PPL is an energy and utility holding company with headquarters in Allentown, PA. 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 PA 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 downturn in the financial markets has increased the complexity 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 dramatically and the cost of renewing or establishing new credit facilities has increased significantly, thereby introducing uncertainties as to businesses' ability to enter into long-term energy commitments or reliably estimate the longer-term cost and availability of credit.

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 continued volatility and downturn in financial and commodity markets during the first quarter of 2009 have generally increased PPL's exposure to credit risk. See Note 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

The downturn in financial markets generally continues to make obtaining new sources of bank and capital markets funding and issuing commercial paper more difficult and costly. During this challenging period, PPL expects to continue to have access to adequate sources of liquidity through operating cash flows, cash and cash equivalents, short-term investments and its credit facilities. 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 downturn in the financial markets has 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 March 31, 2009, with the exception of the market for auction rate securities. See Note 13 to the Financial Statements and "Financial Condition - Liquidity and Capital Resources - Auction Rate Securities" for a discussion of these investments. The FASB recently issued FSP FAS 157-4 that addresses how to determine fair value when the volume and level of activity for the asset or liability has significantly decreased and how to identify transactions that are not orderly. See Note 18 to the Financial Statements for additional information.

Securities Price Risk

Declines in the market price of debt and equity securities resulted in unrealized losses that have reduced the asset values of PPL's investments in its nuclear plant decommissioning trust funds and defined benefit plans.

PPL actively monitors the performance of the investments held in its nuclear plant decommissioning trust funds and periodically reviews the funds' investment allocations. See "Financial Condition - Risk Management - Energy Marketing & Trading and Other - Nuclear Plant Decommissioning Trust Funds - Securities Price Risk" for additional information on securities price risk.

PPL's defined benefit plans' assets continued to experience net negative investment returns in the first quarter of 2009, impacting the funded status of those plans. 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" programs, and has initiated a process for that purpose. The Commonwealth of Pennsylvania is accepting applications for funding for energy projects such as wind, hydroelectric, solar and other 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 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 months ended March 31, 2009, with the same period 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 attributable to PPL and the related EPS were:

                                              Three Months Ended March 31,
                                                2009                 2008

         Net income attributable to PPL   $         241         $         260
         EPS - basic                      $        0.64         $        0.69
         EPS - diluted                    $        0.64         $        0.69

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

Segment Results

Net income attributable to PPL by segment was:

                                          Three Months Ended March 31,
                                             2009                2008

              Supply                   $        105         $        102
              International Delivery             87                   98
              Pennsylvania Delivery              49                   60
              Total                    $        241         $        260

Supply Segment

The Supply segment primarily consists of the domestic energy marketing, domestic
generation and domestic development operations of PPL Energy Supply. Supply
segment net income attributable to PPL was:

                                              Three Months Ended March 31,
                                                 2009                 2008
        Energy revenues
        External (a)                      $         1,194         $       289
        Intersegment                                  497                 489
        Energy-related businesses                      92                 107
        Total operating revenues                    1,783                 885
        Fuel and energy purchases
        External (a)                                1,179                 257
        Intersegment                                   20                  28
        Other operation and maintenance               233                 227
        Depreciation                                   51                  44
        Taxes, other than income                        8                   2
        Energy-related businesses                      88                 105
        Total operating expenses                    1,579                 663
        Other Income - net                             13
        Interest Expense                               47                  41
        Income Taxes                                   65                  79
        Net Income Attributable to PPL    $           105         $       102

(a) Includes unrealized gains and losses from economic activity. See Note 14 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.

Domestic gross energy margins     $ (4 )
Other operation and maintenance     16
Depreciation                        (4 )
Taxes, other than income            (4 )
Other income - net                  12
Interest expense                    (3 )
Income taxes                        (3 )
Other                                1
Special items                       (8 )
                                  $  3

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

· Other operation and maintenance decreased primarily due to lower outage costs at the Susquehanna nuclear plant as a result of the timing of the 2009 refueling outage.

· Other income - net increased primarily due to gains related to the extinguishment of notes.

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

                                        Three Months Ended March 31,
                                           2009                2008

               MTM adjustments
               from economic
               activity (Note 14)    $         50         $         50
               Impairment of
               nuclear
               decommissioning
               trust investments
               (a)                             (3 )
               Impairments and
               other impacts -
               emission allowances
               (Note 13)                      (15 )
               Other asset
               impairments                     (2 )
               Workforce reduction
               charge (Note 6)                 (6 )
               Montana basin

(a) Represents other-than-temporary impairment charges on securities, including realized gains and losses from sales of previously impaired securities.

2009 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 coal expense, partially offset by higher operation and maintenance expenses and depreciation.

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 adjustments and other
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 March 31,
                                                   2009                2008

       Utility revenues                      $        176         $        241
       Energy-related businesses                        7                    9
       Total operating revenues                       183                  250
       Other operation and maintenance                 34                   46
       Depreciation                                    26                   36
       Taxes, other than income                        13                   17
       Energy-related businesses                        3                    3
       Total operating expenses                        76                  102
       Other Income - net                               2                    3
       Interest Expense                                13                   38
       Income Taxes                                     9                   20
       Income from Discontinued Operations                                   5
       Net Income Attributable to PPL        $         87         $         98

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

U.K.
Delivery margins                   $   2
Other operating expenses               4
Interest expense                      15
Income taxes                           9
Foreign currency exchange rates      (34 )
Hyder liquidation distributions       (2 )
U.S. Income taxes                      2
Discontinued operations (Note 8)      (5 )
Other                                  1
Special items                         (3 )
                                   $ (11 )

· Lower U.K. interest expense on the Index-Linked Senior Unsecured Notes primarily due to lower inflation rates.

· Lower U.K. income taxes primarily due to a favorable settlement of an uncertain tax position, partially offset by changes in other uncertain tax positions.

· Changes in U.K. foreign currency exchange rates negatively impacted WPD earnings between the periods. The weighted-average exchange rate for the British pound sterling was approximately $1.45 for the first three months of 2009 versus approximately $1.98 for the same period in 2008. This decreased WPD-related revenue and expense line items by 27%.

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

                                                 Three Months Ended March 31,
                                                    2009                2008

        Asset impairments                     $         (1 )
        Workforce reduction charge (Note 6)             (2 )
        Total                                 $         (3 )

2009 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.

Pennsylvania Delivery Segment

The Pennsylvania Delivery segment for both 2008 and 2009 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. These revenues and expenses are included in 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 March 31,
                                                        2009                2008
   Operating revenues
   External                                       $        890         $        880
   Intersegment                                             20                   28
   Total operating revenues                                910                  908
   Fuel and energy purchases
   External                                                 32                   41
   Intersegment                                            497                  489
   Other operation and maintenance                         106                  104
   Amortization of recoverable transition costs             84                   76
   Depreciation                                             33                   32
   Taxes, other than income                                 52                   56
   Total operating expenses                                804                  798
   Other Income - net                                        4                    5
   Interest Expense                                         29                   29
   Income Taxes                                             27                   30
   Income from Discontinued Operations                                            9
   Noncontrolling Interests                                  5                    5
   Net Income Attributable to PPL                 $         49         $         60

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

Delivery revenues
(net of CTC/ITC
amortization,
interest expense
on transition
bonds and
ancillary
charges)                $     1
Other operation
and maintenance               7
Interest expense             (3 )
Discontinued
operations (Note
8)                           (9 )
Other                        (1 )
Special items                (6 )
                        $   (11 )

· Other operation and maintenance decreased primarily due to higher PUC-reportable storm costs in 2008 and decreased contractor expenses in 2009.

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

                                                 Three Months Ended March 31,
                                                    2009                2008

        Asset impairments                     $         (1 )
        Workforce reduction charge (Note 6)             (5 )
        Total                                 $         (6 )

2009 Outlook

Excluding special items, PPL projects lower earnings for its Pennsylvania Delivery segment in 2009 compared with 2008, due to the divestiture of PPL's natural gas distribution and propane businesses and slightly lower results from the electricity delivery business. Slightly higher revenues are expected to be offset by higher other operation and maintenance expenses.

See Note 10 to the Financial Statements for a discussion of items that could impact earnings beyond 2009, including the PUC-approved plan to procure default electricity supply for 2010, Pennsylvania legislative and other regulatory activities and a FERC-approved transmission rate.

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.

                                        Three Months Ended March 31,
                                          2009                 2008

              Operating Income
              (a)                   $         417         $         480
              Adjustments:
              Energy-related
              businesses, net (b)              (8 )                  (8 )
              Other operation and
              maintenance (a)                 373                   377
              Amortization of
              recoverable
              transition costs
              (a)                              84                    76
              Depreciation (a)                110                   112
              Taxes, other than
              income (a)                       73                    75
              Revenue adjustments
              (c)                            (897 )                (426 )
              Expense adjustments
              (c)                             243                  (285 )
              Domestic gross
              energy margins        $         395         $         401

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

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

                                                        Three Months Ended March 31,
                                                       2009            2008       Change
  Revenue
  Utility (a)                                      $    1,065       $  1,120     $  (55 )
  Unregulated retail electric and gas (a)                  42             34          8
  Wholesale energy marketing (a)                        1,165            258        907
  Net energy trading margins (a)                          (12 )           (2 )      (10 )
  Revenue adjustments (b)
  WPD utility revenue                                    (176 )         (241 )       65
  Domestic delivery component of utility revenue         (354 )         (354 )
  Other utility revenue                                   (14 )          (12 )       (2 )
  MTM adjustments from economic activity (c)             (353 )          180       (533 )
  Gains from sale of emission allowances (d)                               1         (1 )
  Total revenue adjustments                              (897 )         (426 )     (471 )
                                                        1,363            984        379
  Expense
  Fuel (a)                                                258            240         18
  Energy purchases (a)                                    953             58        895
  Expense adjustments (b)
  MTM adjustments from economic activity (c)             (267 )          266       (533 )
  Domestic electric ancillaries (e)                       (12 )          (12 )
  Gross receipts tax (f)                                   31             30          1
  Other                                                     5              1          4
  Total expense adjustments                              (243 )          285       (528 )
                                                          968            583        385
  Domestic gross energy margins                    $      395       $    401     $   (6 )

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

Domestic Gross Energy Margins By Region

Domestic gross energy margins are generated through PPL's various strategies to
maximize the value of its wholesale energy portfolio. The most significant of
these strategies include the sales of baseload generation, optimization of
intermediate and peaking generation and its marketing and proprietary trading
activities. PPL also manages these activities on a geographic basis that is
aligned with its generation assets.

                                                Three Months Ended March 31,
                                              2009           2008         Change
          Generation related margins:
          Eastern U.S.                     $    297       $    315       $  (18 )
          Western U.S.                           84             72           12
          Marketing and trading margins:
          Eastern U.S.                           15             25          (10 )
          Western U.S.                           (1 )          (11 )         10
          Domestic gross energy margins    $    395       $    401       $   (6 )

Eastern U.S.

Eastern U.S. generation related margins were $18 million lower during the three . . .