PPL is an energy and utility holding company with headquarters in Allentown, Pennsylvania. Refer to "Item 1. Business - Background" in PPL's 2008 Form 10-K 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. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" in PPL's 2008 Form 10-K for a discussion of PPL's strategy and the risks and challenges that it faces in its business. See "Forward-Looking Information," Note 10 to the Financial Statements and the remainder of Item 2 in this Form 10-Q, and "Item 1A. Risk Factors" and the rest of Item 7 in PPL's 2008 Form 10-K for more information concerning the material risks and uncertainties that PPL faces in its businesses and with respect to its future earnings.

Market Events

The recent conditions in the financial markets have been disruptive to the processes of managing credit risk, responding to liquidity needs, measuring derivatives and other financial instruments at fair value, and managing market price risk. Bank credit capacity has been reduced and the cost of renewing or establishing new credit facilities has increased significantly, thereby making less certain businesses' ability to enter into long-term energy commitments or reliably estimate the longer-term cost and availability of credit.

Commodity Price Risk

The volatility of wholesale energy prices due to recent conditions in the financial and commodity markets significantly impacted PPL's earnings in 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. The recent conditions in the financial and commodity markets have generally increased PPL's exposure to credit risk. See Notes 13 and 14 to the Financial Statements and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's 2008 Form 10-K for more information on credit risk.

Liquidity Risk

Despite the recent conditions in the financial and capital markets, external financing activities by domestic electric utilities are being completed, albeit at higher-than-historical interest rates. 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, through the issuance of capital market securities. See "Financial Condition - Liquidity and Capital Resources" for an expanded discussion of PPL's liquidity position and a discussion of financing transactions.

Valuations in Inactive Markets

The recent 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 June 30, 2009, with the exception of the market for auction rate securities. See Notes 13 and 18 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 NDT funds and defined benefit plans. Both the pension plan and the NDT funds had positive returns in the second quarter 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 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" in PPL's 2008 Form 10-K for a discussion of the assumptions and sensitivities regarding those assumptions.

The Economic Stimulus Package

The Economic Stimulus Package is 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 will be allocated to various federal agencies, such as the DOE, and will also be provided to state agencies through block grants. The DOE plans to use a portion of the funds for smart grid and other efficiency-related programs, and has initiated a process for that purpose. The Commonwealth of Pennsylvania is accepting applications for funding of certain energy projects including solar projects. As discussed in Note 8 to the Financial Statements, PPL has 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. PPL has filed DOE loan guarantee applications for the Holtwood expansion project and for the Rainbow redevelopment project. In addition, in July 2009, PPL Electric proposed to the DOE a $38 million project that would use smart grid technology to strengthen reliability, save energy and improve electric service for 60,000 Harrisburg, Pennsylvania area customers. PPL Electric is requesting a DOE grant to provide half of the funding for this pilot program. PPL and its subsidiaries continue to review the Economic Stimulus Package's provisions to determine the impact on PPL's possible expansion plans, transmission projects and other business-related activities.

The following information should be read in conjunction with PPL's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL's 2008 Form 10-K.

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

The following discussion begins with a summary of PPL's earnings. "Results of Operations" continues with a review of results by reportable segment and a description of key factors by segment that management expects may impact future earnings. This section ends with "Statement of Income Analysis," which includes explanations of significant changes in principal items on PPL's Statements of Income, comparing the three and six months ended June 30, 2009, with the same periods in 2008.

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

Earnings

Net income (loss) attributable to PPL and the related EPS were:

                         Three Months Ended June 30,         Six Months Ended June 30,
                            2009              2008             2009             2008

       Net income
       (loss)
       attributable
       to PPL         $          (7 )     $       190     $       234       $       450
       EPS - basic    $       (0.02 )     $      0.50     $      0.62       $      1.20
       EPS -
       diluted        $       (0.02 )     $      0.50     $      0.62       $      1.19

The changes in net income (loss) attributable to PPL from period to period 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.

Segment Results

Net income (loss) attributable to PPL by segment was:

                        Three Months Ended June 30,           Six Months Ended June 30,
                          2009                2008             2009               2008

    Supply          $        (86 )       $         97     $        19         $       199
    International
    Delivery                  62                   62             149                 160
    Pennsylvania
    Delivery                  17                   31              66                  91
    Total           $         (7 )       $        190     $       234         $       450

Supply Segment

The Supply segment primarily consists of the domestic energy marketing, domestic generation and domestic development operations of PPL Energy Supply. In May 2009, PPL announced its intention to sell its Long Island generation business, and in July 2009, announced its intention to sell the majority of its Maine hydroelectric generation business. PPL expects the sales to close in 2009. See Note 8 to the Financial Statements for additional information.

In 2009 and 2008, the Supply segment results reflect the reclassification of the revenues and expenses of the Long Island generation business and the majority of its Maine hydroelectric generation business to Discontinued Operations.

Supply segment net income (loss) attributable to PPL was:

                            Three Months Ended June 30,          Six Months Ended June 30,
                               2009              2008             2009               2008
  Energy revenues
  External (a)           $         686       $       (97 )   $      1,872       $        182
  Intersegment                     411               428              908                917
  Energy-related
  businesses                        97               121              189                228
  Total operating
  revenues                       1,194               452            2,969              1,327
  Fuel and energy
  purchases
  External (a)                     835              (150 )          2,014                107
  Intersegment                      20                30               40                 58
  Other operation and
  maintenance                      225               205              457                431
  Depreciation                      57                49              107                 92
  Taxes, other than
  income                             8                 7               15                  9
  Energy-related
  businesses                        94               117              182                221
  Total operating
  expenses                       1,239               258            2,815                918
  Other Income
  (Expense) - net                    6                 9               35                 12
  Other-Than-Temporary
  Impairments                        1                 7               18                 10
  Interest Expense                  50                48               97                 89
  Income Taxes                     (36 )              55               26                131
  Income (Loss) from
  discontinued
  operations                       (32 )               5              (29 )                9
  Noncontrolling
  Interest                                             1                                   1
  Net Income (Loss)
  Attributable to PPL    $         (86 )     $        97     $         19       $        199

(a) Includes unrealized gains and losses from economic activity. See "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 for additional information.

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

                                             June 30, 2009 vs. June 30, 2008
                                       Three Months Ended        Six Months Ended

    Domestic gross energy margins     $             (34 )       $             (37 )
    Other operation and maintenance                 (11 )                       4
    Depreciation                                     (5 )                      (9 )
    Taxes, other than income                         (1 )                      (4 )
    Other income (expense) - net                     (6 )                       5
    Interest expense                                 (2 )                      (5 )
    Income taxes and other                           (3 )                      (5 )
    Special items                                  (121 )                    (129 )
                                      $            (183 )       $            (180 )

· See "Domestic Gross Energy Margins" for further discussion.

· Higher other operation and maintenance for the three months ended June 30, 2009, compared with the same period in 2008, primarily due to higher outage costs at the Susquehanna nuclear plant as a result of the timing of the 2009 refueling outage, partially offset by lower outage costs at the Eastern and Western U.S. fossil/hydroelectric stations.

· Higher depreciation for the six months ended June 30, 2009, compared with the same period in 2008, primarily due to the Montour scrubbers and Susquehanna generation uprate projects that were placed in-service in the second quarter of 2008 and the Brunner Island scrubber placed in-service in the second quarter of 2009.

· Lower other income (expense) - net for the three months ended June 30, 2009, compared with the same period in 2008, primarily due to lower interest income.

The following after-tax amounts, which management considers special items, impacted the Supply segment earnings. See the indicated Notes to the Financial Statements for additional information.

                        Three Months Ended June 30,        Six Months Ended June 30,
                            2009            2008            2009               2008

       Unrealized
       gains (losses)
       from
       energy-related
       economic
       activity
       (Note 14)        $    (88 )       $       4     $       (38 )       $        54
       Adjustments -
       NDT
       investments
       (a)                     2                (4 )            (1 )                (4 )
       Impairments
       and other
       impacts -
       emission
       allowances
       (Note 13)                                               (15 )
       Impairments -
       assets held
       for sale and
       other (Note
       13)                   (34 )                             (36 )
       Workforce
       reduction
       charge (Note
       6)                                                       (6 )
       Off-site
       remediation of
       ash basin leak
       (Note 10)                                 1                                   1
       Montana basin

(a) Represents other-than-temporary impairment charges on securities, including reversals of previous impairments when securities previously impaired were sold.

Earnings Outlook

Excluding special items, PPL projects higher earnings for its Supply segment in 2009 compared with 2008, driven by higher energy margins as a result of higher expected baseload generation and margins from marketing and trading activities, despite higher expected coal expense, partially offset by higher expected operation and maintenance expenses and depreciation.

In July 2009, PPL Maine signed a definitive agreement to sell the majority of its hydroelectric generation business. The transaction is expected to result in an after-tax gain in the range of $26 million to $35 million ($0.07 to $0.09 per share, basic and diluted), including the contingent consideration that would be realized upon completion of the anticipated sale of PPL Maine's three other hydroelectric facilities. This gain will be classified as a special item, and due to the contingent consideration, a portion may be recorded beyond 2009 or ultimately may not be realized. See Note 8 to the Financial Statements for additional information.

International Delivery Segment

The International Delivery segment consists primarily of the electricity
distribution operations in the U.K. In the first quarter of 2008, the
International Delivery segment recognized income tax benefits and miscellaneous
expenses in Discontinued Operations as the dissolution of the remaining Latin
American holding companies commenced. See Note 8 to the Financial Statements for
additional information. International Delivery segment net income attributable
to PPL was:

                         Three Months Ended June 30,           Six Months Ended June 30,
                           2009                2008             2009               2008

   Utility
   revenues          $        155         $        211     $       331         $       452
   Energy-related
   businesses                   8                    9              15                  18
   Total operating
   revenues                   163                  220             346                 470
   Other operation
   and maintenance             31                   50              65                  96
   Depreciation                27                   35              53                  71
   Taxes, other
   than income                 13                   17              26                  34
   Energy-related
   businesses                   4                    3               7                   6
   Total operating
   expenses                    75                  105             151                 207
   Other Income
   (Expense) - net            (13 )                  1             (11 )                 4
   Interest
   Expense                     18                   34              31                  72
   Income Taxes                (5 )                 20               4                  40
   Income from
   Discontinued
   Operations                                                                            5
   Net Income
   Attributable to
   PPL               $         62         $         62     $       149         $       160

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

                                            June 30, 2009 vs. June 30, 2008
                                       Three Months Ended       Six Months Ended
     U.K.
     Delivery margins                 $             (2 )
     Other operating expenses                        6         $              10
     Interest expense                                6                        21
     Income taxes                                   22                        31
     Foreign currency exchange rates               (25 )                     (60 )
     Hyder liquidation distributions                (1 )                      (3 )
     Other                                          (3 )                      (2 )
     U.S. Income taxes                               4                         6
     Discontinued operations (Note 8)                                         (5 )
     Other                                          (1 )
     Special items                                  (6 )                      (9 )
                                      $                        $             (11 )

· Lower other operating expenses for both periods primarily due to lower pension costs resulting from an increase in the discount rate and lower WPD meter operator expenses due to the transfer of that activity to a third party.

· Lower interest expense for both periods on the index-linked senior unsecured notes primarily due to lower inflation rates.

· Lower U.K. income taxes for both periods primarily due to changes in uncertain tax positions, partially offset by tax return adjustments in 2008. See Note 5 to the Financial Statements for additional information.

· Changes in foreign currency exchange rates negatively impacted U.K. earnings for both periods. The weighted-average exchange rate for the British pound sterling was approximately $1.46 for the three and six months ended June 30, 2009, versus approximately $1.98 for the same periods in 2008.

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

                       Three Months Ended June 30,           Six Months Ended June 30,
                          2009                2008             2009                2008

     Unrealized
     losses from
     foreign
     currency
     economic
     activity
     (Note 14)      $         (6 )                       $         (6 )
     Asset
     impairments                                                   (1 )
     Workforce
     reduction
     charge (Note
     6)                                                            (2 )

Earnings Outlook

Excluding special items, PPL projects lower earnings for its International Delivery segment in 2009 compared with 2008, primarily as a result of less favorable foreign currency exchange rates. See Note 10 to the Financial Statements for information on the potential impact of the Ofgem's five-year pricing review and its potential impact on WPD's revenues and earnings for 2010 and beyond.

Pennsylvania Delivery Segment

The Pennsylvania Delivery segment for both 2009 and 2008 includes the regulated electric delivery operations of PPL Electric. The Pennsylvania Delivery segment results in 2008 also include the revenues and expenses of PPL's natural gas distribution and propane businesses, which are classified as Discontinued Operations. In October 2008, PPL sold its natural gas distribution and propane businesses. See Note 8 to the Financial Statements for additional information.

Pennsylvania Delivery segment net income attributable to PPL was:

                         Three Months Ended June 30,           Six Months Ended June 30,
                           2009                2008             2009               2008
   Operating
   revenues
   External          $        727         $        770     $      1,617       $      1,650
   Intersegment                20                   30               40                 58
   Total operating
   revenues                   747                  800            1,657              1,708
   Fuel and energy
   purchases
   External                    31                   44               63                 85
   Intersegment               411                  428              908                917
   Other operation
   and maintenance             98                  103              204                207
   Amortization of
   recoverable
   transition
   costs                       70                   68              154                144
   Depreciation                30                   33               63                 65
   Taxes, other
   than income                 46                   48               98                104
   Total operating
   expenses                   686                  724            1,490              1,522
   Other Income
   (Expense) - net              1                    3                5                  8
   Interest
   Expense                     31                   26               60                 55
   Income Taxes                10                   19               37                 49
   Income from
   Discontinued
   Operations                                        1                                  10
   Noncontrolling
   Interests                    4                    4                9                  9
   Net Income
   Attributable to
   PPL               $         17         $         31     $         66       $         91

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

                                      June 30, 2009 vs. June 30, 2008
                                       Three Months       Six Months
                                          Ended             Ended

                  Delivery revenues
                  (net of CTC/ITC
                  amortization,
                  interest expense on
                  transition bonds
                  and ancillary
                  charges)            $      (11 )       $      (10 )
                  Other operation and
                  maintenance                  3                 10
                  Interest expense            (6 )               (9 )
                  Discontinued
                  operations, net of
                  special item (Note
                  8)                          (2 )              (11 )
                  Income taxes and
                  other                        1
                  Special items                1                 (5 )
                                      $      (14 )       $      (25 )

· Lower delivery revenues for both periods were primarily due to economic conditions including industrial customers scaling back on production, and a true-up of the FERC formula-based transmission revenues recorded in the three months ended June 30, 2009. See Note 2 to the Financial Statements for additional information on the true-up. In addition, during the second quarter of 2009, weather had an unfavorable impact on sales volumes.

· Lower other operation and maintenance expense for the six months ended June 30, 2009, compared with the same period in 2008, primarily due to decreased contractor expenses in 2009 and higher storm costs in 2008, net of insurance recoveries.

· Higher interest expense for both periods, primarily due to $400 million of debt issuances in 2008 that prefund a portion of 2009 debt maturities.

The following after-tax amounts, which management considers special items, also had an impact on the Pennsylvania Delivery segment earnings.

                        Three Months Ended June 30,          Six Months Ended June 30,
                          2009                2008             2009              2008

      Sale of gas
      and propane
      businesses                         $         (1 )                      $       (1 )
      Asset
      impairments                                         $       (1 )
      Workforce
      reduction
      charge (Note
. . .