursuant to Item 601(b)(10)(iii) of Regulation S-K.
|
3(a)
|
-
|
Amended
and Restated Articles of Incorporation of PPL Corporation effective May
21, 2008 (Exhibit 3(i) to PPL Corporation Form 8-K Report (File No.
1-11459) dated May 21, 2008)
|
|
3(b)
|
-
|
Amended
and Restated Articles of Incorporation of PPL Electric Utilities
Corporation (Exhibit 3(a) to PPL Electric Utilities Corporation Form 10-Q
Report (File No. 1-905) for the quarter ended March 31,
2006)
|
|
3(c)
|
-
|
Certificate
of Formation of PPL Energy Supply, LLC (Exhibit 3.1 to PPL Energy Supply,
LLC Form S-4 (Registration Statement No. 333-74794))
|
|
3(d)
|
-
|
Amended
and Restated Bylaws of PPL Corporation, effective May 21, 2008 (Exhibit
3.(ii) to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 21,
2008)
|
|
3(e)
|
-
|
Bylaws
of PPL Electric Utilities Corporation, as amended and restated effective
March 30, 2006 (Exhibit 3.2 to PPL Electric Utilities Corporation Form 8-K
Report (File No. 1-905) dated March 30, 2006)
|
|
3(f)
|
-
|
Limited
Liability Company Agreement of PPL Energy Supply, LLC, dated March 20,
2001 (Exhibit 3.2 to PPL Energy Supply, LLC Form S-4 (Registration
Statement No. 333-74794))
|
|
4(a)-1
|
-
|
Amended
and Restated Employee Stock Ownership Plan, dated January 12, 2007
(Exhibit 4(a) to PPL Corporation Form 10-K Report (File No. 1-11459) for
the year ended December 31, 2006)
|
|
4(a)-2
|
-
|
Amendment
No. 1 to said Amended and Restated Employee Stock Ownership Plan, dated
July 2, 2007 (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No.
1-11459) for the quarter ended September 30, 2007)
|
|
4(a)-3
|
-
|
Amendment
No. 2 to said Amended and Restated Employee Stock Ownership Plan, dated
December 13, 2007 (Exhibit 4(a)-3 to PPL Corporation Form 10-K Report
(File No. 1-11459) for the year ended December 31,
2007)
|
|
4(a)-4
|
-
|
Amendment
No. 3 to said Amended and Restated Employee Stock Ownership Plan, dated
August 19, 2009 (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File
No. 1-11459) for quarter ended September 30, 2009)
|
|
-
|
Amendment
No. 4 to said Amended and Restated Employee Stock Ownership Plan, dated
December 2, 2009
|
|
|
4(b)
|
-
|
Trust
Deed constituting £150 million 9 ¼ percent Bonds due 2020, dated November
9, 1995, between South Wales Electric plc and Bankers Trustee Company
Limited (Exhibit 4(k) to PPL Corporation Form 10-K Report (File No.
1-11459) for the year ended December 31, 2004)
|
|
4(c)-1
|
-
|
Indenture,
dated as of November 1, 1997, among PPL Corporation, PPL Capital Funding,
Inc. and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as
Trustee (Exhibit 4.1 to PPL Corporation Form 8-K Report (File No. 1-11459)
dated November 12, 1997)
|
|
4(c)-2
|
-
|
Supplement,
dated as of May 18, 2004, to said Indenture (Exhibit 4.7 to Registration
Statement Nos. 333-116478, 333-116478-01 and
333-116478-02)
|
|
4(c)-3
|
-
|
Supplement,
dated as of July 1, 2007, to said Indenture (Exhibit 4(b) to PPL
Corporation Form 8-K Report (File No. 1-11459) dated July 16,
2007)
|
|
4(d)-1
|
-
|
Indenture,
dated as of August 1, 2001, by PPL Electric Utilities Corporation and
JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee
(Exhibit 4.1 to PPL Electric Utilities Corporation Form 8-K Report (File
No. 1-905) dated August 21, 2001)
|
|
4(d)-2
|
-
|
Supplement,
dated as of February 1, 2005, to said Indenture (Exhibit 4(g)-5 to PPL
Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the
year ended December 31, 2004)
|
|
4(d)-3
|
-
|
Supplement,
dated as of May 1, 2005, to said Indenture (Exhibit 4(b) to PPL Electric
Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter
ended June 30, 2005)
|
|
4(d)-4
|
-
|
Supplement,
dated as of December 1, 2005, to said Indenture (Exhibit 4(a) to PPL
Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated
December 22, 2005)
|
|
4(d)-5
|
-
|
Supplement,
dated as of August 1, 2007, to said Indenture (Exhibit 4(b) to PPL
Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated
August 14, 2007)
|
|
4(d)-6
|
-
|
Supplement,
dated as of October 1, 2008, to said Indenture (Exhibit 4(b) to PPL
Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated
October 20, 2008)
|
|
4(d)-7
|
-
|
Supplement,
dated as of October 1, 2008, to said Indenture (Exhibit 4(c) to PPL
Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated
October 31, 2008)
|
|
4(d)-8
|
-
|
Supplement,
dated as of May 1, 2009, to said Indenture (Exhibit 4(b) to PPL Electric
Utilities Corporation Form 8-K Report (File No. 1-905) dated May 22,
2009)
|
|
4(e)-1
|
-
|
Indenture,
dated as of October 1, 2001, by PPL Energy Supply, LLC and JPMorgan Chase
Bank (formerly The Chase Manhattan Bank), as Trustee (Exhibit 4.1 to PPL
Energy Supply, LLC Form S-4 (Registration Statement No.
333-74794))
|
|
4(e)-2
|
-
|
Supplement,
dated as of October 1, 2001, to said Indenture (Exhibit 4.2 to PPL Energy
Supply, LLC Form S-4 (Registration Statement No.
333-74794))
|
|
4(e)-3
|
-
|
Registration
Rights Agreement, dated October 19, 2001, between PPL Energy Supply, LLC
and the Initial Purchasers (Exhibit 4.5 to PPL Energy Supply, LLC Form S-4
(Registration Statement No. 333-74794))
|
|
4(e)-4
|
-
|
Supplement,
dated as of August 15, 2004, to said Indenture (Exhibit 4(h)-4 to PPL
Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year
ended December 31, 2004)
|
|
4(e)-5
|
-
|
Supplement,
dated as of October 15, 2005, to said Indenture (Exhibit 4(a) to PPL
Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated October 28,
2005)
|
|
4(e)-6
|
-
|
Form
of Note for PPL Energy Supply, LLC's $300 million aggregate principal
amount of 5.70% REset Put Securities due 2035 (REPS
SM
)
(Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No.
333-74794) dated October 28, 2005)
|
|
4(e)-7
|
-
|
Supplement,
dated as of May 1, 2006, to said Indenture (Exhibit 4(a) to PPL Energy
Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended
June 30, 2006)
|
|
4(e)-8
|
-
|
Supplement,
dated as of July 1, 2006, to said Indenture (Exhibit 4(b) to PPL Energy
Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended
June 30, 2006)
|
|
4(e)-9
|
-
|
Supplement,
dated as of July 1, 2006, to said Indenture (Exhibit 4(c) to PPL Energy
Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended
June 30, 2006)
|
|
4(e)-10
|
-
|
Supplement,
dated as of December 1, 2006, to said Indenture (Exhibit 4(f)-10 to PPL
Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year
ended December 31, 2006)
|
|
4(e)-11
|
-
|
Supplement,
dated as of December 1, 2007, to said Indenture (Exhibit 4(b) to PPL
Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated December 18,
2007)
|
|
4(e)-12
|
-
|
Supplement,
dated as of March 1, 2008, to said Indenture (Exhibit 4(b) to PPL Energy
Supply, LLC Form 8-K Report (File No. 333-74794) dated March 14,
2008)
|
|
4(e)-13
|
-
|
Supplement,
dated as of July 1, 2008, to said Indenture (Exhibit 4(b) to PPL Energy
Supply, LLC Form 8-K Report (File No. 1-32944) dated July 21,
2008)
|
|
4(f)-1
|
-
|
Trust
Deed constituting £200 million 5.875 percent Bonds due 2027, dated March
25, 2003, between Western Power Distribution (South West) plc and J.P.
Morgan Corporate Trustee Services Limited (Exhibit 4(o)-1 to PPL
Corporation Form 10-K Report (File No. 1-11459) for the year ended
December 31, 2004)
|
|
4(f)-2
|
-
|
Supplement,
dated May 27, 2003, to said Trust Deed, constituting £50 million 5.875
percent Bonds due 2027 (Exhibit 4(o)-2 to PPL Corporation Form 10-K Report
(File No. 1-11459) for the year ended December 31,
2004)
|
|
-
|
Indenture,
dated as of March 16, 2001, among WPD Holdings UK, Bankers Trust Company,
as Trustee, Principal Paying Agent, and Transfer Agent and Deutsche Bank
Luxembourg, S.A., as Paying and Transfer Agent
|
|
|
4(h)
|
-
|
Trust
Deed constituting £105 million 1.541 percent Index-Linked Notes due 2053,
dated December 1, 2006, between Western Power Distribution (South West)
plc and HSBC Trustee (CI) Limited (Exhibit 4(i) to PPL Corporation Form
10-K Report (File No. 1-11459) for the year ended December 31,
2006)
|
|
4(i)
|
-
|
Trust
Deed constituting £120 million 1.541 percent Index-Linked Notes due 2056,
dated December 1, 2006, between Western Power Distribution (South West)
plc and HSBC Trustee (CI) Limited (Exhibit 4(j) to PPL Corporation Form
10-K Report (File No. 1-11459) for the year ended December 31,
2006)
|
|
4(j)
|
-
|
Trust
Deed constituting £225 million 4.80436 percent Notes due 2037, dated
December 21, 2006, between Western Power Distribution (South Wales) plc
and HSBC Trustee (CI) Limited (Exhibit 4(k) to PPL Corporation Form 10-K
Report (File No. 1-11459) for the year ended December 31,
2006)
|
|
4(k)-1
|
-
|
Subordinated
Indenture, dated as of March 1, 2007, between PPL Capital Funding, Inc.,
PPL Corporation and The Bank of New York, as Trustee (Exhibit 4(a) to PPL
Corporation Form 8-K Report (File No. 1-11459) dated March 20,
2007)
|
|
4(k)-2
|
-
|
Supplement,
dated as of March 1, 2007, to said Subordinated Indenture (Exhibit 4(b) to
PPL Corporation Form 8-K Report (File No. 1-11459) dated March 20,
2007)
|
|
4(l)-1
|
-
|
Series
2009A Exempt Facilities Loan Agreement, dated as of April 1, 2009, between
PPL Energy Supply, LLC and Pennsylvania Economic Development Financing
Authority (Exhibit 4(a) to PPL Energy Supply, LLC Form 8-K Report (File
No. 1-32944) dated April 9, 2009)
|
|
4(l)-2
|
-
|
Series
2009B Exempt Facilities Loan Agreement, dated as of April 1, 2009, between
PPL Energy Supply, LLC and Pennsylvania Economic Development Financing
Authority (Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File
No. 1-32944) dated April 9, 2009)
|
|
4(l)-3
|
-
|
Series
2009C Exempt Facilities Loan Agreement, dated as of April 1, 2009, between
PPL Energy Supply, LLC and Pennsylvania Economic Development Financing
Authority (Exhibit 4(c) to PPL Energy Supply, LLC Form 8-K Report (File
No. 1-32944) dated April 9, 2009)
|
|
10(a)
|
-
|
$150
Million Credit and Reimbursement Agreement, dated as of April 25, 2001,
among PPL Montana, LLC and the banks named therein (Exhibit 10(d) to PPL
Montana, LLC Form 10-Q Report (File No. 333-50350) for the quarter ended
June 30, 2001)
|
|
10(b)
|
-
|
Generation
Supply Agreement, dated as of June 20, 2001, between PPL Electric
Utilities Corporation and PPL EnergyPlus, LLC (Exhibit 10.5 to PPL Energy
Supply, LLC Form S-4 (Registration Statement No.
333-74794))
|
|
10(c)-1
|
-
|
Master
Power Purchase and Sale Agreement, dated as of October 15, 2001, between
NorthWestern Energy Division (successor in interest to The Montana Power
Company) and PPL Montana, LLC (Exhibit 10(g) to PPL Montana, LLC Form 10-K
Report (File No. 333-50350) for the year ended December 31,
2001)
|
|
10(c)-2
|
-
|
Confirmation
Letter dated July 5, 2006, between PPL Montana, LLC and NorthWestern
Corporation (PPL Corporation and PPL Energy Supply, LLC Form 8-K Reports
(File Nos. 1-11459 and 333-74794) dated July 6, 2006)
|
|
10(d)
|
-
|
Guaranty,
dated as of December 21, 2001, from PPL Energy Supply, LLC in favor of LMB
Funding, Limited Partnership (Exhibit 10(j) to PPL Energy Supply, LLC Form
10-K Report (File No. 333-74794) for the year ended December 31,
2001)
|
|
10(e)-1
|
-
|
Agreement
for Lease, dated as of December 21, 2001, between LMB Funding, Limited
Partnership and Lower Mt. Bethel Energy, LLC (Exhibit 10(m) to PPL Energy
Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended
December 31, 2003)
|
|
10(e)-2
|
-
|
Amendment
No. 1 to Agreement for Lease, dated as of September 16, 2002, between LMB
Funding, Limited Partnership and Lower Mt. Bethel Energy, LLC (Exhibit
10(m)-1 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794)
for the year ended December 31, 2003)
|
|
10(f)-1
|
-
|
Lease
Agreement, dated as of December 21, 2001, between LMB Funding, Limited
Partnership and Lower Mt. Bethel Energy, LLC (Exhibit 10(n) to PPL Energy
Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended
December 31, 2003)
|
|
10(f)-2
|
-
|
Amendment
No. 1 to Lease Agreement, dated as of September 16, 2002, between LMB
Funding, Limited Partnership and Lower Mt. Bethel Energy, LLC (Exhibit
10(n)-1 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794)
for the year ended December 31, 2003)
|
|
10(g)
|
-
|
Pollution
Control Facilities Loan Agreement, dated as of May 1, 1973, between PPL
Electric Utilities Corporation and the Lehigh County Industrial
Development Authority (Exhibit 5(z) to Registration Statement No.
2-60834)
|
|
10(h)
|
-
|
Facility
Lease Agreement (BA 1/2) between PPL Montana, LLC and Montana OL3, LLC
(Exhibit 4.7a to PPL Montana, LLC Form S-4 (Registration Statement No.
333-50350))
|
|
10(i)
|
-
|
Facility
Lease Agreement (BA 3) between PPL Montana, LLC and Montana OL4, LLC
(Exhibit 4.8a to PPL Montana, LLC Form S-4 (Registration Statement No.
333-50350))
|
|
10(j)
|
-
|
Services
Agreement, dated as of July 1, 2000, among PPL Corporation, PPL Energy
Funding Corporation and its direct and indirect subsidiaries in various
tiers, PPL Capital Funding, Inc., PPL Gas Utilities Corporation, PPL
Services Corporation and CEP Commerce, LLC (Exhibit 10.20 to PPL Energy
Supply, LLC Form S-4 (Registration Statement No.
333-74794))
|
|
10(k)-1
|
-
|
Asset
Purchase Agreement, dated as of June 1, 2004, by and between PPL Sundance
Energy, LLC, as Seller, and Arizona Public Service Company, as Purchaser
(Exhibit 10(a) to PPL Corporation and PPL Energy Supply, LLC Form 10-Q
Reports (File Nos. 1-11459 and 333-74794) for the quarter ended June 30,
2004)
|
|
10(k)-2
|
-
|
Amendment
No. 1, dated December 14, 2004, to said Asset Purchase Agreement (Exhibit
99.1 to PPL Corporation and PPL Energy Supply, LLC Form 8-K Reports (File
Nos. 1-11459 and 333-74794) dated December 15, 2004)
|
|
10(l)-1
|
-
|
Receivables
Sale Agreement, dated as of August 1, 2004, between PPL Electric Utilities
Corporation, as Originator, and PPL Receivables Corporation, as Buyer
(Exhibit 10(d) to PPL Electric Utilities Corporation Form 10-Q Report
(File No. 1-905) for the quarter ended June 30, 2004)
|
|
10(l)-2
|
-
|
Amendment
No. 1 to Receivables Sale Agreement, dated as of August 5, 2008, between
PPL Electric Utilities Corporation, as Originator, and PPL Receivables
Corporation, as Buyer (Exhibit 10(b) to PPL Electric Utilities Corporation
Form 8-K Report (File No. 1-905) dated August 6, 2008)
|
|
10(l)-3
|
-
|
Credit
and Security Agreement, dated as of August 5, 2008, among PPL Receivables
Corporation, PPL Electric Utilities Corporation, Victory Receivables
Corporation, the Liquidity Banks from time to time party thereto and The
Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (Exhibit 10(a) to PPL
Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated
August 6, 2008)
|
|
10(1)-4
|
-
|
Amendment
No. 1 to said Credit and Security Agreement, dated as of July 28, 2009,
among PPL Receivables Corporation, as Borrower, PPL Electric Utilities
Corporation, as Servicer, Victory Receivables Corporation, as a Lender,
and The Bank of Tokyo-Mitsubishi UFJ, Ltd, New York Branch, as Liquidity
Bank and as Agent (Exhibit 10(a) to PPL Electric Utilities Corporation
Form 10-Q Report (File No. 1-905) for quarter ended September 30,
2009)
|
|
10(1)-5
|
-
|
Amended
and Restated Fee Letter, dated July 28, 2009, among PPL Receivables
Corporation, as Borrower, PPL Electric Utilities Corporation, as Servicer,
Victory Receivables Corporation, as a Lender, and The Bank of
Tokyo-Mitsubishi UFJ, Ltd, New York Branch, as Liquidity Bank and as Agent
(Exhibit 10(b) to PPL Electric Utilities Corporation Form 10-Q Report
(File No. 1-905) for quarter ended September 30, 2009)
|
|
10(m)
|
-
|
$300
Million Demand Loan Agreement, dated as of August 20, 2004, among CEP
Lending, Inc. and PPL Energy Funding Corporation (Exhibit 10(dd) to PPL
Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the
year ended December 31, 2004)
|
|
10(n)-1
|
-
|
Reimbursement
Agreement, dated as of March 31, 2005, among PPL Energy Supply, LLC, The
Bank of Nova Scotia, as Issuer and Administrative Agent, and the Lenders
party thereto from time to time (Exhibit 10(a) to PPL Energy Supply, LLC
Form 10-Q Report (File No. 333-74794) for the quarter ended March 31,
2005)
|
|
10(n)-2
|
-
|
First
Amendment to said Reimbursement Agreement, dated as of June 16, 2005
(Exhibit 10(b) to PPL Energy Supply, LLC Form 10-Q Report (File No.
333-74794) for the quarter ended June 30, 2005)
|
|
10(n)-3
|
-
|
Second
Amendment to said Reimbursement Agreement, dated as of September 1, 2005
(Exhibit 10(a) to PPL Energy Supply, LLC Form 10-Q Report (File No.
333-74794) for the quarter ended September 30, 2005)
|
|
10(n)-4
|
-
|
Third
Amendment to said Reimbursement Agreement, dated as of March 30, 2006
(Exhibit 10(a) to PPL Energy Supply, LLC Form 8-K Report (File No.
333-74794) dated April 5, 2006)
|
|
10(n)-5
|
-
|
Fourth
Amendment to said Reimbursement Agreement, dated as of April 12, 2006
(Exhibit 10(b) to PPL Energy Supply, LLC Form 10-Q Report (File No.
333-74794) for the quarter ended September 30, 2006)
|
|
10(n)-6
|
-
|
Fifth
Amendment to said Reimbursement Agreement, dated as of November 1, 2006
(Exhibit 10(q)-6 to PPL Energy Supply, LLC Form 10-K Report (File No.
333-74794) for the year ended December 31, 2006)
|
|
10(n)-7
|
-
|
Sixth
Amendment to said Reimbursement Agreement, dated as of March 29, 2007
(Exhibit 10(q)-7 to PPL Energy Supply, LLC Form 10-K Report (File No.
333-74794) for the year ended December 31, 2007)
|
|
10(n)-8
|
-
|
Seventh
Amendment to said Reimbursement Agreement, dated as of March 1, 2008
(Exhibit 10(a) to PPL Energy Supply, LLC Form 10-Q Report (File No.
333-74794) for the quarter ended March 31, 2008)
|
|
10(n)-9
|
-
|
Eighth
Amendment to said Reimbursement Agreement, dated as of March 30, 2009
(Exhibit 10(a) to PPL Energy Supply, LLC Form 10-Q Report (File No.
1-32944) for the quarter ended March 31, 2009)
|
|
10(o)-1
|
-
|
$300
Million Five-Year Letter of Credit and Revolving Credit Agreement, dated
as of December 15, 2005, among PPL Energy Supply, LLC and the banks named
therein (Exhibit 10(b) to PPL Energy Supply, LLC Form 8-K Report (File No.
333-74794) dated December 21, 2005)
|
|
10(o)-2
|
-
|
First
Amendment to said Letter of Credit and Revolving Credit Agreement, dated
as of December 29, 2006 (Exhibit 10(t)-2 to PPL Energy Supply, LLC Form
10-K Report (File No. 333-74794) for the year ended December 31,
2006)
|
|
10(p)-1
|
-
|
$300
Million Five-Year Letter of Credit and Reimbursement Agreement, dated as
of December 15, 2005, among PPL Energy Supply and the banks named therein
(Exhibit 10(c) to PPL Energy Supply, LLC Form 8-K Report (File No.
333-74794) dated December 21, 2005)
|
|
10(p)-2
|
-
|
First
Amendment to said Letter of Credit and Reimbursement Agreement, dated as
of December 29, 2006 (Exhibit 10(u)-2 to PPL Energy Supply, LLC Form 10-K
Report (File No. 333-74794) for the year ended December 31,
2006)
|
|
10(q)
|
-
|
$400
million Amended and Restated 364-Day Credit Agreement, dated as of
September 8, 2009, among PPL Energy Supply, LLC and the banks named
therein (Exhibit 10(a) to PPL Energy Supply, LLC Form 8-K Report (File No.
1-32944) dated September 11, 2009)
|
|
10(r)-1
|
-
|
$200
million Third Amended and Restated Five-Year Credit Agreement, dated as of
May 4, 2007, among PPL Electric Utilities Corporation and the banks named
therein (Exhibit 10(b) to PPL Electric Utilities Corporation Form 8-K
Report (File No. 1-905) dated May 9, 2007)
|
|
10(r)-2
|
-
|
First
Amendment to Third Amended and Restated Credit Agreement, dated as of
December 3, 2008, by and among PPL Electric Utilities Corporation, certain
of the lenders party to the Third Amended and Restated Credit Agreement
dated as of May 4, 2007 and Wachovia Bank, National Association, as
administrative agent (Exhibit 99.2 to PPL Electric Utilities Corporation
Form 8-K Report (File No. 1-905) December 4, 2008)
|
|
10(s)-1
|
-
|
$3.4
billion Second Amended and Restated Five-Year Credit Agreement, dated as
of May 4, 2007, among PPL Energy Supply, LLC and the banks named therein
(Exhibit 10(a) to PPL Energy Supply, LLC Form 8-K Report (File No.
333-74794) dated May 9, 2007)
|
|
10(s)-2
|
-
|
First
Amendment to Second Amended and Restated Credit Agreement, dated as of
December 3, 2008, by and among PPL Energy Supply, LLC, certain of the
lenders party to the Second Amended and Restated Credit Agreement dated as
of May 4, 2007 and Wachovia Bank, National Association, as administrative
agent (Exhibit 99.1 to PPL Energy Supply, LLC Form 8-K Report (File No.
1-32944) dated December 4, 2008)
|
|
10(t)
|
-
|
£150
million Credit Agreement, dated as of January 24, 2007, among Western
Power Distribution Holdings Limited and the banks named therein (Exhibit
10(y) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year
ended December 31, 2006)
|
|
10(u)-1
|
-
|
Pollution
Control Facilities Loan Agreement, dated as of February 1, 2005, between
PPL Electric Utilities Corporation and the Lehigh County Industrial
Development Authority (Exhibit 10(ff) to PPL Electric Utilities
Corporation Form 10-K Report (File No. 1-905) for the year ended December
31, 2004)
|
|
10(u)-2
|
-
|
Pollution
Control Facilities Loan Agreement, dated as of May 1, 2005, between PPL
Electric Utilities Corporation and the Lehigh County Industrial
Development Authority (Exhibit 10(a) to PPL Electric Utilities Corporation
Form 10-Q Report (File No. 1-905) for the quarter ended June 30,
2005)
|
|
10(u)-3
|
-
|
Pollution
Control Facilities Loan Agreement, dated as of October 1, 2008, between
Pennsylvania Economic Development Financing Authority and PPL Electric
Utilities Corporation (Exhibit 4(a) to PPL Electric Utilities Corporation
Form 8-K Report (File No. 1-905) dated October 31,
2008)
|
|
10(v)
|
-
|
£210
million Multicurrency Revolving Facility Agreement, dated July 7, 2009,
between Western Power Distribution (South West) plc and HSBC Bank plc,
Lloyds TSB Bank plc and Clydesdale Bank plc (Exhibit 10(c) to PPL
Corporation Form 10-Q Report (File No. 1-11459) for quarter ended June 30,
2009)
|
|
[_]10(w)-1
|
-
|
Amended
and Restated Directors Deferred Compensation Plan, dated June 12, 2000
(Exhibit 10(h) to PPL Corporation Form 10-K Report (File No. 1-11459) for
the year ended December 31, 2000)
|
|
[_]10(w)-2
|
-
|
Amendment
No. 1 to said Amended and Restated Directors Deferred Compensation Plan,
dated December 18, 2002 (Exhibit 10(m)-1 to PPL Corporation Form 10-K
Report (File No. 1-11459) for the year ended December 31,
2002)
|
|
[_]10(w)-3
|
-
|
Amendment
No. 2 to said Amended and Restated Directors Deferred Compensation Plan,
dated December 4, 2003 (Exhibit 10(q)-2 to PPL Corporation Form 10-K
Report (File No. 1-11459) for the year ended December 31,
2003)
|
|
[_]10(w)-4
|
-
|
Amendment
No. 3 to said Amended and Restated Directors Deferred Compensation Plan,
dated as of January 1, 2005 (Exhibit 10(cc)-4 to PPL Corporation Form 10-K
Report (File No. 1-11459) for the year ended December 31,
2005)
|
|
[_]10(w)-5
|
-
|
Amendment
No. 4 to said Amended and Restated Directors Deferred Compensation Plan,
dated as of May 1, 2008 (Exhibit 10(x)-5 to PPL Corporation Form 10-K
Report (File No. 1-11459) for the year ended December 31,
2008)
|
|
[_]10(x)-1
|
-
|
Trust
Agreement, dated as of April 1, 2001, between PPL Corporation and Wachovia
Bank, N.A. (as successor to First Union National Bank), as
Trustee
|
|
[_]10(x)-2
|
-
|
Trust
Agreement, dated as of March 20, 2007, between PPL Corporation and
Wachovia Bank, N.A., as Trustee (Exhibit 10(c) to PPL Corporation Form
10-Q Report (File No. 1-1149) for the quarter ended March 31,
2007)
|
|
[_]10(x)-3
|
-
|
Trust
Agreement, dated as of March 20, 2007, between PPL Corporation and
Wachovia Bank, N.A., as Trustee (Exhibit 10(d) to PPL Corporation Form
10-Q Report (File No. 1-11459) for the quarter ended March 31,
2007)
|
|
[_]10(x)-4
|
-
|
Trust
Agreement, dated as of March 20, 2007, between PPL Corporation and
Wachovia Bank, N.A., as Trustee (Exhibit 10(e) to PPL Corporation Form
10-Q Report (File No. 1-11459) for the quarter ended March 31,
2007)
|
|
[_]10(y)-1
|
-
|
Amended
and Restated Officers Deferred Compensation Plan, dated December 8, 2003
(Exhibit 10(r) to PPL Corporation Form 10-K Report (File No. 1-11459) for
the year ended December 31, 2003)
|
|
[_]10(y)-2
|
-
|
Amendment
No. 1 to said Amended and Restated Officers Deferred Compensation Plan,
dated as of January 1, 2005 (Exhibit 10(ee)-1 to PPL Corporation Form 10-K
Report (File No. 1-11459) for the year ended December 31,
2005)
|
|
[_]10(y)-3
|
-
|
Amendment
No. 2 to said Amended and Restated Officers Deferred Compensation Plan,
dated as of January 22, 2007 (Exhibit 10(bb)-3 to PPL
Corporation Form 10-K Report (File No. 1-11459) for the year ended
December 31, 2006)
|
|
[_]10(y)-4
|
-
|
Amendment
No. 3 to said Amended and Restated Officers Deferred Compensation Plan,
dated as of June 1, 2008 (Exhibit 10(z)-4 to PPL Corporation Form 10-K
Report (File No. 1-11459) for the year ended December 31,
2008)
|
|
[_]10(z)-1
|
-
|
Amended
and Restated Supplemental Executive Retirement Plan, dated December 8,
2003 (Exhibit 10(s) to PPL Corporation Form 10-K Report (File No. 1-11459)
for the year ended December 31, 2003)
|
|
[_]10(z)-2
|
-
|
Amendment
No. 1 to said Supplemental Executive Retirement Plan, dated December 16,
2004 (Exhibit 99.1 to PPL Corporation Form 8-K Report (File No. 1-11459)
dated December 17, 2004)
|
|
[_]10(z)-3
|
-
|
Amendment
No. 2 to said Supplemental Executive Retirement Plan, dated as of January
1, 2005 (Exhibit 10(ff)-3 to PPL Corporation Form 10-K Report (File
1-11459) for the year ended December 31, 2005)
|
|
[_]10(z)-4
|
-
|
Amendment
No. 3 to said Supplemental Executive Retirement Plan, dated as of January
22, 2007 (Exhibit 10(cc)-4 to PPL Corporation Form 10-K Report (File No.
1-11459) for the year ended December 31, 2006)
|
|
[_]10(z)-5
|
-
|
Amendment
No. 4 to said Supplement Executive Retirement Plan, dated as of December
9, 2008 (Exhibit 10(aa)-5 to PPL Corporation Form 10-K Report (File No.
1-11459) for the year ended December 31, 2008)
|
|
[_]10(aa)-1
|
-
|
Incentive
Compensation Plan, amended and restated effective January 1, 2003 (Exhibit
10(p) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year
ended December 31, 2002)
|
|
[_]10(aa)-2
|
-
|
Amendment
No. 1 to said Incentive Compensation Plan, dated as of January 1, 2005
(Exhibit 10(gg)-2 to PPL Corporation Form 10-K Report (File 1-11459) for
the year ended December 31, 2005)
|
|
[_]10(aa)-3
|
-
|
Amendment
No. 2 to said Incentive Compensation Plan, dated as of January 26, 2007
(Exhibit 10(dd)-3 to PPL Corporation Form 10-K Report (File No. 1-11459)
for the year ended December 31, 2006)
|
|
[_]10(aa)-4
|
-
|
Amendment
No. 3 to said Incentive Compensation Plan, dated as of March 21, 2007
(Exhibit 10(f) to PPL Corporation Form 10-Q Report (File No. 1-11459) for
the quarter ended March 31, 2007)
|
|
[_]10(aa)-5
|
-
|
Amendment
No. 4 to said Incentive Compensation Plan, effective December 1, 2007
(Exhibit 10(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for
the quarter ended September, 30, 2008)
|
|
[_]10(aa)-6
|
-
|
Amendment
No. 5 to said Incentive Compensation Plan, dated as of December 16, 2008
(Exhibit 10(bb)-6 to PPL Corporation Form 10-K Report (File 1-11459) for
the year ended December 31, 2008)
|
|
[_]10(aa)-7
|
-
|
Form
of Stock Option Agreement for stock option awards under the Incentive
Compensation Plan (Exhibit 10(a) to PPL Corporation Form 8-K Report (File
No. 1-11459) dated February 1, 2006)
|
|
[_]10(aa)-8
|
-
|
Form
of Restricted Stock Unit Agreement for restricted stock unit awards under
the Incentive Compensation Plan (Exhibit 10(b) to PPL Corporation Form 8-K
Report (File No. 1-11459) dated February 1, 2006)
|
|
[_]10(aa)-9
|
-
|
Form
of Restricted Stock Unit Agreement for restricted stock unit awards under
the Incentive Compensation Plan pursuant to PPL Corporation Cash Incentive
Premium Exchange Program (Exhibit 10(c) to PPL Corporation Form 8-K Report
(File No. 1-11459) dated February 1, 2006)
|
|
[_]10(bb)-1
|
-
|
Incentive
Compensation Plan for Key Employees, amended and restated effective
January 1, 2003 (Schedule B to Proxy Statement of PPL Corporation, dated
March 17, 2003)
|
|
[_]10(bb)-2
|
-
|
Amendment
No. 1 to said Incentive Compensation Plan for Key Employees, dated as of
January 1, 2005 (Exhibit (hh)-1 to PPL Corporation Form 10-K Report (File
1-11459) for the year ended December 31, 2005
|
|
[_]10(bb)-3
|
-
|
Amendment
No. 2 to said Incentive Compensation Plan for Key Employees, dated as of
January 26, 2007 (Exhibit 10(ee)-3 to PPL Corporation Form 10-K Report
(File No. 1-11459) for the year ended December 31,
2006)
|
|
[_]10(bb)-4
|
-
|
Amendment
No. 3 to said Incentive Compensation Plan for Key Employees, dated as of
March 21, 2007 (Exhibit 10(q) to PPL Corporation Form 10-Q Report (File
No. 1-11459) for the quarter ended March 31, 2007)
|
|
[_]10(bb)-5
|
-
|
Amendment
No. 4 to said Incentive Compensation Plan for Key Employees, dated as of
December 15, 2008 (Exhibit 10(cc)-5 to PPL Corporation Form 10-K Report
(File No. 1-11459) for the year ended December 31,
2008)
|
|
[_]10(cc)
|
-
|
Short-term
Incentive Plan (Schedule A to Proxy Statement of PPL Corporation, dated
March 20, 2006)
|
|
[_]10(dd)
|
-
|
Agreement
dated January 15, 2003 between PPL Corporation and Mr. Miller regarding
Supplemental Pension Benefits (Exhibit 10(u) to PPL Corporation Form 10-K
Report (File No. 1-11459) for the year ended December 31,
2002)
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[_]10(ee)
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-
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Employment
letter dated December 19, 2005 between PPL Services Corporation and Jerry
Matthews Simmons, Jr. (Exhibit 10(jj) to PPL Corporation Form 10-K Report
(File No. 1-11459) for the year ended December 31,
2006)
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[_]10(ff)
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-
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Employment
letter dated May 31, 2006 between PPL Services Corporation and William H.
Spence (Exhibit 10(pp) to PPL Corporation Form 10-K Report (File No.
1-11459) for the year ended December 31, 2006)
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[_]10(gg)
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-
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Employment
letter dated August 29, 2006, between PPL Services Corporation and David
G. DeCampli (Exhibit 10(qq) to PPL Corporation Form 10-K Report (File No.
1-11459) for the year ended December 31, 2006)
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[_]10(hh)
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-
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Amendments
to certain compensation programs and arrangements for Named Executive
Officers of PPL Corporation and PPL Electric Utilities Corporation and
compensation arrangement changes for non-employee Directors of PPL
Corporation (PPL Corporation and PPL Electric Utilities Corporation Form
8-K Reports (File Nos. 1-11459 and 1-905) dated November 1,
2006)
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[_]10(ii)
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-
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Form
of Retention Agreement entered into between PPL Corporation and Messrs.
Champagne, Farr, Miller and Shriver (Exhibit 10(h) to PPL Corporation Form
10-Q Report (File No. 1-11459) for the quarter ended March 31,
2007)
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[_]10(jj)-1
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-
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Form
of Severance Agreement entered into between PPL Corporation and the Named
Executive Officers (Exhibit 10(i) to PPL Corporation Form 10-Q Report
(File No. 1-11459) for the quarter ended March 31,
2007)
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[_]10(jj)-2
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-
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Amendment
to said Severance Agreement (Exhibit 10(a) to PPL Corporation Form 10-Q
Report (File No. 1-11459) for the quarter ended June 30,
2009)
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[_]10(kk)
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-
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Form
of Performance Unit Agreement entered into between PPL Corporation and the
Named Executive Officers (Exhibit 10(ss) to PPL Corporation Form 10-K
Report (File No. 1-11459) for the year ended December 31,
2007)
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[_]10(ll)
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-
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2009
compensation matters regarding PPL Corporation Named Executive Officers
(PPL Corporation Form 8-K Report (File No. 1-11459) dated January 28,
2009)
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[_]10(mm)
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-
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2009
compensation matters regarding PPL Electric Utilities Corporation Named
Executive Officers (PPL Electric Utilities Corporation Form 8-K Report
(File No. 1-905) dated January 28, 2009)
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[_]10(nn)
|
-
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Establishment
of 2009 annual performance goals and business criteria for incentive
awards to PPL Corporation Named Executive Officers (PPL Corporation Form
8-K Report (File No. 1-11459) dated April 1, 2009)
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|
[_]10(oo)
|
-
|
Establishment
of 2009 annual performance goals and business criteria for incentive
awards to PPL Electric Utilities Corporation Named Executive Officers (PPL
Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated
April 1, 2009)
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|
[_]10(pp)
|
-
|
Employment
letter dated May 22, 2009, between PPL Services Corporation and Gregory W.
Dudkin (Exhibit 10(b) to PPL Corporation Form 10-Q Report (File No.
1-11459) for quarter ended June 30, 2009)
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-
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PPL
Corporation and Subsidiaries Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
|
|
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-
|
PPL
Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to
Fixed Charges
|
|
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-
|
PPL
Electric Utilities Corporation and Subsidiaries Computation of Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividends
|
|
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-
|
Subsidiaries
of PPL Corporation
|
|
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-
|
Subsidiaries
of PPL Electric Utilities Corporation
|
|
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-
|
Consent
of Ernst & Young LLP - PPL Corporation
|
|
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-
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Consent
of Ernst & Young LLP - PPL Energy Supply, LLC
|
|
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-
|
Consent
of Ernst & Young LLP - PPL Electric Utilities
Corporation
|
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-
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Power
of Attorney
|
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-
|
Certificate
of PPL's principal executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
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-
|
Certificate
of PPL's principal financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
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-
|
Certificate
of PPL Energy Supply's principal executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
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-
|
Certificate
of PPL Energy Supply's principal financial officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
|
|
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-
|
Certificate
of PPL Electric's principal executive officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
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-
|
Certificate
of PPL Electric's principal financial officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
|
|
|
-
|
Certificate
of PPL's principal executive officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
-
|
Certificate
of PPL's principal financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
-
|
Certificate
of PPL Energy Supply's principal executive officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
|
-
|
Certificate
of PPL Energy Supply's principal financial officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
|
|
|
-
|
Certificate
of PPL Electric's principal executive officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
-
|
Certificate
of PPL Electric's principal financial officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
-
|
Examples
of Wholesale Energy, Fuel and Emission Allowance Price Fluctuations - 2005
through 2009
|
|
|
**101.INS
|
-
|
XBRL
Instance Document for PPL Corporation
|
|
**101.SCH
|
-
|
XBRL
Taxonomy Extension Schema for PPL Corporation
|
|
**101.CAL
|
-
|
XBRL
Taxonomy Extension Calculation Linkbase for PPL
Corporation
|
|
**101.DEF
|
-
|
XBRL
Taxonomy Extension Definition Linkbase for PPL
Corporation
|
|
**101.LAB
|
-
|
XBRL
Taxonomy Extension Label Linkbase for PPL Corporation
|
|
**101.PRE
|
-
|
XBRL
Taxonomy Extension Presentation Linkbase for PPL
Corporation
|
** - XBRL
information will be considered to be furnished, not filed, for the first two
years of a company's submission of XBRL information.
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersItem 4 Is Omitted As Ppl Energy Supply Meets The Conditions Set Forth in General Instruction (i)(1)(a) and (b) Of Form 10-kPart IIItem 5. Market For The Registrant's Common Equity,Item 6. Selected Financial and Operating DataItem 6 Is Omitted As Ppl Energy Supply Meets The Conditions Set Forth in General Instructions (i)(1)(a) and (b) Of Form 10-kItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with AccountantsItem 9A. Controls and ProceduresItem 9a(t). Controls and ProceduresItem 9B. Other Information Ppl Corporation, Ppl Energy Supply, Llc and Ppl Electric Utilities Corporation NoneItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 10 Is Omitted As Ppl Energy Supply Meets The Conditions Set Forth in General Instruction (i)(1)(a) and (b) Of Form 10-kItem 11. Executive CompensationItem 11 Is Omitted As Ppl Energy Supply Meets The Conditions Set Forth in General Instruction (i)(1)(a) and (b) Of Form 10-kItem 12. Security Ownership Of Certain Beneficial Owners and ManagementItem 12 Is Omitted As Ppl Energy Supply Meets The Conditions Set Forth in General Instruction (i)(1)(a) and (b) Of Form 10-kItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 13 Is Omitted As Ppl Energy Supply Meets The Conditions Set Forth in General Instruction (i)(1)(a) and (b) Of Form 10-kItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules