-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NKhFUHl8BF/HsoMxEDBTC+Vtv9l5egR6G17hftmPAPrqszymC0aJ8lTxTV3MMzN2 8S4VjN2UnjqHoaybUbLYqQ== 0000922224-07-000030.txt : 20070228 0000922224-07-000030.hdr.sgml : 20070228 20070228104504 ACCESSION NUMBER: 0000922224-07-000030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 51 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070228 DATE AS OF CHANGE: 20070228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPL ENERGY SUPPLY LLC CENTRAL INDEX KEY: 0001161976 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-32944 FILM NUMBER: 07655668 BUSINESS ADDRESS: STREET 1: TWO NORTH NINETH STREET CITY: ALLENTOWN STATE: PA ZIP: 18101 BUSINESS PHONE: 6107745151 MAIL ADDRESS: STREET 1: TWO NORTH NINTH STREET CITY: ALLENTOWN STATE: PA ZIP: 18101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPL ELECTRIC UTILITIES CORP CENTRAL INDEX KEY: 0000317187 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 230959590 STATE OF INCORPORATION: PA FISCAL YEAR END: 0405 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-00905 FILM NUMBER: 07655669 BUSINESS ADDRESS: STREET 1: TWO N NINTH ST CITY: ALLENTOWN STATE: PA ZIP: 18101 BUSINESS PHONE: 6107745151 MAIL ADDRESS: STREET 1: TWO NORTH NINTH STREET CITY: ALLENTOWN STATE: PA ZIP: 18101-1179 FORMER COMPANY: FORMER CONFORMED NAME: PP&L INC DATE OF NAME CHANGE: 19970912 FORMER COMPANY: FORMER CONFORMED NAME: PP & L INC DATE OF NAME CHANGE: 19970912 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPL CORP CENTRAL INDEX KEY: 0000922224 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 232758192 STATE OF INCORPORATION: PA FISCAL YEAR END: 0330 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11459 FILM NUMBER: 07655670 BUSINESS ADDRESS: STREET 1: TWO N NINTH ST CITY: ALLENTOWN STATE: PA ZIP: 181011179 BUSINESS PHONE: 6107745151 MAIL ADDRESS: STREET 1: TWO N NINTH ST CITY: ALLENTOWN STATE: PA ZIP: 18101-1179 FORMER COMPANY: FORMER CONFORMED NAME: PP&L RESOURCES INC DATE OF NAME CHANGE: 19941123 10-K 1 ppl10-k2006.htm PPL FORM 10-K 2006 PPL Form 10-K 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2006
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________

Commission File
Number
Registrant; State of Incorporation;
Address and Telephone Number
IRS Employer
Identification No.
     
1-11459
PPL Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-2758192
     
333-74794
PPL Energy Supply, LLC
(Exact name of Registrant as specified in its charter)
(Delaware)
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-3074920
     
1-905
PPL Electric Utilities Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA 18101-1179
(610) 774-5151
23-0959590
     
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
 
Common Stock of PPL Corporation
New York & Philadelphia Stock Exchanges
 
Senior Unsecured Notes of PPL Energy Supply, LLC
  
 
7.0% due 2046
New York Stock Exchange
 
Preferred Stock of PPL Electric Utilities Corporation
  
 
4-1/2%
4.40% Series
New York Stock Exchange
New York Stock Exchange
     
Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

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

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

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

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

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

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

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

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

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

As of June 30, 2006, PPL Corporation had 380,813,336 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 $12,300,270,753. As of January 31, 2007, PPL Corporation had 385,093,663 shares of its $.01 par value Common Stock outstanding.

As of January 31, 2007, 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 2007 Notice of Annual Meeting and Proxy Statement, and PPL Electric Utilities Corporation's 2007 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, 2006. 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, 2006

TABLE OF CONTENTS

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

Item
    
Page
PART I
   
i
   
v
1.
  
1
1A.
  
10
1B.
  
17
2.
  
18
3.
  
19
4.
  
19
   
20
       
PART II
5.
  
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
22
6.
  
22
7.
  
Management's Discussion and Analysis of Financial Condition and Results of Operations
  
   
25
   
51
   
75
7A.
  
84
   
86
8.
  
93
9.
  
181
9A.
  
181
9B.
  
182
       
PART III
10.
  
182
11.
  
182
12.
  
183
13.
  
184
14.
  
184
       
PART IV
15.
  
185
   
186
   
188
   
191
   
200
   
203
   
209
   
215
   
216

PPL Corporation and its current and former subsidiaries

CEMAR - Companhia Energética do Maranhão, a Brazilian electric distribution company in which PPL Global had a majority ownership interest until the transfer of this interest in April 2004.

CGE - Compañia General de Electricidad, S.A., a distributor of electricity and natural gas with other industrial segments in Chile and Argentina in which PPL Global had an 8.7% direct and indirect minority ownership interest until the sale of this interest in March 2004.

DelSur - Distribuidora de Electricidad Del Sur, S.A. de C.V., an electric distribution company in El Salvador, a majority of which is owned by EC.

EC - Electricidad de Centroamerica, S.A. de C.V., an El Salvadoran holding company and the majority owner of DelSur. EC was also the majority owner of El Salvador Telecom, S.A. de C.V. until the sale of this company in June 2004. PPL Global has 100% ownership of EC.

Elfec - Empresa de Luz y Fuerza Electrica Cochabamba S.A., a Bolivian electric distribution company in which PPL Global has a majority ownership interest.

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

Griffith - a 600 MW gas-fired station in Kingman, Arizona, that was jointly owned by an indirect subsidiary of PPL Generation and LS Power Group until the sale of PPL Generation's interest in June 2006.

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).

Integra - Empresa de Ingenieria y Servicios Integrales Cochabamba S.A., a Bolivian construction and engineering services company in which PPL Global has a majority ownership interest.

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

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

PPL Capital Funding Trust I - a Delaware statutory business trust created to issue the Preferred Security component of the PEPS Units. This trust was terminated in June 2004.

PPL Coal Supply - PPL Coal Supply, LLC, a limited liability company owned by PPL Coal Holdings Corporation (a subsidiary of PPL Generation) and Iris Energy LLC. PPL Coal Supply procures coal, which it sells to PPL Generation for power plants and to Iris Energy for synthetic fuel production.

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 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 subsidiary of PPL that specializes in natural gas distribution, transmission and storage services, and the competitive sale of propane.

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 owns and operates international energy businesses that are focused on the regulated distribution of electricity.

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

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 Telcom - PPL Telcom, LLC, an indirect subsidiary of PPL and PPL Energy Supply that delivers high bandwidth telecommunication services from Washington, D.C., to New York City and to six metropolitan areas in central and eastern Pennsylvania.

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.

SIUK Capital Trust I - a business trust created to issue preferred securities and whose common securities are held by WPD LLP.

SIUK Limited - a former intermediate holding company within the WPDH Limited group. In January 2003, SIUK Limited transferred its assets and liabilities to WPD LLP.

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

£ - 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 (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.

APB - Accounting Principles Board.

ARB - Accounting Research Bulletin.

ARO - asset retirement obligation.

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.

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

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

Customer Choice Act - 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.

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

DIG - Derivatives Implementation Group.

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

EITF - Emerging Issues Task Force, an organization that assists the FASB in improving financial reporting through the identification, discussion and resolution of financial accounting issues within the framework of existing authoritative literature.

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 interstate transmission and wholesale sales of electricity and related matters.

FIN - FASB Interpretation.

Fitch - Fitch, Inc.

FSP - FASB Staff Position.

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 remit payment for certain congestion-related transmission charges that arise when the transmission grid is congested.

GAAP - generally accepted accounting principles.

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

IBEW - International Brotherhood of Electrical Workers.

ICP - Incentive Compensation Plan.

ICPKE - Incentive Compensation Plan for Key Employees.

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

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.

LIBOR - London Interbank Offered Rate.

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.

NorthWestern - NorthWestern Energy Division, a Delaware corporation and a subsidiary of NorthWestern 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.

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

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

NYMEX - New York Mercantile Exchange.

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

OSM - Office of Surface Mining, a U.S. government agency.

PCB - polychlorinated biphenyl, an oil additive used in certain electrical equipment up to the late-1970s. It is now classified as a hazardous chemical.

PEPS Units (Premium Equity Participating Security Units, or PEPSSM Units) - securities issued by PPL and PPL Capital Funding Trust I that consisted of a Preferred Security and a forward contract to purchase PPL common stock, which settled in May 2004.

PEPS Units, Series B (Premium Equity Participating Security Units, or PEPSSM Units, Series B) - securities issued by PPL and PPL Capital Funding that consisted of an undivided interest in a debt security issued by PPL Capital Funding and guaranteed by PPL, and a forward contract to purchase PPL common stock, which settled in May 2004.

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 electricity 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.

Preferred Securities - company-obligated mandatorily redeemable preferred securities issued by PPL Capital Funding Trust I, which solely held debentures of PPL Capital Funding, and by SIUK Capital Trust I, which solely holds debentures of WPD LLP.

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.

RFC - ReliabilityFirst Corporation, the new regional reliability council that replaced the Mid-Atlantic Area Coordination Council.

RMC - Risk Management Committee.

RTO - Regional Transmission Organization.

SAB - Staff Accounting Bulletin.

Sarbanes-Oxley 404 - Section 404 of the 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 attest to and report on management's assessment and 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.

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

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

SPE - special purpose entity.

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

Synfuel projects - production facilities that manufacture synthetic fuel from coal or coal byproducts. Favorable federal tax credits may be 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.

UF - inflation-indexed Chilean peso-denominated unit.

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 facts 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. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in the forward-looking statements. In addition to the specific factors discussed in "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," the following are among the important factors that could cause actual results to differ materially from the forward-looking statements:

·
market demand and prices for energy, capacity and fuel;
·
market prices for crude oil and the potential impact on synthetic fuel operations, synthetic fuel purchases from third parties and the phase-out of synthetic fuel tax credits;
·
weather conditions affecting generation production, customer energy usage and operating costs;
·
competition in retail and wholesale power markets;
·
liquidity of wholesale power markets;
·
defaults by our counterparties under our energy or fuel contracts;
·
the effect of any business or industry restructuring;
·
the profitability and liquidity, including access to capital markets and credit facilities, of PPL and its subsidiaries;
·
new accounting requirements or new interpretations or applications of existing requirements;
·
operation and availability of existing generation facilities and operating costs;
·
transmission and distribution system conditions and operating costs;
·
current and future environmental conditions and requirements and the related costs of compliance, including environmental capital expenditures and emission allowances and other expenses;
·
significant delays in the planned installation of pollution control equipment at certain coal-fired generating units in Pennsylvania due to weather conditions, contractor performance or other reasons;
·
market prices of commodity inputs for ongoing capital expenditures;
·
collective labor bargaining negotiations;
·
development of new projects, markets and technologies;
·
performance of new ventures;
·
asset acquisitions and dispositions;
·
political, regulatory or economic conditions in states, regions or countries where PPL or its subsidiaries conduct business;
·
any impact of hurricanes or other severe weather on PPL and its subsidiaries, including any impact on fuel prices;
·
receipt of necessary governmental permits, approvals and rate relief;
·
new state, federal or foreign legislation, including new tax legislation;
·
state, federal and foreign regulatory developments;
·
the impact of any state, federal or foreign investigations applicable to PPL and its subsidiaries and the energy industry;
·
capital market conditions, including changes in interest rates, and decisions regarding capital structure;
·
stock price performance of PPL;
·
the market prices of equity securities and the impact on pension costs and resultant cash funding requirements for defined benefit pension plans;
·
securities and credit ratings;
·
foreign currency exchange rates;
·
the outcome of litigation against PPL and its subsidiaries;
·
potential effects of threatened or actual terrorism or war or other hostilities; and
·
the commitments and liabilities of PPL and its subsidiaries.

Any such forward-looking statements should be considered in light of such important factors and in conjunction with other documents of PPL, PPL 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 of such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made, and PPL, PPL Energy Supply and PPL Electric undertake no obligations to update the information contained in such statement to reflect subsequent developments or information.
PART I

 
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.; delivers electricity to approximately 5.1 million customers in Pennsylvania, the U.K. and Latin America; and provides energy services for businesses in the mid-Atlantic and northeastern U.S. PPL's significant subsidiaries are shown below:

See Exhibit 99(a) in Item 15 for a listing of the current corporate organization. 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. and Latin America. PPL Energy Supply's major operating subsidiaries are PPL Generation, PPL EnergyPlus and PPL Global. PPL Energy Supply owns or controls 11,556 MW of electric power generation capacity, and has current plans to implement capital projects at certain of its existing generation facilities in Pennsylvania and Montana that would provide 349 MW of additional generation capacity by 2011.

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

·
Supply Segment -
   
 
Owns and operates domestic power plants to generate electricity; markets this electricity and other power purchases 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 has generation assets that are focused on the eastern and western markets. The eastern generation assets are focused on the Northeast/Mid-Atlantic energy markets - including PJM, the New York ISO, ISO New England and the Mid-American Interconnection Network. PPL's western generating capacity is focused on the markets within the Western Electricity Coordinating Council.

 
PPL Generation

PPL Generation owned or controlled generating capacity of 11,556 MW at December 31, 2006. Through subsidiaries, PPL Generation owns and operates power plants in Pennsylvania, Montana, Illinois, Connecticut, New York and Maine. See "Power Supply" for a complete listing of PPL's generating capacity.

The Pennsylvania generation plants had a total capacity of 9,229 MW at December 31, 2006. These plants are fueled by uranium, coal, gas, oil and water. The electricity from these plants is sold to PPL EnergyPlus under FERC-jurisdictional power purchase agreements.

PPL's U.S. generation subsidiaries are EWGs, which sell electricity into the wholesale market. PPL's EWGs are subject to regulation by the FERC, which has authorized these EWGs to sell generation from their facilities at market-based prices.

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; Allegheny Electric Cooperative, Inc. owns the remaining 10% undivided interest. PPL's 90% share of Susquehanna's capacity was 2,120 MW at December 31, 2006.

PPL Generation operates its Pennsylvania and Illinois power plants in conjunction with PJM. PPL Generation's Pennsylvania power plants, PPL Generation's Illinois 540 MW natural gas-fired generating station and PPL EnergyPlus are members of the RFC. Refer to "Pennsylvania Delivery Segment" for information regarding PJM's operations and functions and the RFC.

The Montana coal-fired and hydro-powered stations have a capacity of 1,289 MW. PPL Montana's power plants are parties to the Western Electricity Coordinating Council Agreement.

The Maine oil-fired and hydro-powered stations have a total capacity of 96 MW. The Maine generating assets are operated in conjunction with ISO New England and are parties to the Northeast Power Coordinating Council Agreement. See Note 9 for information on the possible sale of three hydroelectric dams.

The Connecticut natural gas-fired station has a total capacity of 243 MW and is operated in conjunction with ISO New England and is party to the Northeast Power Coordinating Council Agreement.

The New York natural gas-fired generating station and oil-fired generating station have a combined capacity of 159 MW. These generating stations are operated in connection with the New York ISO and are parties to the Northeast Power Coordinating Council Agreement.

PPL Generation has current plans to implement capital projects at certain of its generation facilities in Pennsylvania and Montana that would provide 349 MW of additional generation capacity by 2011. See "Item 2. Properties" for additional information regarding these capital projects.

In 2003, PPL reached an agreement with the New Jersey DEP and the Pennsylvania DEP that included the shutdown of the two 150 MW coal-fired generating units at the Martins Creek generating facility in September 2007. See "Environmental Matters - Domestic - Air" in Note 15 to the Financial Statements for more information regarding this agreement.

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

PPL Generation's 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 Generation's other subsidiaries, including PPL Montana, 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.

 
PPL EnergyPlus

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

PPL EnergyPlus buys and sells energy at competitive prices. PPL EnergyPlus purchases electric capacity and energy at the wholesale level, and also sells electric capacity and energy at the wholesale level under FERC market-based tariffs. PPL EnergyPlus enters into these agreements to market available energy and capacity from PPL Generation's assets and to profit from market price fluctuations. PPL EnergyPlus actively manages its portfolios to maximize the value of PPL's generating assets and to limit exposure to price fluctuations. PPL EnergyPlus also purchases and sells energy forward and futures contracts as well as other commodity-based financial instruments in accordance with PPL's risk management policies, objectives and strategies.

PPL EnergyPlus has executed contracts to provide electricity to PPL Electric sufficient for it to meet its PLR obligation through 2009, at the predetermined capped rates PPL Electric is entitled to charge its customers during this period. This arrangement with PPL Electric accounted for 32% of PPL Energy Supply's operating revenues in 2006. See Note 16 to the Financial Statements for more information concerning these contracts.

PPL EnergyPlus currently is licensed to provide retail electric supply to customers in Delaware, Maine, Maryland, Massachusetts, Montana, New Jersey and Pennsylvania. In 2006, PPL EnergyPlus provided energy to industrial and commercial customers in Montana, New Jersey and Pennsylvania, but currently it is serving retail customers only in Montana.

PPL EnergyPlus also develops distributed generation plants on customer sites using technologies such as fuel cells, small turbines, microturbines and reciprocating engines. As of December 31, 2006, a subsidiary of PPL Energy Supply owned approximately 17 MW of installed capacity serving commercial and industrial customers.

PPL Synfuel Investments, LLC, a subsidiary of PPL EnergyPlus, indirectly owns, through its subsidiaries, two production facilities that manufacture synthetic fuel from coal or coal byproducts. PPL receives federal tax credits for these qualified manufactured solid synthetic fuel products. See Note 15 to the Financial Statements for additional information.

PPL Telcom, an indirect subsidiary of PPL EnergyPlus, has a fiber optic network and markets available capacity on PPL Electric's fiber optic cables in eastern and central Pennsylvania. Through acquisition and customer-driven demand, the fiber optic network has been extended beyond PPL Electric's service area to include portions of the mid-Atlantic states from northern Virginia to New York. The fiber optic services include point-to-point data transport, high-speed connections among multiple sites and access to national and global fiber networks. PPL Telcom markets its services to customers such as other telecommunications companies, internet service providers and large enterprises that need high-speed data connections between multiple locations. Additionally, PPL Telcom provides engineering, construction and site leasing services to wireless carriers.

·
Pennsylvania Delivery Segment -
   
 
Includes the regulated electric and gas delivery operations of PPL Electric and PPL Gas Utilities.

 
PPL Electric

PPL Electric provides electricity delivery service 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.

In addition to providing electricity delivery service in its service territory in Pennsylvania, PPL Electric also provides electricity supply to retail customers in that territory as a PLR under the Customer Choice Act. As part of the PUC Final Order, PPL Electric agreed to provide this electricity supply at predetermined capped rates through 2009. PPL Electric has executed two contracts to purchase electricity from PPL EnergyPlus sufficient for PPL Electric to meet its PLR obligation through 2009, at the predetermined capped rates. PPL Electric's PLR obligation after 2009 will be determined by the PUC pursuant to rules that have not yet been promulgated. In February 2007, the PUC issued proposed PLR regulations and a policy statement regarding interpretation and implementation of those regulations. The PUC is requesting public comment on both the regulations and policy statement.  Refer to "Power Supply" for additional information, as well as Notes 15 and 16 to the Financial Statements.

During 2006, about 95% of PPL Electric's operating revenues were derived from regulated electricity delivery and supply as a PLR. About 5% of 2006 operating revenues were from wholesale sales, primarily the sale to PPL EnergyPlus of power purchased from NUGs. During 2006, about 42% of electricity delivery and PLR revenues were from residential customers, 37% from commercial customers, 20% 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 North America Electric Reliability Council (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 accommodate greater competition and broader participation 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. A primary purpose of the RTO/ISO is to separate the operation of, and access to, the transmission grid from PJM electric utilities' generation interests. PJM also administers regional markets for energy, capacity and ancillary services. Electric utilities continue to own the transmission assets, but the RTO/ISO directs the control and operation of the transmission facilities. PPL Electric fully recovers 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 Standards legislation, which requires electric distribution companies, such as PPL Electric, and electric generation suppliers serving retail load to provide 18% of the electricity sold to retail customers in Pennsylvania from alternative sources within 15 years (by 2020). Under this new state legislation, alternative sources include hydro, wind, solar, waste coal, landfill methane and fuel cells. An electric distribution company will pay an alternative compliance payment of $45 for each MWh that it is short of its required alternative energy supply percentage. Since PPL Electric's PLR generation rates are capped through 2009 as described above and the legislation allows for a cost recovery exemption period, PPL Electric will not be subject to the requirements of this legislation until 2010. In that year, PPL Electric will have to supply about 9% of the total amount of electricity it delivers to its PLR customers from alternative energy sources. At this time, PPL Electric cannot predict the impact of this legislation on its future results of operations because the impact will depend on a number of factors that will not be known until 2010, including customer load requirements, PLR contract terms and available alternative energy sources in the market.

In February 2007, Pennsylvania Governor Rendell announced an Energy Independence Strategy (Strategy). The Strategy encourages development of energy conservation, energy management and alternative energy resources and proposes the creation of an $850 million Energy Independence Fund (Fund) to support these policy objectives through rebates, grants and loans to qualifying programs. The Fund would be raised with revenue bonds and financed through a non-bypassable charge on retail electric bills. The Strategy also contains three initiatives to address PLR issues. Retail customers could elect to phase-in over three years any rate increase approved by the PUC. Also, PLR providers would be required to obtain a "least cost portfolio" of supply by purchasing power in the spot market and through contracts of varying lengths and the provider would be required to procure energy conservation resources before acquiring additional power. In addition, PLR providers could enter into long-term contracts with large energy users and alternative energy developers. The Rendell Administration has released draft legislative language to implement the Strategy, which is currently under review by PPL. The announcement of this Strategy and the draft legislation is the first step in an expected long legislative process involving all of the affected stakeholders. Moreover, it is expected that the implementation details of the Strategy, including the issues of deferral of costs and recovery of interest for the customer rate phase-in program and the timing of PUC approval for PLR supply portfolios, will be delegated to the PUC. At this time, PPL cannot predict the final outcome of this legislative and regulatory process or its ultimate impact.

 
PPL Gas Utilities

PPL Gas Utilities was formed in 1946, and PPL acquired the company in 1998. PPL Gas Utilities operates a natural gas distribution and propane business in portions of various counties in Pennsylvania, as well as in a small area of Maryland and Delaware, providing natural gas and propane services to approximately 110,000 customers. PPL Gas Utilities provides its natural gas services in Pennsylvania subject to the regulatory jurisdiction of the PUC. PPL Gas Utilities also provides intrastate and interstate natural gas storage service from storage fields in Pennsylvania. The intrastate storage service is regulated by the PUC and the interstate storage service is regulated by the FERC. However, under a 1992 FERC Order, rates for interstate storage services are the rates set by the PUC for intrastate service. The propane delivery service is not subject to the regulatory jurisdiction of the PUC or the FERC.

·
International Delivery Segment -
   
 
Includes regulated electricity distribution companies in the U.K. and Latin America.

PPL Global provides electricity delivery service to approximately 3.7 million customers in the U.K. and Latin America.

In the U.K., WPD, through indirect wholly owned subsidiaries, operates two electric distribution companies that together serve approximately 2.6 million end-users.

PPL Global also has controlling interests in electric transmission and distribution companies serving customers in Chile, El Salvador and Bolivia. Emel, of which PPL Global owns 95.4%, serves approximately 575,000 customers through subsidiary distribution companies in northern Chile and just south of its headquarters in Santiago, Chile. DelSur, of which PPL Global owns 86.4%, is an electric distribution company headquartered in San Salvador, which serves approximately 290,000 customers in the central and southern regions of El Salvador, including a portion of the city of San Salvador. Elfec, of which PPL Global owns 92.1%, is the second largest electric distribution company in Bolivia, and serves approximately 281,000 customers in the Cochabamba region. In the recent past, Bolivia has experienced political and social unrest. At this time, PPL is unable to predict the potential effect on its Bolivian operations.

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 nature and location of the facilities PPL owns and the terms of the 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" 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 estimated capital expenditure requirements for the years 2007-2011. See Note 15 to the Financial Statements for additional information concerning expected capital expenditures for environmental matters.

COMPETITION

The unregulated businesses and markets in which PPL and its subsidiaries participate are highly competitive. The U.S. electric industry has experienced an increase in the level of competition in the energy markets due to federal and state deregulation initiatives. For instance, 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 in order to create retail access to a competitive market for the generation of electricity. 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. In "Item 1A. Risk Factors," see "We face intense competition in our energy supply business, which may adversely affect our ability to operate profitably," and "If the present trend towards competitive markets is reversed, discontinued or delayed, our business prospects and financial condition could be materially adversely affected" for more information concerning the risks PPL faces with respect to competition in the deregulated energy markets.

Pursuant to PPL Electric's 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 distribution business. Although the majority of PPL Global's international electricity transmission and distribution companies operate in non-exclusive concession areas in their respective countries, these companies currently face little or no competition with respect to residential customers. See "Franchises and Licenses" for more information.

POWER SUPPLY

PPL Generation's system capacity (winter rating) at December 31, 2006, was:

Plant
Net MW Capacity
     
Pennsylvania
    
Nuclear-fueled steam station
    
Susquehanna
2,120
 (a)
Coal-fired steam stations
    
Montour
1,542
 (b)
Brunner Island
1,483
 (b)
Martins Creek
300
 (c)
Keystone
211
 (d)
Conemaugh
278
 (e)
Total coal-fired
3,814
  
Gas- and oil-fired steam stations
    
Martins Creek
1,670
  
Lower Mt. Bethel
582
  
Total gas- and oil-fired
2,252
  
Combustion turbines and diesels
451
  
Hydroelectric
153
  
Total generating capacity
8,790
  
Firm purchases
    
Hydroelectric
140
 (f)
Qualifying facilities
299
  
Total firm purchases
439
  
Total system capacity - Pennsylvania
9,229
  
     
Montana
    
Coal-fired stations
    
Colstrip Units 1 & 2
307
 (g)
Colstrip Unit 3
222
 (h)
Corette
158
  
Total coal-fired
687
  
Hydroelectric
602
  
Total system capacity - Montana
1,289
  
     
Illinois
    
Natural gas-fired station
    
University Park
540
  
     
Connecticut
    
Natural gas-fired station
    
Wallingford
243
  
     
New York
    
Natural gas- and oil-fired stations
    
Edgewood and Shoreham
159
  
     
Maine
    
Oil-fired generating station
    
Wyman Unit 4
52
 (i)
Hydroelectric
44
 (j)
Total system capacity - Maine
96
  
     
Total system capacity - PPL Generation
11,556
  

(a)
  
PPL's 90% interest.
(b)
  
There is an expected 30 MW reduction in generation capability at each of the Brunner Island and Montour plants due to the estimated increases in station service usage during the scrubber operation.
(c)
  
PPL has agreed to shut down the Martins Creek coal-fired units in September 2007. See "Environmental Matters - Domestic - Air" in Note 15 to the Financial Statements for more information.
(d)
  
PPL's 12.34% interest.
(e)
  
PPL's 16.25% interest.
(f)
  
From Safe Harbor Water Power Corporation, in which PPL has a 33.3% interest.
(g)
  
PPL's 50% leasehold interest.
(h)
  
PPL's 30% leasehold interest.
(i)
  
PPL's 8.33% interest.
(j)
  
Includes PPL's 50% interest in the West Enfield Station.

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 changed circumstances.

During 2006, PPL Generation's plants generated the following amounts of electricity.

State
Millions of kWh
   
Pennsylvania
43,178
Montana
8,298
Maine
338
Illinois
274
Connecticut
227
New York
215
Arizona
4
Total
52,534

This generation represented a 4% decrease below the output for 2005 due to milder weather in the eastern U.S. and the sale of PPL's ownership interest in the Griffith plant, as well as planned and unplanned plant outages. Of this generation, 57% of the energy was generated by coal-fired stations, 30% from nuclear operations at the Susquehanna station, 9% from hydroelectric stations and 4% from oil/gas-fired stations.

PPL estimates that, on average, approximately 89% of its expected annual generation output for the period 2007 through 2009 will be used to meet:

·
PPL EnergyPlus' obligation under two contracts to provide electricity for PPL Electric to satisfy its PLR obligation under the Customer Choice Act through 2009;
·
PPL EnergyPlus' obligation under contracts to provide electricity to NorthWestern through June 2007 and from July 2007 through June 2014; and
·
other contractual sales to other counterparties for terms of various lengths.

PPL has started to and will continue to enter into new power sales contracts over the next few years to obtain firm commitments for a portion of the output of its generating facilities, in advance of the expiration of the PLR contracts. PPL has already entered into commitments of varying quantities and terms for the years 2010 and later.  PPL's strategy for 2007 is to obtain commitments for 30 to 50 percent of its 2010 baseload generation output in the PJM. PPL has already obtained commitments at the lower end of this range.  Based on the way in which the wholesale markets have developed over the last several years, PPL expects that these new contracts are likely to continue to be of a shorter duration than the PLR contracts, which at inception had terms of approximately nine years.

See Note 15 to the Financial Statements for more information regarding PPL's wholesale energy commitments and Note 16 for more information regarding the PLR contracts. These contractual arrangements are consistent with, and are an integral part of, PPL's strategy for its energy supply business, which includes the matching of PPL's anticipated energy supply (including PPL's generation as well as purchase commitments) with load, or customer demand, under contracts of varying lengths with creditworthy counterparties, to capture profits while effectively managing PPL's exposure to movements in energy and fuel prices and counterparty credit risk.

FUEL SUPPLY

Coal

Pennsylvania

PPL Coal Supply provides coal to Iris Energy LLC for the production of synthetic fuel. In 2006, synthetic fuel from Iris Energy provided 55% of the fuel requirements for three Pennsylvania power plants operated by PPL Generation. The contract to provide coal to Iris Energy terminates at the end of 2007. At the termination of this contract, PPL has the option to purchase Iris Energy's membership interest in PPL Coal Supply for fair market value, which is expected to be $7 million. Coal supply costs are expected to increase by $20 million in 2008 as a result of the contract ending.

PPL Coal Supply provides the balance of the Pennsylvania plants' coal requirements. PPL Coal Supply actively manages its supply base by purchasing coal principally from mines located in central Appalachia and western and central Pennsylvania.

During 2006, PPL Coal Supply purchased about 95% of the coal delivered to PPL Generation's wholly owned Pennsylvania stations under short-term and long-term contracts and obtained 5% through spot market purchases. These contracts provided PPL Coal Supply with about 7.7 million tons of coal. Contracts currently in place are expected to provide approximately 7.4 million tons in 2007. At December 31, 2006, the wholly owned Pennsylvania plants had sufficient supply for about 39 days of operations. The amount of coal in inventory varies from time to time depending on market conditions and plant operations.

During the third quarter of 2006, PPL entered into a long-term coal purchase agreement with CONSOL Energy Inc. The contract will provide more than one-third of PPL's projected coal needs for the Pennsylvania power plants for 2008 through 2018.

Also at December 31, 2006, a PPL Generation subsidiary owned a 12.34% interest in the Keystone station and a 16.25% interest in the Conemaugh station. The owners of the Keystone station have a long-term contract with a synthetic fuel supplier. This contract provided 4.4 million tons in 2006 and is projected to provide 4.5 million tons in 2007. This contract terminates at the end of 2007. The Keystone station contracts with Keystone Fuels, LLC for the balance of its requirements. The owners of the Conemaugh station also have a long-term contract with a synthetic fuel supplier. This contract provided 2.4 million tons in 2006 and is projected to provide a minimum of 2.4 million tons in 2007. This contract terminates at the end of 2007. The balance of the Conemaugh station requirements is purchased under contract from Conemaugh Fuels, LLC. PPL's share of Keystone and Conemaugh coal supply costs are expected to increase by $4 million in 2008 as a result of the synthetic fuel contract ending.

Montana

PPL Montana has a 50% leasehold interest in Colstrip Units 1 and 2, and a 30% leasehold interest in Colstrip Unit 3. PPL Montana is party to contracts to purchase 100% of its coal requirements with defined quality characteristics and specifications. The coal supply contract for Units 1 and 2 is in effect through December 31, 2009. The coal supply contract for Unit 3 is in effect through December 31, 2019.

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 supplied 100% of the plant coal requirements in 2006. Similar contracts are currently in place to supply 100% of the expected coal requirements through 2008.

Oil and Natural Gas

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 2006, 100% of the physical oil and gas requirements for the Martins Creek units were purchased on the spot market. As of December 31, 2006, PPL EnergyPlus had no long-term agreements for these oil requirements.

As of December 31, 2006, there were no long-term delivery or supply agreements to purchase natural gas for University Park.

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 supply agreement to purchase natural 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, but has no long-term 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 in effect 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 2012 and Unit 2 to operate into the first quarter of 2011. 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 Nuclear Waste Policy Act (NWPA), the DOE initiated an analysis of a site in Nevada for a permanent nuclear waste repository. There is no definitive date by which this 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, such that, together, the spent fuel pools and the expanded dry fuel storage facility will accommodate all of the spent fuel expected to be discharged through the current licensed life of the plant.

In 2002, President Bush approved the Congressional override of a veto by the State of Nevada, designating Yucca Mountain, Nevada as the site for development of a permanent repository for high-level radioactive waste. The next step is for the DOE to submit a license application to the NRC to build and then operate the Yucca Mountain repository. The DOE has not announced a date when that license application will be submitted.

In 1996, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the NWPA imposed on the DOE an unconditional obligation to begin accepting spent nuclear fuel on or before January 31, 1998. In 1997, the Court ruled that the contracts between the utilities and the DOE provide a potentially adequate remedy if the DOE failed to begin disposal of spent nuclear fuel by January 31, 1998. The DOE did not, in fact, begin to dispose of spent nuclear fuel on that date. The DOE continues to contest claims that its breach of contract resulted in recoverable damages. In January 2004, PPL Susquehanna filed suit in the U.S. Court of Federal Claims for unspecified damages suffered as a result of the DOE's breach of its contract to accept and dispose of spent nuclear fuel. PPL cannot predict the outcome of these proceedings.

ENVIRONMENTAL MATTERS

Certain PPL subsidiaries, including PPL Electric and PPL Generation subsidiaries, are subject to certain present 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" for information concerning environmental expenditures during 2006 and their estimate of those expenditures during the years 2007-2011. Certain environmental laws, regulations and developments that may have a substantial impact on PPL are discussed below. See "Environmental Matters" in Note 15 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.

Air

The Clean Air Act includes, among other things, provisions that: (a) restrict the construction of, and revise the performance standards for, new and substantially modified coal-fired and oil-fired generating stations; and (b) authorize the EPA to impose substantial noncompliance penalties per day of violation for each facility found to be in violation of the requirements of an applicable state implementation plan. The state agencies administer the EPA's air quality regulations through the state implementation plans and have concurrent authority to impose penalties for non-compliance.

In 2005, the EPA finalized its Clean Air Interstate Rule (CAIR) requiring substantial reductions for sulfur dioxide and nitrogen oxides emissions in 28 midwestern and eastern states, including Pennsylvania. Pursuant to a separate rule finalized in 2005, the EPA is requiring mercury reductions nationwide. Montana has already finalized, and Pennsylvania is close to finalizing, mercury regulations more stringent than the federal rule. Pennsylvania is also considering an initiative by the Ozone Transport Commission that would be more stringent than the CAIR. In addition, there is mounting pressure from various states and environmental groups and at the federal level for mandatory carbon dioxide reductions. For example, several states have already passed legislation capping carbon emissions and bills have been introduced at the federal level proposing mandatory reductions. Also in 2005, seven northeast states (excluding Pennsylvania) signed a Memorandum of Understanding establishing a mandatory cap and trade program to stabilize and then reduce carbon dioxide emissions from their electric generating plants. It is not yet clear whether this program or a similar program will be extended to or adopted by Pennsylvania.

Water

To implement the requirements of the Federal Water Pollution Control Act of 1972, as amended by the Clean Water Act of 1977 and the Water Quality Act of 1987, the EPA has adopted regulations on effluent standards for steam electric stations. The states administer the EPA's effluent standards through state laws and regulations relating to, among other things, effluent discharges and water quality. The standards adopted by the EPA pursuant to the Clean Water Act may have a significant impact on existing facilities of certain PPL subsidiaries, depending on the states' interpretation and future amendments to regulations. The EPA has decided to study the steam electric industry for two years to determine if new effluent standards are needed for that industrial category.

Pursuant to the Surface Mining and Reclamation Act of 1977, the OSM has adopted effluent guidelines which are applicable to PPL subsidiaries as a result of their past coal mining and coal processing activities. The EPA and the OSM limitations, guidelines and standards also are enforced through the issuance of NPDES permits. In accordance with the provisions of the Clean Water Act and the Reclamation Act of 1977, the EPA and the OSM have authorized the states to implement the NPDES program. Compliance with applicable water quality standards is assured by state imposition of NPDES permit conditions and requirements to address acid mine drainage.

Solid and Hazardous Waste

The provisions of Superfund authorize the EPA to require past and present owners of contaminated sites and generators of any hazardous substance found at a site to clean-up the site or pay the EPA or the state for the costs of clean-up. The generators and past owners can be liable even if the generator contributed only a minute portion of the hazardous substances at the site. Present owners can be liable even if they contributed no hazardous substances to the site.

State laws such as the Pennsylvania and Montana Superfund statutes and the Pennsylvania Solid Waste Management Act also give state agencies broad authority to identify contaminated sites or sites with waste that has been improperly disposed of, and to order owners or responsible parties to clean-up the sites. If responsible parties cannot or will not perform the clean-up, the agency can hire contractors to clean-up the sites and then require reimbursement from the responsible parties after the clean-up is completed. Another Pennsylvania statute, the Land Recycling and Environmental Remediation Standards, encourages voluntary clean-ups by allowing responsible parties to choose from a menu of clean-up standards and providing liability protection commensurate with the clean-up standard chosen.

Furthermore, the EPA and several states, including Montana, are considering establishing regulations that could impact the disposal and management of coal combustion products including ash and scrubber wastes and other by-products. PPL cannot predict at this time what impact, if any, such regulation would have on the operating facilities.

Certain federal and state statutes, including federal and state Superfund statutes, also impose liability on the responsible parties for the lost value of damaged natural resources.

Low-Level Radioactive Waste

Under federal law, each state is responsible for the disposal of low-level radioactive waste generated in that state. States may join in regional compacts to jointly fulfill their responsibilities. The states of Pennsylvania, Maryland, Delaware and West Virginia are members of the Appalachian States Low-Level Radioactive Waste Compact. Efforts to develop a regional disposal facility in Pennsylvania were suspended by the Pennsylvania DEP in 1998. The Commonwealth retains the legal authority and may be required to resume the siting process should it be necessary. Low-level radioactive waste resulting from the operation of the Susquehanna facility is currently being sent to Barnwell, South Carolina, and Clive, Utah, for disposal. In the event these or other emergent disposal options become unavailable or no longer cost-effective, the low-level radioactive waste will be stored on-site at Susquehanna. PPL Susquehanna cannot predict the future availability of low-level waste disposal facilities or the cost of such disposal.

Electric and Magnetic Fields 

Concerns have been expressed by some members of the public regarding potential health effects of power frequency electric and/or magnetic fields (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 of EMFs causing adverse effects. The agency further noted that there is some epidemiological evidence of an association with childhood leukemia, but that this evidence is difficult to interpret without supporting laboratory evidence. The U.K. National Radiological Protection Board (now 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. 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 abroad, and the associated cost, or what, if any, liabilities they might incur related to the EMF issue.

General

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. In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including the areas of water and air quality, hazardous and solid waste handling and disposal and 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.

FRANCHISES 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.

See "Background - Supply Segment" 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 September 2006, PPL Susquehanna applied to the NRC for 20-year license renewals for each of the Susquehanna units to extend their expiration dates, from 2022 to 2042 for Unit 1 and from 2024 to 2044 for Unit 2. PPL cannot predict whether or when NRC approval will be obtained.

PPL Holtwood operates the Holtwood hydroelectric generating station pursuant to a license renewed by the FERC in 1980 and expiring in 2014. 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 418 MW, and PPL Holtwood is entitled by contract to one-third of the total capacity.

The 11 hydroelectric facilities and one storage reservoir purchased from Montana Power in 1999 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 expires in 2009; the Thompson Falls and Kerr licenses expire in 2025 and 2035, respectively; and the licenses for the nine Missouri-Madison facilities expire in 2040. PPL Montana currently is working to have the Mystic facility relicensed, and it filed the final license application for the new license in December 2006.

In connection with the relicensing of these generation facilities, 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.

PPL Global's international electricity transmission and distribution companies are authorized by the governments of their respective countries to provide electric distribution services within their concession areas and service territories, subject to certain conditions and obligations. For instance, each of these companies is subject to governmental regulation on the prices that it can charge and the quality of service it must provide, and the companies can be fined or even have their licenses or concessions revoked if they do not meet the mandated quality 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. The most recent review was completed in late-2004, and new prices became effective April 1, 2005.

Emel is subject to regulated maximum tariffs set by Chile's National Energy Commission. The components of the distribution tariffs are energy and capacity prices, a transmission surcharge and the value added on account of distribution costs (VAD). The VAD includes a targeted return on invested capital of 10% per year. The energy and capacity prices are a direct pass-through to regulated customers of the energy charge that Emel pays to the generation companies. The tariffs are calculated every four years. The most recent tariff review was completed and revised rates became effective as of November 2004.

DelSur is subject to regulated maximum tariffs set by El Salvador's General Superintendent of Electricity and Telecommunications. The three components of the distribution tariff are an energy price, a commercialization charge and a distribution charge. DelSur's tariff specifies the energy price as a trailing six-month average of the spot market price. The tariffs are calculated every five years and are adjusted for inflation on January 1 of each year. The next comprehensive tariff review will take place in 2007 and be effective in 2008.

Elfec is subject to regulated maximum tariffs set by Bolivia's Superintendent of Electricity. Tariffs are calculated every four years based on the trailing three-year average of the equity returns from companies listed in the Dow Jones Utility Index. Tariffs are adjusted on a monthly basis for local inflation and every six months to reflect any changes in the energy node prices, which is a pass-through to regulated customers of the energy charge that Elfec pays to generation companies. The tariffs are calculated every four years. The most recent ordinary tariff review was completed in January 2004 and new prices became effective at that time. An extraordinary tariff review was completed in November 2006 and new prices became effective at that time. The next ordinary tariff review will be completed by January 2008.

EMPLOYEE RELATIONS

As of December 31, 2006, PPL and its subsidiaries had the following full-time employees.

PPL Energy Supply
    
 
PPL Generation
2,669
  
 
PPL EnergyPlus
2,177
 (a)
 
PPL Global
    
   
Domestic
12
  
   
International
3,886
 (b)
 
Total PPL Energy Supply
8,744
  
PPL Electric
2,207
  
PPL Gas Utilities
396
  
PPL Services & Other
1,273
  
Total PPL
12,620
  

(a)
  
Includes union employees of mechanical contracting subsidiaries, whose number tends to fluctuate due to the nature of this business.
(b)
  
Includes employees of WPD and PPL Global's consolidated subsidiaries in Latin America.

Approximately 60%, or 5,252, of PPL's domestic workforce are members of labor unions, with four IBEW locals representing 3,605 employees. The other unions primarily represent employees of the mechanical contractors and gas utility employees in Pennsylvania. The bargaining agreement with the largest union was negotiated in May 2006 and expires in May 2010. Eight four-year contracts with smaller gas utility locals in Pennsylvania were negotiated in 2003. In June 2004, the IBEW representing 240 employees at the Montana Colstrip power plant approved a four-year labor agreement expiring in June 2008. In April 2005, a three-year contract expiring in April 2008 was negotiated with an IBEW local in Montana that represents 80 employees at the hydroelectric facility and at the Corette plant.

Approximately 78%, or 3,022, of PPL's international workforce are members of labor unions. WPD employs the majority of the international workforce. WPD recognizes five unions, the largest of which represents 38% of union members. WPD has two employment agreements that are negotiated with the unions. The largest agreement, the Electricity Business Agreement, covers 2,033 union employees; it may be amended by agreement between WPD and the unions and is terminable with 12 months notice by either side.

PPL's Latin American subsidiaries have 910 union employees that are represented by 13 unions. Emel concluded labor negotiations in 2006, and now has agreements in place until 2009. DelSur concluded negotiations in January 2007, and the new agreement is in place until 2010. Annually, Elfec negotiates adjustments to its compensation and benefits.

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 registrants 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 tried to identify 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 that involve a number of 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 15 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 PPL Gas Utilities and their consolidated subsidiaries taken as a whole within the Pennsylvania Delivery segment discussion.

Risks Related to Supply Segment

(PPL and PPL Energy Supply)

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 of supplying power, are impacted by changes in the market prices for electricity, as well as fluctuations in fuel prices, fuel transportation costs, emission allowances, renewable energy credits, electricity transmission and related congestion charges and other costs. Unlike most other commodities, there is limited ability to store electric power and it must be consumed at the time of production. As a result, the wholesale market prices for electricity may fluctuate substantially over relatively short periods of time and can be unpredictable. Among the factors that can 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; and
·
weather conditions impacting demand for electricity or the facilities necessary to deliver electricity.

See Exhibit 99(b) for more information concerning the market fluctuations in wholesale energy, fuel and emission allowance prices over the past five years.

Whether we decide to, or are able to, continue to enter into or renew long-term power sales and fuel purchase and fuel transportation agreements in order to mitigate market price and supply risk may affect our earnings.

As a result of the PLR contracts and certain other agreements, a substantial portion of our anticipated generation production is currently committed through 2009 under power sales agreements of various terms that include fixed prices for our electric power. In connection with such agreements we have entered into longer-term fuel purchase and fuel transportation agreements that include fixed prices. Whether we decide to, or are able to, continue to enter into such agreements or renew existing agreements and the market conditions at that time will affect our financial performance. For instance, in the absence of long-term power sales agreements, we would sell the energy, capacity and other products from our facilities into the competitive wholesale power markets under contracts of shorter duration at then-current market prices.  Although the current forward prices for electricity significantly exceed the prices available under some of our current power sales agreements, this situation may not continue. In addition, if we do not secure or maintain favorable fuel purchase and fuel transportation agreements for our power generation facilities, our fuel costs (and the associated fuel transportation costs) could exceed the revenues that 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 the associated fuel transportation costs), our financial results may be materially adversely affected.

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, including disruptions as a result of weather, transportation difficulties, 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.

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), our revenues from energy sales could be significantly decreased and our expenses significantly increased, 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 our failure to satisfy them. Many of our generating units are reaching mid-life, and we are faced with 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 impair 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 a relatively low price. There are other technologies for producing electricity, most notably fuel cells, microturbines, windmills and photovoltaic (solar) cells. Research and development activities are ongoing to seek improvements in the alternate technologies. It is possible that advances will reduce the cost of alternate methods of electric production to a level that is equal to or below that of most central station electric production. Also, as new technologies are developed and become available, the quantity and the pattern of electricity usage (the "demand") by customers could change, thus allowing them to reduce their purchases and the corresponding revenues that the generators receive. If this were to happen, the value of our generation facilities may be significantly impaired.

We rely on transmission and distribution assets that we do not own or control to deliver our wholesale electricity and natural gas. 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 sufficient transmission capacity will not be available to transmit electricity as 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 operate the transmission networks, and provide related services, efficiently.

The PLR contracts do not provide for a specific level of supply, and demand significantly below or above our forecasts could adversely affect our energy margins.

PPL Electric is obligated to provide electricity supply to its PLR customers at predetermined capped rates through 2009 and has entered into PUC-approved, full requirements energy supply agreements with PPL EnergyPlus at the rates PPL Electric is entitled to charge its PLR customers in order to fulfill its PLR obligation. If PPL Electric's customers obtain electricity from alternate suppliers, which they are entitled to do at any time, PPL EnergyPlus' sales of electricity under the PLR contracts may decrease.

Alternatively, demand that we satisfy pursuant to the PLR contracts could increase as a result of severe weather conditions, economic development or other reasons over which we have no control. We satisfy our electricity supply obligations through a portfolio approach of providing electricity from our generation assets, contractual relationships and market purchases.  At December 31, 2006, the PLR requirements required about 80% of the normal operating capacity of our existing Pennsylvania generation assets. A significant increase in demand would adversely affect our energy margins because we are required under the terms of the PLR contracts to provide the energy supply to fulfill this increased demand at the capped rates, which we expect to remain significantly below the wholesale prices at which we would have to purchase the additional supply if needed or, if we had available capacity, the prices at which we could otherwise sell the additional supply. Accordingly, any significant increase in demand could have a material adverse effect on our results of operations or financial position.

PPL Electric's PLR obligation after 2009 will be determined by the PUC pursuant to rules that have not yet been promulgated. While regulations governing PLR obligations after 2009 have been proposed for comment by the PUC, at this time, we cannot predict the content of the final regulations, including whether they will include requirements regarding the length, pricing or other terms of PLR contracts, or when the regulations will be finalized. We also cannot predict the extent to which PPL EnergyPlus will sell power to PPL Electric after 2009.

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 not assured of any rate of return on our capital investments through predetermined rates, and our revenues and results of operations are dependent on our ability to operate in a competitive environment. An important focus of our supply business over the next several years will be the enhancement and expansion of our wholesale marketing and trading of electricity and related products and services, but we may not be successful because of the intense competition that we face in the deregulated electricity markets. 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 regulatory authorities and other factors. These competitive factors may negatively impact our ability to sell electricity and related products and services and the prices which we may charge for such products and services, which could adversely affect our results of operations and our ability to grow our business.

Following the expiration of our existing power sales agreements, we currently expect to sell our available capacity into the competitive wholesale markets through contracts of various duration. Competition in the wholesale power markets will occur principally on the basis of the price of products and, to a lesser extent, on the basis of reliability and availability. We expect the commencement of commercial operation of new electric facilities in the regional markets where we own or control generation capacity 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 merchants 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 many of our competitors 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, may enter 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.

If the present trend towards competitive markets is reversed, discontinued or delayed, our business prospects and financial condition could be materially adversely affected.

Some deregulated electricity markets have experienced supply problems and price volatility. In some of these markets, state legislators, government agencies and other interested parties have made proposals to delay market restructuring, 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. For example, in 2001, the FERC instituted a series of price controls designed to mitigate (or cap) prices in the entire western U.S. to address the extreme volatility in the California electricity markets. These price controls have had the effect of significantly lowering spot and forward electricity prices in the western market. In addition, the independent system operators, or 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 the profits that our wholesale power marketing and trading business would have realized based on 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 the states in which we currently, or may in the future, operate.

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 at the wholesale level under market-based tariffs authorized by the FERC throughout the United States 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 the 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, transmissions 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.

In addition, our power agreements typically include provisions requiring us to post collateral for the benefit of the counterparties if the market price of energy varies from the contract prices by certain thresholds. At December 31, 2006, we posted $228 million of collateral, in the form of letters of credit, under these contracts. Although we currently believe that we have sufficient liquidity facilities to fulfill our potential collateral obligations under these contracts, we have increased our available liquidity facilities to $2.4 billion at December 31, 2006, in order to satisfy these collateral obligations and to maintain our credit ratings due, in significant part, to the potential collateral requirements under these contracts. In addition, we expect to increase our available liquidity facilities in 2007 to support contracts that we expect to enter as we seek to expand our wholesale marketing and trading business, including power contracts for the sale of electricity that will become available following the expiration of our PLR contracts with PPL Electric.

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. We attempt to mitigate these risks through various means, including through agreements that require our counterparties to post collateral for our benefit if the market price of energy varies from the contract prices beyond certain thresholds. However, there can be no assurance that we will avoid counterparty non-performance. Counterparty non-performance could adversely impact our ability to fully meet our obligations to other parties, which could in turn subject us to claims for damages.

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 arrangements by either reserving generation capacity to deliver electricity or purchasing the necessary products and services through the 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 weather conditions, 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.

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 electricity and fuel, debt, foreign currency and counterparty credit positions. We have implemented procedures to enhance and monitor compliance with our risk management policy and programs, including validation of transaction and market prices, verification of risk and transaction limits, sensitivity analyses and daily portfolio reporting of various risk measurement metrics. Nonetheless, our risk management programs may not work as planned. For instance, 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 positions. Similarly, interest rates or foreign currency exchange rates could change in significant ways that our risk management procedures were not set up to address. As a result, we cannot always predict the impact that our risk management decisions may have on us if actual events lead to greater losses or costs than our risk management positions were intended to hedge. If our risk management positions are ineffective in this way, we could be subject to mark-to-market accounting with respect to certain of our risk management contracts, which could lead to significant volatility in our earnings and our balance sheet.

In addition, our trading, marketing and risk management activities are exposed to the credit risk that counterparties that owe us money, electricity or fuel will breach their obligations. We have established a risk management policy and programs, including credit risk programs, to evaluate counterparty credit risk. However, if counterparties to these arrangements fail to perform, 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.

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 U.S. 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 workably 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 15 to the Financial Statements for information regarding recent court decisions that could impact the FERC's market-based rate authority program.

In addition, the acquisition, 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 planned generation growth plans may not achieve the desired financial results.

We currently plan to expand our generation capacity over the next several years through power uprates at certain of our existing power plants, the potential construction of new power plants and the potential acquisition of existing plants. The acquisition, development and construction of additional generation capacity through any of these means 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 or the acquisition of existing plants, we may be required to expend significant sums for preliminary engineering, permitting, resource exploration, legal and other expenses in preparation for competitive bids that we may not win or before it can be established whether a project is feasible, economically attractive or capable of being financed. The success of both a new project and a newly-acquired plant would likely be contingent upon, among other things, the negotiation of satisfactory fuel supply and power sales contracts. Our success in developing a new plant would likely be contingent upon, among other things, negotiation of satisfactory engineering and construction contracts, receipt of required governmental permits and satisfactory completion of construction. If we were unable to complete the construction of a facility, we would generally not be able to recover our investment in the project. Furthermore, we may 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.

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 on pollution control measures 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 expect to spend substantial amounts in the future on environmental control and compliance.

As a result of existing and recently-enacted federal environmental laws and regulations primarily governing air emissions from coal-burning plants, PPL's current installation plan for the scrubbers and other pollution control equipment (primarily aimed at sulfur dioxide, particulate, nitrogen oxides and mercury emissions reduction) through 2011 reflects a total cost of approximately $1.5 billion. Many states and environmental groups have challenged certain of the 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 developed that will impose more stringent limitations on emissions than are currently in effect, which could require us to incur significantly greater 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 facilities it may be uneconomical for us to install the necessary equipment, which may cause us to shut down those generation units.

There also is growing concern nationally and internationally about carbon dioxide and other greenhouse gas emissions (including concern about global warming). Various legislative proposals are being considered in Congress, and several states already have passed legislation capping carbon dioxide emissions.

For more information regarding environmental matters, including the existing and proposed federal, state and local statutes, rules and regulations to which we are subject, see "Environmental Matters - Domestic" in Note 15 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 30% of our 2006 generation output. The risks of nuclear generation generally include:

·
the potential harmful effects on the environment and human health resulting 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 NRC has broad authority under federal law to impose licensing requirements, as well as security-related and safety-related requirements for the operation of nuclear generation facilities. In the event of non-compliance, the NRC has the 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 international delivery businesses are also subject to risks with respect to rate regulation and operational performance.

Like our Pennsylvania delivery businesses, our international delivery businesses are rate-regulated. In addition, their ability to manage operational risk is critical to their financial performance. Accordingly, these businesses are subject to the same risks as those described below under "Risks Related to Pennsylvania Delivery Segment."

Our international delivery businesses expose us to risks related to laws of other countries, taxes, economic conditions, fluctuations in foreign currency exchange rates, political and social conditions and policies of foreign governments. These risks may reduce our results of operations from our delivery businesses.

The acquisition, financing, development and operation of projects outside of the United States entail significant financial risks, which vary by country, including:

·
changes in foreign laws or regulations relating to foreign operations, including tax laws and regulations;
·
changes in United States laws related to foreign operations, including tax laws and regulations;
·
changes in government policies, personnel or approval requirements;
·
changes in general economic conditions affecting each country;
·
regulatory reviews of tariffs for local distribution companies;
·
severe weather and natural disaster impacts on the electric sector and our assets in each country;
·
material increases in the cost of generation supply for our local distribution customers;
·
changes in labor relations in foreign operations;
·
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 difficulty in converting our foreign funds 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;
·
limitations on the ability to import or export property and equipment;
·
compliance with United States foreign corrupt practices laws;
·
political instability and civil unrest; and
·
expropriation and confiscation of assets and facilities.

Our international operations are subject to regulation by various foreign governments and regulatory authorities. The laws and regulations of some countries may limit our ability to hold a majority interest in some of the projects that we may develop or acquire, thus limiting our ability to control the development, construction and operation of those projects. In addition, the legal environment in foreign countries in which we currently own assets or projects or may develop projects in the future could make it more difficult for us to enforce our rights under agreements relating to such projects. Our international projects also may be subject to risks of being delayed, suspended or terminated by the applicable foreign governments or may be subject to risks of contract invalidation by commercial or governmental entities.

Despite contractual or other protections we have against many of these risks for our international operations or potential investments in the future, our actual results and the value of our investments may be adversely affected by the occurrence of any of these events.

Risks Related to Pennsylvania Delivery Segment

(PPL and PPL Electric)

Regulators may not approve the rates we request.

Our Pennsylvania delivery businesses are rate-regulated. While such regulation is generally premised on the recovery of prudently incurred costs, including energy supply costs for PLR 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, and 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. Operation of our delivery systems below our expectations may result in lost revenues or increased expenses, including higher maintenance costs.

PPL Electric generally bears the risk, through 2009, that it will not be able to obtain adequate energy supply at the predetermined capped rates it may charge to its PLR customers.

In order to mitigate the risk that we will not be able to obtain adequate energy supply, through 2009, at the predetermined capped rates we may charge to our PLR customers, we have entered into PUC-approved, full requirements energy supply agreements with PPL EnergyPlus at these capped rates. Under one of the PLR contracts, we are required to make performance assurance deposits with PPL EnergyPlus when the market price of electricity is less than the contract price by more than our contract collateral threshold. Conversely, PPL EnergyPlus is required to make performance assurance deposits with us when the market price of electricity is greater than the contract price by more than its contract collateral threshold. Over the past few years, market prices for electricity have exceeded the contract price, and we estimated that, at December 31, 2006, the market price of electricity exceeded the contract price in total by approximately $2.2 billion. Accordingly, at December 31, 2006, PPL EnergyPlus was required to provide us with performance assurance of $300 million, the maximum amount of collateral required under the contract. If PPL EnergyPlus is unable to satisfy its energy supply obligations to us under the PLR contracts, we would be required to obtain energy supply in the wholesale market at then-current market rates to meet our PLR obligation. While the Customer Choice Act provides generally for PLR costs to be borne by customers, it is not clear whether we would be able to pass on to our customers any costs of this replacement energy supply that exceed the predetermined capped rates.

Our PLR obligation after 2009 will be determined by the PUC pursuant to rules that have not yet been promulgated. While regulations governing PLR obligations after 2009 have been proposed for comment by the PUC, at this time, we cannot predict the content of the final regulations, including the specific mechanism for recovery from customers of our costs for energy supply, or when the regulations will be finalized. Recognizing the uncertain status of the PLR rules, we have requested permission from the PUC to purchase generation supply in 2007 through 2009 to meet our PLR obligation in 2010 and to recover all costs of those purchases from our PLR customers in 2010. The request currently is pending before the PUC, and we cannot predict the outcome. We expect that PLR supply and cost recovery issues for 2011 and beyond will be addressed by the PLR rules.

Other Risks Related to All Segments

(PPL, PPL Energy Supply and PPL Electric)

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

Our businesses may be seasonal. For example, in some markets demand for, and market prices of, electricity peak during the hot summer months, while in other markets such peaks occur in the cold winter months. As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis, especially when severe weather conditions such as heat waves, extreme cold weather or storms make such fluctuations more pronounced. The pattern of this fluctuation may change depending on the nature and location of the facilities we acquire or develop 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 15 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 regulations 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 are listed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." While we do not expect these ratings to limit our ability to fund our short-term liquidity needs and/or access any new long-term debt, any ratings downgrades could increase our short-term borrowing costs and negatively affect our ability to fund our short-term liquidity needs and access new long-term debt.

Significant increases in our operation and maintenance expenses, including our 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, especially with respect to health care and pension costs. Pursuant to our collective bargaining agreements, we are contractually committed to provide specified levels of health care and pension benefits to current employees and retirees covered by the contracts, and we provide a similar level of benefits to our management employees, which benefits give rise to significant expenses. We have experienced significant health care cost inflation in the last few 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 continue 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 experience significant costs with respect to the defined benefit pension plans that we sponsor 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 costs could be significantly increased.

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. While no goodwill impairments were required based on our annual review in the fourth quarter of 2006, we are unable to predict whether any impairment charges may be necessary in the future.

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 2006, PPL recorded a loss on the sale of our interest in the Griffith plant and fully impaired our synfuel-related assets. See Notes 10 and 15 to the Financial Statements. We are unable to predict whether impairment charges, or other losses on sale of other assets or businesses, may be necessary in the future. In particular, our ability to recover our investment in our gas-fired generation facilities, and to avoid any future impairment charges with respect to these assets, will depend upon future electricity and fuel price levels (which are subject to substantial fluctuations), as well as applicable accounting rules and other factors.
 

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

None.

Supply Segment

For a description of PPL's domestic generation portfolio, see "Item 1. Business - Power Supply."

PPL is continuously reexamining development projects based on market conditions and other factors to determine whether to proceed with these projects, sell them, cancel them, expand them, execute tolling agreements or pursue other opportunities. At December 31, 2006, PPL Generation was planning on implementing the following incremental capacity increases.

Project
  
Type
  
Total MW
Capacity (a)
  
PPL Ownership or Lease
Interest in MW
  
Expected
In-Service Date (b)
  
                   
Pennsylvania
                      
Susquehanna (c)
  
Nuclear
  
152
  
137
  
(90%)
  
2008 - 2010
  
Holtwood (d) 
  
Hydro
  
125
  
125
  
(100%)
  
2011
  
Brunner Island (e)
  
Coal-fired
  
21
  
21
  
(100%)
  
2007 - 2009
  
Montour (f)
  
Coal-fired
  
16
  
16
  
(100%)
  
2008
  
Montana
                      
Colstrip (g)
  
Coal-fired
  
37
  
10
  
(15-50%)
  
2007 - 2008
  
Kerr (h)
  
Hydro
  
12
  
12
  
(100%)
  
2007
  
   Great Falls (i)   Hydro  
28
  
28
  
(100%)
  
2011
  
Total
      
391
  
349
          

(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 and permits and other contingencies.
(c)
  
This project involves the extended upgrade of Units 1 and 2 and will be implemented in two uprates per unit, the first increase being an average of 50 MW per unit. The uprates for Unit 1 are planned to occur in 2008 and 2010. Both uprates for Unit 2 are planned in 2009.
(d)
  
This project includes a study to add two hydro units. Both units are expected to be in-service in 2011.
(e)
  
These projects involve turbine upgrades to Units 1 and 2. Unit 1 is expected to be completed in 2007 and Unit 2 in 2009.
(f)
  
This project involves turbine upgrades.
(g)
  
This project involves turbine upgrades to Units 2 and 3. Unit 3 is expected to be completed in 2007 and Unit 2 in 2008.
(h)
  
This project upgrades the Unit 3 water wheel. The upgrade is expected to be completed in the spring of 2007.
(i)   This project involves reconstruction of a powerhouse.

In 2003, PPL reached an agreement with the New Jersey DEP and the Pennsylvania DEP that included the shut down of the two 150 MW coal-fired generating units at PPL Martins Creek in September 2007. See "Environmental Matters - Domestic - Air" in Note 15 to the Financial Statements for more information regarding this agreement.

Pennsylvania Delivery Segment

Electric

For a description of PPL Electric's service territory, see "Item 1. Business - Background." At December 31, 2006, 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 384 substations with a total capacity of 26.3 million kVA, 32,856 circuit miles of overhead lines and 6,931 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 1945 First Mortgage Bond Indenture and its 2001 Senior Secured Bond Indenture.

Gas

PPL Gas Utilities distributes natural gas and propane to customers in northern, southeastern and central Pennsylvania and in a small portion of Maryland and Delaware. It also has natural gas storage facilities in Pennsylvania. At December 31, 2006, PPL Gas Utilities had approximately 110,000 natural gas and propane delivery customers and 4,087 miles of pipeline mains, with 20 miles in Maryland and the remainder in Pennsylvania.

International Delivery Segment

PPL Global has consolidated investments in electricity distribution companies, serving approximately 3.7 million delivery customers in Latin America and the U.K.
Company
  
Location
  
PPL
Ownership Interest
      
2006 Electricity
Sales GWh (a)
  
                   
Latin America
                  
Emel
  
Santiago, Chile
  
95.4%
      
2,802
  
Elfec
  
Cochabamba, Bolivia
  
92.1%
      
680
  
DelSur
  
San Salvador, El Salvador
  
86.4%
      
1,094
  
United Kingdom
                  
WPDH Limited
  
Bristol, England
  
100%
      
28,776
  
Total
              
33,352
  

(a)
  
Corresponds to revenues recorded by PPL Global in 2006.

PPL Global's distribution system in Latin America includes 104 substations with a total capacity of 2.4 million kVA, 24,176 miles of overhead lines and 100 cable miles of underground conductors. PPL Global's distribution system in the U.K. includes 640 substations with a total capacity of 23.8 million kVA, 28,999 miles of overhead lines and 23,029 cable miles of underground conductors.


See Note 15 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 2006.

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, 2006.

PPL Corporation
             
Name
  
Age
  
Positions Held During the Past Five Years
  
Dates
             
James H. Miller (a)
  
58
  
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
       
Executive Vice President
 
January 2004 - August 2004
       
President-PPL Generation
  
February 2001 - August 2004
             
William H. Spence (b)
  
49
  
Executive Vice President and Chief Operating Officer
  
June 2006 - present
       
Senior Vice President-Pepco Holdings, Inc.
 
August 2002 - June 2006
       
Senior Vice President-Conectiv Holdings
  
September 2000 - June 2006
             
John R. Biggar (c)
  
62
  
Executive Vice President and Chief Financial Officer
  
January 2001 - present
             
Paul A. Farr (c)
  
39
  
Senior Vice President-Financial
 
January 2006 - present
       
Senior Vice President-Financial and Controller
  
August 2005 - January 2006
       
Vice President and Controller
  
August 2004 - July 2005
       
Senior Vice President-PPL Global
  
January 2004 - August 2004
       
Vice President-International Operations-PPL Global
  
June 2002 - January 2004
       
Vice President-PPL Global
  
October 2001 - June 2002
             
Robert J. Grey
  
56
  
Senior Vice President, General Counsel and Secretary
  
March 1996 - present
             
Paul T. Champagne (d)
  
48
  
President-PPL Energy Services Group, LLC
  
June 2006 - present
       
President-PPL EnergyPlus
  
October 2001 - June 2006
             
Clarence J. Hopf, Jr. (d)
  
50
  
President-PPL EnergyPlus
  
July 2006 - present
       
Senior Vice President-Energy Marketing-
PPL EnergyPlus
  
October 2005 - June 2006
       
Vice President-The Goldman Sachs Group, Inc.
  
August 2003 - September 2005
       
Vice President-AmerenEnergy, Inc.
  
June 1999 - August 2003
             
Rick L. Klingensmith (d)
  
46
  
President-PPL Global
  
August 2004 - present
       
Vice President-Finance-PPL Global
  
August 2000 - August 2004
             
Bryce L. Shriver (d)
 
59
  
President-PPL Generation
  
May 2005 - present
       
President and Chief Nuclear Officer-PPL Generation
  
September 2004 - May 2005
       
Senior Vice President and Chief Nuclear Officer-
PPL Generation
  
May 2002 - August 2004
       
Vice President-Nuclear Site Operations-PPL Susquehanna
  
January 2000 - May 2002
             
John F. Sipics (d) (e)
  
58
  
President-PPL Electric
 
October 2003 - December 2006
       
Vice President-Asset Management-PPL Electric
  
August 2001 - September 2003
             
James E. Abel
  
55
  
Vice President-Finance and Treasurer
  
June 1999 - present
             
Matt Simmons
  
41
  
Vice President and Controller
  
January 2006 - present
       
Vice President-Finance and Controller-
Duke Energy Americas
  
October 2003 - January 2006
       
Chief Risk and Chief Accounting Officer-Reliant Energy Europe
  
February 2000 - October 2003

 
(a)
  
On September 30, 2006, William F. Hecht retired as Chairman and Chief Executive Officer, at which time Mr. Miller was appointed Chairman and Chief Executive Officer effective October 1, 2006.
(b)
  
On June 26, 2006, Mr. Spence was appointed Executive Vice President and Chief Operating Officer.
(c)
  
On January 29, 2007, PPL announced that Mr. Biggar will retire as Executive Vice President and Chief Financial Officer effective April 1, 2007, at which time Mr. Farr will succeed him.
(d)
  
Designated an executive officer of PPL by virtue of their respective positions at a PPL subsidiary.
(e)
  
Effective January 1, 2007, Mr. Sipics retired as President of PPL Electric. Mr. Spence was elected as President of PPL Electric as of January 2, 2007.


PPL Electric Utilities Corporation
             
Name
  
Age
  
Positions Held During the Past Five Years
  
Dates
             
John F. Sipics (a)
  
58
  
President
  
October 2003 - December 2006
       
Vice President-Asset Management 
  
August 2001 - September 2003
             
Paul A. Farr
  
39
  
Senior Vice President-Financial
  
January 2006 - present
       
Senior Vice President-Financial and Controller
  
August 2005 - January 2006
       
Vice President and Controller
  
August 2004 - July 2005
       
Senior Vice President-PPL Global
  
January 2004 - August 2004
       
Vice President-International Operations-PPL Global
  
June 2002 - January 2004
       
Vice President-PPL Global
  
October 2001 - June 2002
             
David G. DeCampli (b)
  
49
  
Senior Vice President-Transmission and Distribution Engineering and Operations
  
December 2006 - present
       
Vice President-Asset Investment Strategy and Development-Exelon Energy Delivery-Exelon Corp.
  
April 2004 - December 2006
       
Vice President and Chief Integration Officer-Exelon Energy Delivery-Exelon Corp.
  
June 2003 - March 2004
       
Vice President Distribution Operations-Exelon Energy Delivery-Exelon Corp.
  
April 2002 - June 2003
       
Vice President-Merger Implementation & Operations Strategy-Exelon Energy Delivery-Exelon Corp.
  
October 2000 - April 2002
             
James E. Abel
  
55
  
Treasurer
  
July 2000 - present
             
Matt Simmons
  
41
  
Vice President and Controller
  
January 2006 - present
       
Vice President-Finance and Controller-
Duke Energy Americas
  
October 2003 - January 2006
       
Chief Risk and Chief Accounting Officer-
Reliant Energy Europe
  
February 2000 - October 2003

(a)
  
Effective January 1, 2007, Mr. Sipics retired as President of PPL Electric. William H. Spence was elected as President of PPL Electric as of January 2, 2007.
(b)
  
Effective December 4, 2006, Mr. DeCampli was appointed Senior Vice President-Transmission and Distribution Engineering and Operations, reporting to the President.

PPL Energy Supply, LLC

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

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. The number of common shareowners is set forth in "Item 6. Selected Financial and Operating Data."

There were no issuer purchases of equity securities during the fourth quarter of 2006.

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 $712 million in 2006 and $278 million in 2005.

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 $116 million in 2006 and $93 million in 2005.


PPL Energy Supply, LLC

Item 6 is omitted as PPL Energy Supply meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K.

ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
 
PPL Corporation (a)
    
2006
      
2005
      
2004
      
2003
      
2002
  
Income Items - millions
                                        
Operating revenues (b)
  
$
6,899
    
$
6,179
    
$
5,754
    
$
5,514
    
$
5,410
  
Operating income (b)
    
1,599
      
1,349
      
1,395
      
1,362
      
1,247
  
Income from continuing operations (b)
    
885
      
739
      
710
      
731
      
361
  
Net income
    
865
      
678
      
698
      
734
      
208
  
Balance Sheet Items - millions (c)
                                        
Property, plant and equipment - net
    
12,069
      
10,916
      
11,149
      
10,593
      
9,733
  
Recoverable transition costs
    
884
      
1,165
      
1,431
      
1,687
      
1,946
  
Total assets
    
19,747
      
17,926
      
17,733
      
17,123
      
15,552
  
Long-term debt
    
7,746
      
7,081
      
7,658
      
7,859
      
6,267
  
Long-term debt with affiliate trusts (d)
    
89
      
89
      
89
      
681
          
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely company debentures (d)
                                    
661
  
Preferred securities of a subsidiary
    
301
      
51
      
51
      
51
      
82
  
Common equity
    
5,122
      
4,418
      
4,239
      
3,259
      
2,224
  
Short-term debt
    
42
      
214
      
42
      
56
      
943
  
Total capital provided by investors
    
13,300
      
11,853
      
12,079
      
11,906
      
10,177
  
Capital lease obligations
    
10
      
11
      
11
      
12
          
Financial Ratios
                                        
Return on average common equity - %
    
17.81
      
15.65
      
18.14
      
26.55
      
10.27
  
Embedded cost rates (c)
                                        
Long-term debt - %
    
6.37
      
6.60
      
6.67
      
6.56
      
7.04
  
Preferred securities - % (d)
    
6.18
      
5.14
      
5.14
      
5.14
      
5.81
  
Times interest earned before income taxes
    
3.34
      
2.69
      
2.78
      
2.97
      
2.23
  
Ratio of earnings to fixed charges - total enterprise basis (e)
    
3.0
      
2.6
      
2.7
      
2.6
      
1.9
  
Common Stock Data
                                        
Number of shares outstanding - thousands
                                        
Year-end
    
385,039
      
380,145
      
378,143
      
354,723
      
331,472
  
Average
    
380,754
      
379,132
      
368,456
      
345,589
      
304,984
  
Number of shareowners of record (c)
    
77,762
      
79,198
      
81,175
      
83,783
      
85,002
  
Income from continuing operations - Basic EPS (b)
  
$
2.32
    
$
1.95
    
$
1.93
    
$
2.12
    
$
1.20
  
Income from continuing operations - Diluted EPS (b)
  
$
2.29
    
$
1.93
    
$
1.92
    
$
2.12
    
$
1.20
  
Net income - Basic EPS
  
$
2.27
    
$
1.79
    
$
1.89
    
$
2.13
    
$
0.68
  
Net income - Diluted EPS
  
$
2.24
    
$
1.77
    
$
1.89
    
$
2.12
    
$
0.68
  
Dividends declared per share
  
$
1.10
    
$
0.96
    
$
0.82
    
$
0.77
    
$
0.72
  
Book value per share (c)
  
$
13.30
    
$
11.62
    
$
11.21
    
$
9.19
    
$
6.71
  
Market price per share (c)
  
$
35.84
    
$
29.40
    
$
26.64
    
$
21.88
    
$
17.34
  
Dividend payout rate - % (f)
    
49
      
54
      
44
      
36
      
106
  
Dividend yield - % (g)
    
3.07
      
3.27
      
3.08
      
3.52
      
4.15
  
Price earnings ratio (f) (g)
    
16.00
      
16.61
      
14.10
      
10.32
      
25.50
  
Sales Data - millions of kWh
                                        
Domestic - Electric energy supplied - retail
    
38,810
      
39,413
      
37,673
      
36,774
      
36,746
  
Domestic - Electric energy supplied - wholesale
    
32,832
      
33,768
      
37,394
      
37,841
      
36,849
  
Domestic - Electric energy delivered
    
36,683
      
37,358
      
35,906
      
36,083
      
35,712
  
International - Electric energy delivered (h)
    
33,352
      
33,146
      
32,846
      
31,952
      
33,313
  

(a)
  
The earnings each year were affected by items management considers unusual, which affected net income. See "Earnings" in Management's Discussion and Analysis of Financial Condition and Results of Operations for a description of unusual items in 2006, 2005 and 2004.
(b)
  
Data for certain years are reclassified to conform to the current presentation.
(c)
  
As of each respective year-end.
(d)
  
On July 1, 2003, PPL adopted the provisions of SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The company-obligated mandatorily redeemable preferred securities are mandatorily redeemable financial instruments, as they require the issuer to redeem the securities for cash on a specified date. Thus, they should be classified as liabilities, as a component of long-term debt, instead of "mezzanine" equity on the Balance Sheet. However, as of December 31, 2003, and subsequent periods, no amounts were included in "Long-term Debt" for these securities because PPL Capital Funding Trust I and SIUK Capital Trust I were deconsolidated effective December 31, 2003, in connection with the adoption of FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," for certain entities. Instead, the subordinated debt securities that support the company-obligated mandatorily redeemable preferred securities of the trusts are reflected in "Long-term Debt with Affiliate Trusts" as of December 31, 2006, 2005, 2004 and 2003, to the extent they were outstanding. See Notes 8 and 22 to the Financial Statements for additional information.
(e)
  
Computed using earnings and fixed charges of PPL and its subsidiaries. Fixed charges consist of interest on short-and long-term debt, other interest charges, the estimated interest component of other rentals and preferred dividends.
(f)
  
Based on diluted EPS.
(g)
  
Based on year-end market prices.
(h)
  
Deliveries for 2002 include the electricity deliveries of WPD for the full year and of CEMAR prior to deconsolidation.
 

ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
 
PPL Electric Utilities Corporation (a)
    
2006
      
2005
      
2004
      
2003
      
2002
  
Income Items - millions
                                        
Operating revenues
  
$
3,259
    
$
3,163
    
$
2,847
    
$
2,788
    
$
2,748
  
Operating income
    
418
      
377
      
259
      
251
      
275
  
Net income
    
194
      
147
      
76
      
28
      
55
  
Income available to PPL
    
180
      
145
      
74
      
25
      
39
  
Balance Sheet Items - millions (b)
                                        
Property, plant and equipment - net
    
2,880
      
2,716
      
2,657
      
2,589
      
2,456
  
Recoverable transition costs
    
884
      
1,165
      
1,431
      
1,687
      
1,946
  
Total assets
    
5,315
      
5,537
      
5,526
      
5,469
      
5,583
  
Long-term debt
    
1,978
      
2,411
      
2,544
      
2,937
      
3,175
  
Shareowner's equity
    
1,559
      
1,375
      
1,323
      
1,273
      
1,229
  
Short-term debt
    
42
      
42
      
42
              
15
  
Total capital provided by investors
    
3,579
      
3,828
      
3,909
      
4,210
      
4,419
  
Financial Ratios
                                        
Return on average common equity - %
    
14.33
      
11.20
      
5.95
      
2.08
      
3.87
  
Embedded cost rates (b)
                                        
Long-term debt - %
    
6.46
      
6.56
      
6.86
      
6.61
      
6.83
  
Preferred securities - %
    
6.18
      
5.14
      
5.14
      
5.14
      
5.81
  
Times interest earned before income taxes
    
2.96
      
2.19
      
1.45
      
1.22
      
1.33
  
Ratio of earnings to fixed charges (c)
    
2.9
      
2.1
      
1.4
      
1.2
      
1.2
  
Ratio of earnings to combined fixed charges and preferred stock dividends (d)
    
2.5
      
2.1
      
1.4
      
1.2
      
1.2
  
Sales Data
                                        
Customers (thousands) (b)
    
1,377
      
1,365
      
1,351
      
1,330
      
1,308
  
Electric energy delivered - millions of kWh
                                        
Residential
    
13,714
      
14,218
      
13,441
      
13,266
      
12,640
  
Commercial
    
13,174
      
13,196
      
12,610
      
12,388
      
12,371
  
Industrial
    
9,638
      
9,777
      
9,620
      
9,599
      
9,853
  
Other
    
157
      
167
      
163
      
154
      
169
  
                                         
Retail electric sales
    
36,683
      
37,358
      
35,834
      
35,407
      
35,033
  
Wholesale electric sales (e)
                    
72
      
676
      
679
  
                                         
Total electric energy delivered
    
36,683
      
37,358
      
35,906
      
36,083
      
35,712
  
                                         
Electric energy supplied as a PLR - millions of kWh
    
36,577
      
36,917
      
34,841
      
33,627
      
33,747
  

(a)
  
The earnings for each year other than 2004 were affected by items management considers unusual, which affected net income. See "Earnings" in Management's Discussion and Analysis of Financial Condition and Results of Operations for a description of unusual items in 2006 and 2005.
(b)
  
As of each respective year-end.
(c)
  
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 and the estimated interest component of other rentals.
(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; the estimated interest component of other rentals and preferred dividends.
(e)
  
The contracts for wholesale sales to municipalities expired in January 2004.

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, PA. Please refer to Exhibit 99(a) in Item 15 for a listing of the current corporate organization and to "Item 1. Business - Background," for descriptions of PPL's 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, the U.K. and Latin America. 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 regulated 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 movements in energy and fuel prices and counterparty credit risk. PPL's strategy for its electricity delivery businesses is to own and operate these businesses at the most efficient cost while maintaining high levels of customer service and reliability.

PPL faces several risks in its generation business. The principal risks are electricity and capacity wholesale price risk, fuel price 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 currently expects to expand its generation capacity over the next several years through power uprates at certain of its power plants, 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, and other means to mitigate the risks associated with adverse changes in the difference, or margin, between the cost to produce electricity and the price at which PPL sells it. 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 and the market conditions at that time will affect its future profitability. Currently, PPL's commitments for energy sales are substantially satisfied through its own generation assets - i.e., PPL primarily markets and trades around its physical portfolio of generating assets through integrated generation, marketing and trading functions. However, PPL's future marketing efforts may rely less on PPL's generation assets and more on supply contracted from others. PPL has in place risk management programs that, among other things, are designed to monitor and manage its exposure to volatility of earnings and cash flows related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operational performance of its generating units.

The principal challenge that PPL faces in its electricity delivery businesses is to maintain high standards of 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 in terms of the costs that they may recover and the investment returns that they may collect in customer rates. PPL Electric's PLR obligation and the associated recovery from customers of its energy supply costs after 2009, when PPL Electric's full requirements energy supply agreements with PPL EnergyPlus expire, will be determined by the PUC pursuant to rules that have not yet been promulgated. To address this risk, PPL Electric has filed a plan with the PUC detailing how it proposes to acquire its electricity supply for non-shopping customers after 2009. In February 2007, a PUC Administrative Law Judge issued a recommended decision approving PPL Electric's plan with minor modifications. PPL Electric cannot predict when the PUC will act on the recommended decision or what action it will take. Also, in February 2007, the PUC issued proposed PLR regulations and a policy statement regarding interpretation and implementation of those regulations. The PUC is requesting public comment on both the regulations and policy statement. At current forward market prices, PPL Electric currently estimates that customer rates could increase by about 20% in 2010.

PPL faces additional financial risks in conducting international operations, such as fluctuations in currency exchange rates. PPL attempts to manage these financial risks through its risk management programs.

A key challenge for PPL's business as a whole is to maintain a strong credit profile. Investors, analysts and rating agencies that follow companies in the energy industry continue to be focused on the credit quality and liquidity position of these companies. PPL continually focuses on maintaining an appropriate capital structure and liquidity position, thereby managing its target credit profile.

See "Item 1A. Risk Factors" for more information concerning the material risks that PPL faces in its businesses.

The purpose of "Management's Discussion and Analysis of Financial Condition and Results of Operations" is to provide information concerning PPL's past and expected future 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 2006, 2005 and 2004, including a review of earnings, with details of results by reportable segment. It also provides a brief outlook for 2007.
   
·
"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 commitments 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 Financial Statements and the accompanying Notes.

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

Results of Operations

Earnings

Net income and the related EPS were:

   
2006
    
2005
    
2004
  
                   
Net income
  
$
865
    
$
678
    
$
698
  
EPS - basic
  
$
2.27
    
$
1.79
    
$
1.89
  
EPS - diluted
  
$
2.24
    
$
1.77
    
$
1.89
  

The changes in net income from year to year were, in part, attributable to several significant items that management considers unusual. Details of these unusual 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 2006 are subject to various risks and uncertainties. See "Forward-Looking Information," "Item 1A. Risk Factors," the rest of this Item 7 and Note 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact PPL's future earnings.

Segment Results

Net income by segment was:

   
2006
  
2005
  
2004
                         
Supply
  
$
416
    
$
311
    
$
421
  
International Delivery
    
268
      
215
      
197
  
Pennsylvania Delivery
    
181
      
152
      
80
  
Total
  
$
865
    
$
678
    
$
698
  

Supply Segment

The Supply segment primarily consists of the domestic energy marketing, domestic generation and domestic development operations of PPL Energy Supply.

The Supply segment results in 2006, 2005 and 2004 reflect the reclassification of the Griffith plant revenues and expenses from certain income statement line items to "Loss from Discontinued Operations." The Supply segment results in 2005 and 2004 also reflect the reclassification of the Sundance plant revenues and expenses from certain income statement line items to "Loss from Discontinued Operations." See Notes 9 and 10 to the Financial Statements for further discussion.

Supply segment net income was:

   
2006
  
2005
  
2004
Energy revenues
                        
External
  
$
1,659
    
$
1,224
    
$
1,319
  
Intersegment
    
1,708
      
1,590
      
1,500
  
Energy-related businesses
    
580
      
550
      
464
  
Total operating revenues
    
3,947
      
3,364
      
3,283
  
                         
Fuel and energy purchases
                        
External
    
1,560
      
1,165
      
1,109
  
Intersegment
    
160
      
152
      
156
  
Other operation and maintenance
    
707
      
734
      
631
  
Depreciation
    
159
      
144
      
144
  
Taxes, other than income
    
35
      
36
      
41
  
Energy-related businesses
    
621
      
620
      
523
  
Total operating expenses
    
3,242
      
2,851
      
2,604
  
                         
Other Income - net
    
3
      
(2
)
    
(7
)
Interest Expense
    
122
      
116
      
114
  
Income Taxes
    
147
      
21
      
125
  
Minority Interest
    
3
      
2
      
2
  
Loss from Discontinued Operations
    
20
      
53
      
10
  
Cumulative Effect of a Change in Accounting Principle
            
(8
)
        
Total
  
$
416
    
$
311
    
$
421
  

The after-tax changes in net income were due to the following factors, including discontinued operations.

   
2006 vs. 2005
  
2005 vs. 2004
             
Eastern U.S. non-trading margins
  
$
94
    
$
(45
)
Western U.S. non-trading margins
    
7
      
(5
)
Net energy trading margins
    
1
      
8
  
Energy-related businesses
    
5
      
6
  
Operation and maintenance expenses
    
(28
)
    
(26
)
Earnings from synfuel projects
    
(32
)
    
25
  
Depreciation
    
(7
)
    
3
  
Realized earnings on nuclear decommissioning trust (Note 17)
    
4
      
7
  
Interest expense
    
3
      
(2
)
Interest income on 2004 IRS tax settlement
            
(9
)
Income tax reserve adjustments (Note 5)
            
21
  
Other
    
(4
)
    
(8
)
Unusual items
    
62
      
(85
)
   
$
105
    
$
(110
)

·
See "Domestic Gross Energy Margins" for an explanation of non-trading margins by geographic region and for an explanation of net energy trading margins.
   
·
Higher operation and maintenance expenses in 2006 compared with 2005 were primarily due to increased outage and non-outage expenses at the Susquehanna nuclear facility and certain of PPL's coal plants and the timing of other planned outages. Higher operation and maintenance expenses in 2005 compared with 2004 were primarily due to higher levels of planned maintenance and plant outages in 2005.
   
·
The decline in earnings contributions from synfuel projects in 2006 compared with 2005 resulted primarily from the anticipated phase-out of synthetic fuel tax credits starting in 2006 and lower production levels due to high crude oil prices. See Note 15 to the Financial Statements for more information on the temporary shutdown of the Somerset facility. The improved earnings contribution from synfuel projects in 2005 compared with 2004 resulted primarily from higher synthetic fuel tax credits due to higher output at the Tyrone facility, which went into commercial operation in August 2004. Also contributing to the 2005 synthetic fuel earnings increase were unrealized gains on options purchased to hedge the risk associated with synthetic fuel tax credits for 2006 and 2007.

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

   
2006
  
2005
  
2004
                         
Sale of interest in the Griffith plant (Note 10)
  
$
(16
)
                
Reduction in Enron reserve (Note 1)
    
11
                  
Impairment of synfuel-related assets (Note 15)
    
(6
)
                
Off-site remediation of ash basin leak (Note 15)
    
6
    
$
(27
)
        
Susquehanna workforce reduction (Note 13)
    
(3
)
                
PJM billing dispute (Note 15)
    
(18
)
                
Impairment of nuclear decommissioning trust investments (Note 21)
    
(3
)
                
Sale of the Sundance plant (Note 9)
            
(47
)
        
Acceleration of stock-based compensation expense for
periods prior to 2005 (Note 1)
            
(3
)
        
Settlement of NorthWestern litigation (a)
            
(6
)
        
Impairment of investment in technology supplier (Note 9)
                  
$
(6
)
Recording of conditional AROs (Note 21)
            
(8
)
        
Total
  
$
(29
)
  
$
(91
)
  
$
(6
)

(a)
  
In the first quarter of 2005, PPL recognized a charge for a loss contingency related to litigation with NorthWestern. In September 2005, PPL and NorthWestern reached a final agreement to settle this litigation.

2007 Outlook

PPL projects significantly higher earnings in its supply business segment in 2007 compared with 2006. Based on current forward energy prices and hedges already in place, PPL is projecting higher energy margins, driven primarily by the replacement of expiring fixed-price supply obligations with higher-margin wholesale energy contracts, and an increase in generation prices under the PUC-approved PLR contracts between PPL Electric and PPL EnergyPlus for customers who choose not to shop for an energy supplier.

While PPL expects improved baseload power plant performance in 2007, this performance will be somewhat offset by the retirement in September of two coal units at the Martins Creek power plant in Pennsylvania and by more planned outages, including the Susquehanna Unit 1 outage to address the remaining control rod friction issues. PPL believes these planned outages will improve the overall long-term reliability of PPL's generation fleet. PPL also expects a modest increase in fuel-related expenses and increased operation and maintenance expenses.

International Delivery Segment

The International Delivery segment includes operations of the international energy businesses of PPL Global that are primarily focused on the distribution of electricity. Substantially all of PPL Global's international businesses are located in the U.K., Chile, El Salvador and Bolivia.

International Delivery segment net income was:

   
2006
  
2005
  
2004
                         
Utility revenues
  
$
1,260
    
$
1,130
    
$
1,032
  
Energy-related businesses
    
87
      
76
      
70
  
Total operating revenues
    
1,347
      
1,206
      
1,102
  
Energy purchases
    
337
      
266
      
215
  
Other operation and maintenance
    
286
      
250
      
208
  
Depreciation
    
161
      
157
      
146
  
Taxes, other than income
    
58
      
58
      
56
  
Energy-related businesses
    
38
      
28
      
41
  
Total operating expenses
    
880
      
759
      
666
  
Other Income - net
    
33
      
10
      
31
  
Interest Expense
    
203
      
203
      
203
  
Income Taxes
    
21
      
34
      
59
  
Minority Interest
    
8
      
5
      
6
  
Loss from Discontinued Operations
                    
2
  
Total
  
$
268
    
$
215
    
$
197
  

The after-tax changes in net income were due to the following factors, including discontinued operations.

   
2006 vs. 2005
  
2005 vs. 2004
U.K.
                
Delivery margins
  
$
32
    
$
23
  
Operation and maintenance expenses
    
(15
)
    
(30
)
Depreciation
    
(9
)
    
(6
)
Income taxes
    
34
          
Impact of changes in foreign currency exchange rates
    
(5
)
    
2
  
Impairment of investment in U.K. real estate (Note 9)
    
(6
)
        
Gain on transfer of equity investment (Note 9)
    
5
          
Hyder liquidation distributions (Note 9)
    
27
          
Other
    
5
      
5
  
Latin America
                
Delivery margins
    
10
      
6
  
Operation and maintenance expenses
    
(1
)
    
(4
)
Income taxes
    
11
      
(1
)
Impact of changes in foreign currency exchange rates
    
2
      
2
  
Other
    
(1
)
    
(2
)
U.S. income taxes
    
(38
)
    
36
  
Other
    
1
      
1
  
Unusual items
    
1
      
(14
)
   
$
53
    
$
18
  

·
The U.K.'s earnings in both periods were positively impacted by higher margins. Favorable margins in 2006 compared with 2005 were primarily due to price increases and changes in customer mix. For 2005 compared with 2004, higher margins were partially due to a favorable customer mix and an incentive revenue award from the regulator for outstanding customer service.
   
·
Higher U.K. operation and maintenance expenses in both periods were due primarily to increased pension costs.
   
·
Higher depreciation in both periods was, in part, due to a reduction in meter lives during 2005.
   
·
Lower U.K. income taxes in 2006 compared with 2005 were primarily due to the transfer of a future tax liability from WPD and certain surplus tax losses from Hyder to a former Hyder affiliate. See Note 5 to the Financial Statements for additional information.
   
·
Changes in foreign exchange rates decreased WPD's portion of revenue and expense line items by 2% in 2006 compared with 2005, and increased them by about 1% in 2005 compared with 2004.
   
·
U.S. income taxes increased in 2006 compared with 2005 due to a 2005 tax true-up, 2006 WPD dividend planning and lower utilization of foreign tax credits. U.S. income taxes decreased in 2005 compared with 2004 partly due to greater utilization of foreign tax credits.
   
·
Latin America earnings were positively impacted in 2006 compared with 2005 by higher margins, primarily due to a 7% increase in sales volumes at Emel and accounting adjustments related to Chilean deferred taxes and depreciation related to prior periods. See Note 2 to the Financial Statements for additional information on the accounting adjustments.

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

   
2006
  
2005
  
2004
                         
Reduction in Enron reserve
  
$
1
                  
Sale of CGE (Note 9)
                  
$
(7
)
Sale of CEMAR (Note 9)
                    
23
  
Sale of Latin American telecommunications company
(Note 9)
                    
(2
)
Total
  
$
1
            
$
14
  

2007 Outlook
 
PPL projects the earnings from its international delivery business segment to decline in 2007 compared with 2006. Higher delivery margins, due to higher unit sales in Latin America and higher unit prices in the U.K., are expected to be offset by increased operating expenses in the majority of these delivery businesses and a significantly higher effective tax rate in the U.K. due to the favorable resolution of several tax-related items in 2006. In addition, PPL does not expect gains from the sale or liquidation of U.K. non-electricity delivery businesses to continue at the same level in 2007 as occurred in 2006.

Pennsylvania Delivery Segment

The Pennsylvania Delivery segment includes the regulated electric and gas delivery operations of PPL Electric and PPL Gas Utilities.

Pennsylvania Delivery segment net income was:

   
2006
  
2005
  
2004
Operating revenues
                        
External
  
$
3,313
    
$
3,199
    
$
2,869
  
Intersegment
    
160
      
152
      
156
  
Total operating revenues
    
3,473
      
3,351
      
3,025
  
                         
Fuel and energy purchases
                        
External
    
322
      
376
      
312
  
Intersegment
    
1,708
      
1,590
      
1,500
  
Other operation and maintenance
    
418
      
423
      
408
  
Amortization of recoverable transition costs
    
282
      
268
      
257
  
Depreciation
    
126
      
119
      
114
  
Taxes, other than income
    
189
      
185
      
152
  
Energy-related businesses
    
1
      
1
      
2
  
Total operating expenses
    
3,046
      
2,962
      
2,745
  
                         
Other Income - net
    
32
      
21
      
15
  
Interest Expense
    
157
      
189
      
196
  
Income Taxes
    
107
      
67
      
17
  
Dividends on Preferred Securities
    
14
      
2
      
2
  
Total
  
$
181
    
$
152
    
$
80
  

The after-tax changes in net income were due to the following factors.

   
2006 vs. 2005
  
2005 vs. 2004
             
Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges)
  
$
(6
)
  
$
123
  
Operation and maintenance expenses
   
(13
)
    
(9
)
Interest expense
    
(5
)
    
5
  
Taxes, other than income (excluding gross receipts tax)
    
1
      
(8
)
Depreciation
    
(4
)
    
(3
)
Change in tax reserves associated with stranded costs securitization (Note 5)
            
(15
)
Interest income on 2004 IRS tax settlement
            
(5
)
Interest income on loans to affiliates
    
4
      
6
  
Income tax return adjustments
    
(7
)
    
5
  
Income tax reserve adjustments
    
(2
)
    
5
  
Other
    
(3
)
    
(3
)
Unusual items
    
64
      
(29
)
   
$
29
    
$
72
  

·
Delivery revenues decreased in 2006 compared with 2005 primarily due to milder weather in 2006.
   
·
In December 2004, the PUC approved an increase in PPL Electric's distribution rates of $137 million (based on a return on equity of 10.7%), and approved PPL Electric's proposed mechanism for collecting an additional $57 million in transmission-related charges, for a total annual increase of $194 million, effective January 1, 2005. Additionally, delivery revenues increased in 2005 compared with 2004 due to a 4.3% increase in electricity delivery sales volumes.
   
·
Operation and maintenance expense increased in 2006 compared with 2005, primarily due to higher tree trimming costs, a union contract ratification bonus and storm restoration costs. Operation and maintenance expense increased in 2005 compared with 2004, primarily due to increased system reliability work and tree trimming costs. Operation and maintenance expenses were also impacted in 2005 due to the January 2005 ice storm costs and subsequent deferral as discussed below.
   
 
In January 2005, severe ice storms hit PPL Electric's service territory. The total cost of restoring service to 238,000 customers, excluding capitalized costs and regular payroll expenses, was $16 million.
 
In August 2005, the PUC issued an order granting PPL Electric's petition for authority to defer and amortize for regulatory accounting and reporting purposes a portion of the ice storm costs, subject to certain conditions. As a result of the PUC Order and in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation," in the third quarter of 2005, PPL Electric deferred $12 million of its previously expensed storm costs. The deferral was based on its assessment of the timing and likelihood of recovering the deferred costs in PPL Electric's next distribution base rate case.

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

   
2006
  
2005
  
2004
                         
Reversal of cost recovery - Hurricane Isabel (Note 1)
  
$
(7
)
                
Realization of benefits related to Black Lung Trust assets (Note 13)
    
21
                  
PJM billing dispute (Note 15)
    
21
    
$
(27
)
        
Acceleration of stock-based compensation expense for periods prior to 2005 (Note 1)
            
(2
)
        
Total
  
$
35
    
$
(29
)
        

2007 Outlook

PPL expects the Pennsylvania Delivery segment to have flat earnings in 2007 compared with 2006, with modest load growth being offset by increased operation and maintenance expenses.

In late March 2007, PPL Electric expects to file a request with the PUC seeking an increase in its distribution rates beginning in January 2008.

Statement of Income Analysis --

Domestic Gross Energy Margins

The following table provides pre-tax changes in the income statement line items that comprise domestic gross energy margins.

   
2006 vs. 2005
  
2005 vs. 2004
             
Utility
  
$
244
    
$
429
  
Unregulated retail electric and gas
    
(10
)
    
(13
)
Wholesale energy marketing
    
441
      
(93
)
Net energy trading margins
   
3
      
11
  
Other revenue adjustments (a)
    
(125
)
    
(309
)
Total revenues
    
553
      
25
  
                 
Fuel
    
(5
)
    
159
  
Energy purchases
    
417
      
12
  
Other cost adjustments (a)
    
(45
)
    
(73
)
Total cost of sales
    
367
      
98
  
Domestic gross energy margins
  
$
186
    
$
(73
)

(a)
  
Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy margins, consistent with the way management reviews domestic gross energy margins internally. These exclusions include revenues and energy costs related to the international operations of PPL Global, the domestic delivery operations of PPL Electric and PPL Gas Utilities and an accrual for the loss contingency related to the PJM billing dispute in 2005 and 2006 (see Note 15 to the Financial Statements for additional information). Also adjusted to include the margins of the Griffith and Sundance plants prior to their sales in June 2006 and May 2005, which are included in "Loss from Discontinued Operations," and gains or losses on sales of emission allowances, which are included in "Other operation and maintenance" expenses on the Statements of Income.

Changes in 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. Additionally, beginning in 2006, PPL further segregates non-trading activities into two categories: hedge activity and economic activity. Economic activity represents the net unrealized effect of derivative transactions that are entered into as economic hedges, but do not qualify for hedge accounting, or hedge accounting was not elected, under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted.

   
2006 vs. 2005
  
2005 vs. 2004
                 
Non-trading
                
Eastern U.S.
 
$
161
    
$
(77
)
Western U.S.
   
12
      
(9
)
Net energy trading
    
13
      
13
  
Domestic gross energy margins
  
$
186
    
$
(73
)

Eastern U.S.

Eastern U.S. non-trading margins were higher in 2006 compared with 2005, primarily due to higher PLR sales prices and higher wholesale prices. PLR sales prices were 8.4% higher in 2006, in accordance with the schedule established by the PUC Final Order. Partially offsetting these higher margins was lower nuclear generation of 3%, as well as higher coal and nuclear fuel prices, which were up 12% and 10%.

In 2005, PPL began participating in the Midwest ISO (MISO), an independent transmission system operator that serves the electric transmission needs of much of the Midwest. PPL records its business activities within MISO consistent with its accounting for activities in other RTOs.

Eastern U.S. non-trading margins were lower in 2005 compared with 2004, primarily due to higher fuel costs. Average coal prices increased by 12% over 2004, while average gas and oil prices increased by 24%. Despite record high generation in 2005, the increased use of higher-cost oil and gas units to cover retail volumes, which were up 5% over 2004, and generation output lost during coal and nuclear plant outages contributed to lower margins. Due to market price increases and changes in fuel mix, average fuel prices increased 22% over 2004. Partially offsetting the effects of higher fuel costs was a 2% increase in PLR sales prices, in accordance with the schedule established by the PUC Final Order.

The amount of Eastern non-trading margins from unrealized mark-to-market transactions that did not qualify for hedge accounting treatment, or for which hedge accounting was not elected, and from hedge ineffectiveness was a loss of $8 million in 2006, compared with a loss of $4 million in 2005, and an immaterial loss in 2004.

Western U.S.

Northwestern U.S. non-trading margins were higher in 2006 compared with 2005, primarily due to higher wholesale prices. Also contributing to the increase was a 6% increase in hydroelectric generation. Partially offsetting these improvements were higher coal prices, which were up 14%.

Southwestern U.S. non-trading margins were lower in 2006 compared with 2005, as well as in 2005 compared with 2004, primarily due to the sale of PPL's 50% interest in the Griffith plant in June 2006 and the sale of PPL's Sundance plant in May 2005.

The amount of Western non-trading margins from unrealized mark-to-market transactions that did not qualify for hedge accounting treatment, or for which hedge accounting was not elected, and from hedge ineffectiveness was immaterial in 2006, 2005 and 2004.

Net Energy Trading

PPL enters into certain energy contracts that meet the criteria of trading derivatives as defined by EITF Issue 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." These physical and financial contracts cover trading activity associated with electricity, gas and oil.

Net energy trading margins increased by $13 million in 2006 compared to 2005 primarily due to contracts reclassified as trading activity from hedge (non-trading) transactions related to the Griffith plant after the announced plan to sell PPL's interest in the plant. See Note 10 to the Financial Statements for additional information.

Net energy trading margins increased by $13 million in 2005 compared with 2004, primarily due to the inclusion of FTRs. As of July 1, 2005, FTRs were deemed to meet the definition of a derivative and were accounted for as such prospectively. Therefore, the forward and realized value for FTRs entered into for speculative purposes is accounted for as part of "Net energy trading margins" on the Statement of Income. From July 1 through December 31, 2005, gains on speculative FTRs totaled $10 million.

The amount of energy trading margins from unrealized mark-to-market transactions was a $9 million gain in 2006, a $5 million loss in 2005, and a $13 million gain in 2004.

The realized physical volumes for electricity and gas associated with energy trading were:

   
2006
  
2005
  
2004
                         
GWh
    
7,724
      
5,800
      
5,700
  
Bcf
    
21.5
      
13.4
      
11.7
  

Utility Revenues

The increases in utility revenues were attributable to:

   
2006 vs. 2005
  
2005 vs. 2004
Domestic:
                
Retail electric revenue (PPL Electric)
                
PLR electric generation supply
  
$
127
    
$
122
  
Electric delivery
    
(38
)
    
201
  
Wholesale electric revenue (PPL Electric)
    
(2
)
    
(2
)
Gas revenue (PPL Gas Utilities)
    
26
      
9
  
Other
    
1
      
1
  
                 
International:
                
Retail electric revenue
               
U.K.
    
45
      
26
  
Latin America
                
Chile
    
46
      
36
  
El Salvador
    
24
      
10
  
Bolivia
    
5
      
2
  
Foreign currency exchange rates
    
10
      
24
  
   
$
244
    
$
429
  

The increases in utility revenues for 2006 compared with 2005, excluding foreign currency exchange rate impacts, were primarily due to:

·
higher retail electric revenue from increased PLR revenues resulting from an 8.4% rate increase, offset by a decrease in domestic electric delivery revenues resulting from a decrease in sales volumes due in part to milder weather in 2006;
·
higher gas revenues primarily due to the increase in natural gas prices, which are passed through to customers;
·
an increase in the U.K. due to higher average prices and changes in customer mix; and
·
increases in Latin America due to a 7.3% increase in sales volumes in Chile and an 8.6% increase in sales volumes in El Salvador and higher generation supply average prices in both countries.

The increases in utility revenues for 2005 compared with 2004, excluding foreign currency exchange rate impacts, were primarily due to:

·
higher domestic electric delivery revenues resulting from higher transmission and distribution customer rates effective January 1, 2005, and a 4.3% increase in sales volume;
·
higher PLR revenues due to a 2% rate increase and a 6% increase in sales volume, in part due to the return of customers previously served by alternate suppliers;
·
an increase in the U.K. primarily due to favorable customer mix and an incentive revenue award for outstanding customer service; and
·
increases in Latin America due to a 6% increase in sales volumes in El Salvador and a 7% increase in sales volumes in Chile and higher generation supply average prices in both countries.

Energy-related Businesses

Energy-related businesses contributed $31 million more to operating income in 2006 compared with 2005. The increase was primarily attributable to:

·
$18 million of lower pre-tax losses from synfuel projects. This reflects $29 million of lower operating losses due to lower production levels, partially offset by an impairment charge of $10 million on the synfuel-related assets;
·
an $8 million increase from PPL Telcom due to an increase in transport-related sales, as well as reduced spending on a product line (before depreciation, interest expense and income taxes); and
·
a $3 million increase from WPD's telecommunications business.

Energy-related businesses contributed $8 million more to operating income in 2005 compared with 2004. The increase was attributable to:

·
a $15 million pre-tax loss in 2004, related to the sale of CGE (see Note 9 to the Financial Statements for additional information);
·
an aggregate increase of $4 million from various international subsidiary businesses; and
·
a $6 million increase from PPL Telcom due to an increase in transport-related sales, as well as reduced spending on a product line (before depreciation, interest expense and income taxes); partially offset by
·
additional pre-tax losses in 2005 of $16 million on synfuel projects. This reflects $26 million of additional operating losses due to higher production levels, offset by a $10 million net unrealized gain on options purchased to hedge a portion of the risk associated with the phase-out of the synthetic fuel tax credits for 2006 and 2007.

See Note 15 to the Financial Statements for an overall assessment of synthetic fuel tax credits and a further discussion of the impairment of these facilities and the temporary shutdown of one of these facilities.

Other Operation and Maintenance

For the year ended 2006, PPL's other operation and maintenance expense was reduced by a $36 million pre-tax one-time credit in connection with the realization of benefits related to the ability to use excess Black Lung Trust assets to make future benefit payments for retired miners' medical benefits. See Note 13 to the Financial Statements for additional information.

Excluding this one-time credit, the increases in other operation and maintenance expenses were due to:

   
2006 vs. 2005
  
2005 vs. 2004
             
Martins Creek ash basin remediation (Note 15)
  
$
(37
)
  
$
48
  
Costs associated with severe ice storms in January 2005 (Note 1)
    
(16
)
    
16
  
Subsequent deferral of a portion of costs associated with January 2005 ice storms (Note 1)
    
12
      
(12
)
Accelerated amortization of stock-based compensation (Note 1)
    
(18
)
    
18
  
NorthWestern litigation payment
   
(9
)
    
9
  
Outage costs at Eastern U.S. fossil/hydro stations
    
13
      
14
  
Outage costs at Susquehanna nuclear station
    
24
      
6
  
Outage costs at Western U.S. fossil/hydro stations
    
3
      
4
  
U.K metering expense
   
4
      
5
  
Changes in U.K. reserve related to contractor dispute
    
4
      
(8
)
Latin America vendor dispute
    
5
          
Reduction in Enron reserve (Note 1)
    
(19
)
        
Increase in domestic distribution system reliability work, including tree trimming
    
19
      
10
  
Increase in pension and postretirement benefit costs (Note 13)
    
34
      
44
  
Reversal of cost recovery - Hurricane Isabel (Note 1)
    
11
          
Union contract ratification bonus
    
7
          
Stock-based compensation expense
   
10
      
2
  
Increase in PUC-reportable storm costs
   
9
          
PJM system control and dispatch services
   
(12
)
    
(4
)
Change in retired miners' medical benefits
    
(7
)
    
5
  
Change in foreign currency exchange rates
    
3
      
5
  
Other
            
(2
)
   
$
40
    
$
160
  

Depreciation

Increases in depreciation expense were due to:

   
2006 vs. 2005
  
2005 vs. 2004
             
Additions to PP&E
  
$
27
    
$
14
  
Purchase of equipment previously leased (Note 11)
    
4
          
Reduction of useful lives of certain distribution assets (Note 1)
    
3
      
7
  
Lower Mt. Bethel generation facility, which began commercial operation in May 2004
            
6
  
Extension of useful lives of certain generation assets (Note 1)
    
(2
)
    
(12
)
Chilean depreciation accounting adjustment (Note 2)
    
(7
)
        
Changes in foreign currency exchange rates
    
1
      
1
  
   
$
26
    
$
16
  

Taxes, Other Than Income

A $6 million increase in domestic gross receipts tax expense, offset by a $2 million decrease in domestic capital stock tax expense and a $2 million decrease in domestic real estate tax expense, are the primary reasons for the $3 million increase in taxes, other than income, in 2006 compared with 2005.

In 2004, PPL Electric reversed a $14 million accrued liability for 1998 and 1999 PURTA taxes that had been accrued based on potential exposure in the proceedings regarding the Susquehanna nuclear station tax assessment. The rights of third-party intervenors to further appeal expired in 2004. The reversal and a $19 million increase in domestic gross receipts tax expense, offset by an $8 million decrease in domestic capital stock expense in 2005, are the primary reasons for the $30 million increase in taxes, other than income in 2005, compared with 2004.

Other Income - net

See Note 17 to the Financial Statements for details of other income and deductions.

Financing Costs

The decreases in financing costs, which includes "Interest Expense" and "Dividends on Preferred Securities of a Subsidiary," were due to:

   
2006 vs. 2005
  
2005 vs. 2004
             
Hedging activities
 
$
24
    
$
26
  
Dividends on 6.25% Series Preference Stock (Note 7)
    
12
          
Expense related to the University Park generation facility (a)
            
(13
)
Change in capitalized interest
    
(15
)
    
11
  
Interest accrued for PJM billing dispute (Note 15)
    
(12
)
    
8
  
Write-off in 2005 of financing costs associated with PPL Energy Supply's 2.625% Convertible Senior Notes due to the market trigger price being met
   
(6
)
    
6
  
Change in amortization expense
    
(6
)
    
9
  
Decrease in long-term debt interest expense
    
(5
)
    
(55
)
Change in short-term debt interest expense
    
(4
)
    
4
  
Change in foreign currency exchange rates
    
(2
)
    
1
  
Other
           
(2
)
   
$
(14
)
  
$
(5
)

(a)
  
In June 2004, a subsidiary of PPL Energy Supply purchased the University Park generation facility from the lessor that was consolidated by PPL Energy Supply under FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." In connection with the purchase, the related financing was repaid and the deferred financing costs were written off. See Note 22 to the Financial Statements for additional information.

Income Taxes

The changes in income taxes were due to:

   
2006 vs. 2005
  
2005 vs. 2004
             
Higher (lower) pre-tax book income
  
$
101
    
$
(19
)
Nonconventional fuel tax credits
    
49
      
(33
)
Tax on foreign earnings
    
8
      
(19
)
Chilean tax benefit related to monetary indexation (Note 2)
    
(9
)
        
Transfer of WPD tax items in the first quarter 2006 (Note 5)
    
(20
)
        
Tax return adjustments
    
20
      
(12
)
Tax reserve adjustments
    
3
      
3
  
Other
    
1
      
1
  
   
$
153
    
$
(79
)

See Note 5 to the Financial Statements for details on effective income tax rates.

Discontinued Operations

In 2006, PPL recorded a $23 million loss, which is net of a tax benefit of $16 million, in connection with the sale of its ownership interest in the Griffith plant. The "Loss from Discontinued Operations" also includes the acceleration of net unrealized gains on derivatives associated with the Griffith plant of $7 million after tax. See Note 10 to the Financial Statements for information on this sale, along with information regarding operating results recorded prior to the sale.

In 2005, PPL recorded a $47 million loss, which is net of a tax benefit of $26 million, in connection with the sale of its Sundance power plant. See "Discontinued Operations" in Note 9 to the Financial Statements for information on this sale, along with information regarding operating losses recorded prior to the sale of the Sundance plant and for operating losses recorded in 2004 related to the sale of PPL Global's investment in a Latin American telecommunications company.

Cumulative Effect of a Change in Accounting Principle

PPL adopted FIN 47, "Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143," in 2005. FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional ARO when incurred if the fair value of the ARO can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO. Application of the interpretation resulted in a cumulative effect of a change in accounting principle that decreased net income by $8 million in 2005. See Note 21 to the Financial Statements for additional information.

Financial Condition

Liquidity and Capital Resources

PPL is focused on maintaining an appropriate liquidity position and strengthening its balance sheet, thereby continuing to improve its credit profile. PPL believes that its cash on hand, short-term investments, operating cash flows, access to debt and equity capital markets and borrowing capacity, taken as a whole, provide sufficient resources to fund its ongoing operating requirements, future security maturities and estimated future capital expenditures. PPL currently expects cash, cash equivalents and short-term investments at the end of 2007 to be approximately $600 million and expects to increase its credit facilities from $3.4 billion to greater than $4.0 billion in 2007. However, PPL's cash flows from operations and its 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, price and credit risks associated with selling and marketing products in the wholesale power markets;
·
significant switching by customers to or from alternative suppliers that would impact the level of sales under the PLR contracts;
·
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; and
·
a downgrade in PPL's or its subsidiaries' credit ratings that could negatively affect their ability to access capital and increase the cost of maintaining credit facilities and any new debt.

At December 31, PPL had the following:

   
2006
  
2005
  
2004
                         
Cash and cash equivalents
 
$
794
    
$
555
    
$
616
  
Short-term investments
    
359
      
63
      
66
  
     
1,153
      
618
      
682
  
Short-term debt
    
42
      
214
      
42
  

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

   
2006
  
2005
  
2004
                   
Net Cash Provided by Operating Activities
  
$
1,758
    
$
1,388
    
$
1,497
 
Net Cash Used in Investing Activities
    
(1,617
)
    
(779
)
    
(778
)
Net Cash Provided by (Used in) Financing Activities
    
95
      
(676
)
    
(578
)
Effect of Exchange Rates on Cash and Cash Equivalents
    
3
      
6
      
9
  
Net Increase (Decrease) in Cash and Cash Equivalents
  
$
239
    
$
(61
)
  
$
150
  

Operating Activities

Net cash from operating activities increased by 27%, or $370 million, in 2006 compared with 2005, primarily as a result of higher domestic retail electric revenues resulting from an 8.4% increase in PLR sales prices and increased international delivery revenues, predominantly related to price increases and changes in customer mix. The increase from 2005 to 2006 was also due, to a lesser extent, to reduced expenditures for oil in 2006 as a result of building up inventory in 2005. These increases were partially offset by a decrease in domestic delivery revenues resulting from a decrease in sales volumes, due in part to milder weather in 2006, increased expenditures for coal and increased U.S. income tax payments, primarily due to lower utilization of foreign tax credits in 2006.

Net cash from operating activities decreased by 7%, or $109 million, in 2005 compared with 2004, primarily as a result of increased income tax payments and fuel expenditures, partially offset by favorable margin impacts attributable to the 7.1% increase in distribution rates and transmission cost recoveries effective January 1, 2005. Income tax payments increased primarily due to favorable impacts of tax credits and refunds realized in 2004. Fuel expenditures increased $115 million due to increased prices and inventory build-up in anticipation of price increases in 2006.

PPL expects to continue to maintain stable cash provided by operating activities as a result of its long-term and intermediate-term power sales commitments from wholesale and retail customers and long-term fuel purchase contracts. PPL estimates that, on average, approximately 89% of its expected annual generation output for the period 2007 through 2009 is committed under long-term and intermediate-term power sales contracts. PPL has started and will continue to layer in sales contracts in the wholesale markets for the capacity and energy currently committed under the PLR supply contracts with PPL Electric, which expire at the end of 2009. Based on the way in which the wholesale markets have developed to this point, new contracts may be of a shorter duration than the PLR supply contracts, which at inception had terms of approximately nine years.

PPL's contracts for the sale and purchase of electricity and fuel often require cash collateral or other credit enhancement, 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 energy prices increased by 10%, PPL estimates that, based on its December 31, 2006 positions, it would have had to post additional collateral of approximately $387 million, compared with $611 million at December 31, 2005. 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 prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operational 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 2006 and projected expenditures for the years 2007 through 2011.

Net cash used in investing activities increased 108%, or $838 million, in 2006 compared with 2005. There were a few items that contributed to this increase. Capital expenditures increased $583 million, primarily as a result of the construction of pollution control equipment at coal-fired plants in Pennsylvania, as discussed in Note 15 to the Financial Statements, and $107 million related to the purchase of leased equipment. See Note 11 to the Financial Statements for further discussion of the purchase of leased equipment in connection with the termination of the related master lease agreements. Additionally, there was an increase of $298 million in net purchases of short-term investments, and PPL received $80 million less in proceeds from the sale of power plants in 2006 compared with 2005. The impact of the above items was partially offset by a decrease of $75 million in net purchases of emission allowances and a decrease of $22 million in the additional amount of cash that became restricted.

Although net cash used in investing activities remained stable in 2005 compared with 2004, there were significant changes in certain components. PPL received $190 million in proceeds from the sale of the Sundance power plant in 2005, compared with $123 million of proceeds from the sale of PPL's minority interest in CGE in 2004. Additionally, there was an increase of $58 million in net proceeds from the sales of short-term investments, an increase of $77 million in capital expenditures and an increase of $63 million in net purchases of emission allowances, in anticipation of future generation.

Financing Activities

Net cash provided by financing activities was $95 million in 2006, compared with net cash used in financing activities of $676 million in 2005 and $578 million in 2004. The change from 2005 to 2006 primarily reflects increased issuance of long-term debt, as well as the issuance of preference stock. In 2006, cash provided by financing activities primarily consisted of net debt issuances of $277 million, net proceeds of $245 million from the issuance of preference stock and $21 million of common stock sale proceeds, partially offset by common and preferred distributions paid of $419 million. See Note 7 to the Financial Statements for details regarding the preference stock issued by PPL Electric.

The increase in cash used in financing activities from 2004 to 2005 primarily reflects the continued retirement of long-term debt and increased dividends to shareowners. In 2005, cash used in financing activities primarily consisted of net debt retirements of $340 million and common and preferred distributions paid of $349 million, partially offset by common stock sale proceeds of $37 million. In 2004, cash used in financing activities primarily consisted of net debt retirements of $863 million and common and preferred distributions paid of $299 million, partially offset by common stock sale proceeds of $596 million, of which $575 million related to the settlement of the common stock purchase contracts that were a component of the PEPS Units and the PEPS Units, Series B.

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 PPL's plans to pay dividends on its common and preferred securities and repurchase common stock in the future, as well as maturities of PPL's long-term debt.

PPL's debt financing activity in 2006 was:

   
Issuances
  
Retirements
             
PPL Energy Supply Senior Unsecured Notes
  
$
997
          
PPL Energy Supply Convertible Senior Notes (a)
          
$
(298
)
PPL Capital Funding Subordinated Notes
            
(148
)
PPL Capital Funding Senior Floating Rate Notes
            
(99
)
PPL Transition Bond Company Transition Bonds
            
(288
)
PPL Electric First Mortgage Bonds
            
(146
)
WPD Senior Unsecured Notes (b) (c)
    
887
      
(450
)
Emel UF Denominated Bonds
    
101
      
(103
)
Elfec Bolivian Bonds
            
(3
)
PPL Energy Supply Commercial Paper (net change)
           
(100
)
WPD short-term debt (net change)
           
(73
)
Total
  
$
1,985
    
$
(1,708
)
Net increase
  
$
277
          

(a)
  
Convertible Senior Notes in an aggregate principal amount of $298 million were presented for conversion in 2006. The total conversion premium related to these conversions was $121 million, which was settled with 3,448,109 shares of PPL common stock, along with an insignificant amount of cash in lieu of fractional shares. After such conversions, $102 million of Convertible Senior Notes remain outstanding and are eligible for conversion in the first quarter of 2007. See Notes 4 and 8 to the Financial Statements for discussion of the terms of the Convertible Senior Notes and further discussion of the conversions.
(b)
  
Issuance includes $446 million of index-linked notes.
(c)
  
Retirement includes $118 million to settle related cross-currency swaps.

Long-term debt issued during 2006 had stated interest rates ranging from 1.541% to 7.0% and maturities from 2011 through 2056. See Note 8 to the Financial Statements for more detailed information regarding PPL's financing activities.

Forecasted Sources of Cash

PPL expects to continue to have significant sources of cash available in the near term, including various credit facilities, commercial paper programs, an asset-backed commercial paper program and operating leases. PPL also expects to continue to have access to debt and equity capital markets, as necessary, for its long-term financing needs.

Credit Facilities

At December 31, 2006, PPL's total committed borrowing capacity under credit facilities and the use of this borrowing capacity were:

   
Committed Capacity
    
Borrowed
    
Letters of Credit Issued (d)
    
Available Capacity
  
                         
PPL Electric Credit Facility (a)
  
$
200
                    
$
200
  
PPL Energy Supply Credit
Facilities (b)
    
2,400
            
$
320
      
2,080
  
WPD (South West) Credit
Facilities (c)
    
792
      
 
      
3
      
789
  
Total
  
$
3,392
            
$
323
    
$
3,069
  

(a)
  
Borrowings under PPL Electric's credit facility bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating. PPL Electric also has the capability to cause the lenders to issue up to $200 million of letters of credit under this facility, which issuances reduce available borrowing capacity.
 
The credit facility contains a financial covenant requiring debt to total capitalization to not exceed 70%. At December 31, 2006 and 2005, PPL Electric's consolidated debt to total capitalization percentages, as calculated in accordance with its credit facility, were 48% and 55%. The credit facility also contains standard representations and warranties that must be made for PPL Electric to borrow under it.
     
(b)
  
PPL Energy Supply has the ability to borrow $2.2 billion under its credit facilities. Such borrowings 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 $2.4 billion of letters of credit under these facilities, which issuances reduce available borrowing capacity.
 
These credit facilities contain a financial covenant requiring debt to total capitalization to not exceed 65%. At December 31, 2006 and 2005, PPL Energy Supply's consolidated debt to total capitalization percentage, as calculated in accordance with its credit facilities, was 35%. The credit facilities also contain standard representations and warranties that must be made for PPL Energy Supply to borrow under them.
     
(c)
  
Borrowings under WPD (South West)'s credit facilities bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating. WPD (South West) also has the capability to cause the lenders to issue up to £3 million (approximately $5 million at December 31, 2006) of letters of credit under one of its facilities, which can only be used for letters of credit.
 
These credit facilities contain 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 a regulatory asset base (RAB) at £150 million greater than total gross debt, in each case as calculated in accordance with the credit facilities. At December 31, 2006 and 2005, WPD (South West)'s interest coverage ratios, as calculated in accordance with its credit lines, were 5.3 and 6.0. At December 31, 2006 and 2005, WPD (South West)'s RAB, as calculated in accordance with the credit facilities, exceeded its total gross debt by £247 million and £407 million.
     
(d)
  
The Borrower under each of these facilities has a reimbursement obligation to the extent any letters of credit are drawn upon. The letters of credit issued as of December 31, 2006, expire as follows: $318 million in 2007 and $5 million in 2008.

In addition to the financial covenants noted in the table above, these credit agreements contain various other covenants. Failure to meet the covenants beyond applicable grace periods could result in acceleration of due dates of borrowings and/or termination of the agreements. PPL monitors the covenants on a regular basis. At December 31, 2006, 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.

During 2007, PPL intends to maintain the existing $3.4 billion of credit facility capacity, which may require the renewal and extension or replacement of certain facilities. In addition, PPL expects to increase its credit facility capacity by up to $1.0 billion in 2007 to support potential collateral requirements under contracts that it expects to enter into in connection with expanding its wholesale marketing and trading business. See Note 8 to the Financial Statements for further discussion of PPL's credit facilities, including the termination and replacement of a £150 million credit facility of WPD (South West) with a new £150 million credit facility at WPDH Limited in January 2007.

Commercial Paper

PPL Energy Supply and PPL Electric maintain commercial paper programs for up to $500 million for PPL Energy Supply and for up to $200 million for PPL Electric to provide them each with an additional financing source to fund their short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by certain credit agreements of each company. PPL Energy Supply had no commercial paper outstanding at December 31, 2006, and $100 million of commercial paper outstanding at December 31, 2005. PPL Electric had no commercial paper outstanding at December 31, 2006 and 2005. During 2007, PPL Energy Supply and PPL Electric may issue commercial paper from time to time to facilitate short-term cash flow needs.

Asset-Backed Commercial Paper Program

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 pledges these assets to secure loans of up to an aggregate of $150 million from a commercial paper conduit sponsored by a financial institution. PPL Electric uses the proceeds from the program for general corporate purposes and to cash collateralize letters of credit. At December 31, 2006 and 2005, the loan balance outstanding was $42 million, all of which was used to cash collateralize letters of credit. See Note 8 to the Financial Statements for further discussion of the asset-backed commercial paper program.

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 with 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, which is in accordance with applicable accounting guidance. 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 8 to the Financial Statements for a discussion of other dividend restrictions related to PPL subsidiaries.

See Note 11 to the Financial Statements for further discussion of the operating leases.

Long-Term Debt and Equity Securities

Subject to market conditions in 2007, PPL and its subsidiaries currently plan to issue up to $1.1 billion in long-term debt securities. PPL expects to use the proceeds primarily to fund capital expenditures, to fund maturities of existing debt and for general corporate purposes. PPL currently does not plan to issue significant amounts of common stock in 2007.

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 repurchase of a portion of its common stock, beginning in 2009.

Capital Expenditures

The table below shows PPL's actual spending for the year 2006 and current capital expenditure projections for the years 2007 through 2011.

   
Actual
  
Projected
  
           
   
2006
  
2007
  
2008
  
2009
  
2010
  
2011
  
Construction expenditures (a)
                                      
Generating facilities
  
$
275
  
$
329
  
$
231
  
$
294
  
$
314
  
$
313
  
Transmission and distribution facilities
    
625
    
608
    
582
    
616
    
629
    
686
  
Environmental
    
320
    
612
    
408
    
129
    
37
    
77
  
Other
    
100
    
91
    
64
    
61
    
60
    
66
  
Total Construction Expenditures
    
1,320
    
1,640
    
1,285
    
1,100
    
1,040
    
1,142
  
Nuclear fuel
    
74
    
92
    
112
    
113
    
128
    
130
  
Total Capital Expenditures
  
$
1,394
  
$
1,732
  
$
1,397
  
$
1,213
  
$
1,168
  
$
1,272
  

(a)
  
Construction expenditures include capitalized interest and AFUDC, which are expected to be approximately $243 million for the 2007-2011 period.

PPL's capital expenditure projections for the years 2007-2011 total approximately $6.8 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 349 MW incremental capacity increases. See Note 15 to the Financial Statements for additional information regarding the installation cost of sulfur dioxide scrubbers and other pollution control equipment, which comprise most of the "Environmental" expenditures noted above.

PPL plans to fund all of its capital expenditures in 2007 with cash on hand, cash from operations and 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, 2006, the estimated contractual cash obligations of PPL were:

Contractual Cash Obligations
  
Total
  
Less
Than
1 Year
  
1-3
Years
  
4-5
Years
  
After 5
Years
                               
Long-term Debt (a)
  
$
7,854
    
$
1,107
    
$
1,315
    
$
551
    
$
4,881
  
Capital Lease Obligations
    
16
      
1
      
2
      
2
      
11
  
Operating Leases
   
608
      
49
      
101
      
104
      
354
  
Purchase Obligations (b)
    
5,602
      
1,396
      
1,763
      
689
      
1,754
  
Other Long-term Liabilities Reflected on the Balance Sheet under GAAP (c)
    
13
              
13
                  
Total Contractual Cash Obligations
  
$
14,093
    
$
2,553
    
$
3,194
    
$
1,346
    
$
7,000
  

(a)
  
Reflects principal maturities only. See Note 4 to the Financial Statements for a discussion of conversion triggers related to PPL Energy Supply's 2.625% Convertible Senior Notes. Also, see Statements of Long-term Debt for a discussion of the remarketing feature related to PPL Energy Supply's 5.70% REset Put Securities.
(b)
  
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.
(c)
  
The amounts reflected represent WPD’s contractual deficit pension funding requirements arising from an actuarial valuation performed in March 2004 and do not include pension funding requirements for future service or a contingent funding requirement of $59 million payable by March 31, 2008, if certain conditions are not met by March 31, 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 review period, which extends to March 31, 2010.
 
Based on the current funded status of PPL's U.S. qualified pension plans, no contributions are required. See Note 13 to the Financial Statements for a discussion of expected contributions.

Dividends

In December 2004, PPL's Board of Directors adopted a dividend policy that provides for growing the common stock dividend in the future at a rate exceeding the projected rate of growth in earnings per share from ongoing operations until the dividend payout ratio reaches the 50 percent level. Earnings from ongoing operations exclude items that management considers unusual. PPL announced in February 2006 and again in February 2007 its expectation that the growth rate of its dividends over the next few years will continue to exceed the growth rate in the company's earnings per share and, therefore, result in a dividend payout ratio above 50 percent after 2006. Any future dividends are subject to the Board of Directors' quarterly dividend declarations, based on the company's financial position and other relevant considerations at the time.

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

Common Stock Repurchase

Given the continued improvement in its credit profile, PPL expects to be in a position to repurchase a portion of its common stock beginning in 2009.

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 key subsidiaries at December 31, 2006.

   
Moody's
  
S&P
  
Fitch (b)
PPL
            
 
Issuer Rating
  
Baa2
  
BBB
  
BBB
 
Outlook
  
STABLE
  
STABLE
  
STABLE
               
PPL Energy Supply
            
 
Issuer Rating
      
BBB
  
BBB
 
Senior Unsecured Notes
  
Baa2
  
BBB
  
BBB+
 
Commercial Paper
  
P-2
  
A-2
  
F2
 
Outlook
  
STABLE
  
STABLE
  
STABLE
               
PPL Capital Funding
            
 
Issuer Rating
          
BBB
 
Senior Unsecured Debt
  
Baa2
  
BBB-
  
BBB
 
Medium-Term Notes
  
Baa2
  
BBB-
  
BBB
 
Outlook
  
STABLE
  
STABLE
  
STABLE
               
PPL Electric
           
 
Senior Unsecured/Issuer Rating
  
Baa1
  
A-
  
BBB
 
First Mortgage Bonds
  
A3
  
A-
  
A-
 
Pollution Control Bonds (a)
  
Aaa
  
AAA
    
 
Senior Secured Bonds
  
A3
  
A-
  
A-
 
Commercial Paper
  
P-2
  
A-2
  
F2
 
Preferred Stock
  
Baa3
  
BBB
  
BBB+
 
Preference Stock
  
Baa3
  
BBB
  
BBB
 
Outlook
  
STABLE
  
STABLE
  
STABLE
               
PPL Transition Bond Company
            
 
Transition Bonds
  
Aaa
  
AAA
  
AAA
               
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
  
STABLE
  
STABLE
               
WPD LLP
            
 
Issuer Rating
      
BBB-
  
BBB
 
Short-term Debt
  
 
  
A-3
    
 
Preferred Stock (c)
  
Baa3
  
BB
  
BBB
 
Outlook
  
STABLE
  
STABLE
  
STABLE
               
WPD (South Wales)
            
 
Issuer Rating
      
BBB+
  
BBB+
 
Senior Unsecured Debt
  
Baa1
  
BBB+
  
A-
 
Short-term Debt
      
A-2
  
F2
 
Outlook
  
STABLE
  
STABLE
  
STABLE
               
WPD (South West)
            
 
Issuer Rating
  
Baa1
  
BBB+
  
BBB+
 
Senior Unsecured Debt
  
Baa1
  
BBB+
  
A-
 
Short-term Debt
  
P-2
  
A-2
  
F2
 
Outlook
  
STABLE
  
STABLE
  
STABLE

(a)
  
Insured as to payment of principal and interest.
(b)
  
All Issuer Ratings for Fitch are "Issuer Default Ratings."
(c)
  
Securities were redeemed in February 2007.

The rating agencies took the following actions related to PPL and its key subsidiaries in 2006:

Moody's

In March 2006, Moody's took the following actions related to the credit ratings of PPL and its subsidiaries:

·
PPL - assigned a Baa2 issuer rating;
·
PPL Capital Funding - upgraded the ratings of its senior unsecured debt and Medium Term Notes to Baa2 from Baa3 and subordinated debt to Baa3 from Ba1; and
·
PPL Electric - upgraded the issuer rating to Baa1 from Baa2 and upgraded the ratings of its First Mortgage Bonds and Senior Secured Bonds to A3 from Baa1 and upgraded the rating of its preferred stock to Baa3 from Ba1.

In March 2006, Moody's also reviewed the credit ratings of PPL Energy Supply and concluded that its ratings remain unchanged.

S&P

In connection with PPL Electric's issuance of preference stock in April 2006, S&P affirmed all of PPL Electric's credit ratings.

In November 2006, S&P completed its annual review of its credit ratings for PPL and its domestic rated subsidiaries. At that time, S&P affirmed its credit ratings and stable outlook for PPL, PPL Energy Supply, PPL Capital Funding, PPL Electric and PPL Montana.

Fitch

In February 2006, Fitch's Europe, Middle East and Africa group implemented Issuer Default Ratings (IDRs) based on its new IDR methodology. This implementation led to Fitch's assignment of the following IDRs and Fitch's upgrading of its ratings on the following securities of WPD and its affiliates.

·
WPDH Limited IDR of BBB- and senior unsecured rating to BBB from BBB-;
·
WPD LLP IDR of BBB, senior unsecured rating to BBB+ from BBB and preferred stock rating to BBB from BBB-; and
·
WPD (South Wales) and WPD (South West) IDR of BBB+ and senior unsecured debt rating to A- from BBB+.

In August 2006, Fitch affirmed its credit ratings and stable outlook for PPL, PPL Energy Supply, PPL Capital Funding and PPL Electric.

In November 2006, Fitch affirmed its credit ratings and stable outlook for WPDH Limited, WPD LLP, WPD (South Wales) and WPD (South West).

Ratings Triggers

PPL Energy Supply's 2.625% Convertible Senior Notes due 2023 are convertible upon the occurrence of certain events, including if the long-term credit ratings assigned to the notes by Moody's and S&P are lower than BB and Ba2, or either Moody's or S&P no longer rates the notes. The terms of the notes require cash settlement of the principal amount upon conversion of the notes. See Note 4 to the Financial Statements for more information concerning the Convertible Senior Notes.

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 Ba1or 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 $885 million at December 31, 2006.

PPL and its subsidiaries do not have additional material liquidity exposures caused by a ratings downgrade below "investment grade" that would accelerate the due dates of borrowings. However, if PPL's and PPL Energy Supply's debt ratings had been below investment grade at December 31, 2006, PPL and PPL Energy Supply would have had to post an additional $128 million of collateral to counterparties.

Off-Balance Sheet Arrangements

PPL provides guarantees for certain consolidated affiliate financing arrangements that enable certain transactions. 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 the relevant funding sources.

PPL has entered into certain guarantee agreements that are within the scope of FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." See Note 15 to the Financial Statements for a discussion on guarantees.

Risk Management - Energy Marketing & Trading and Other

Market Risk

Background

Market risk is the potential loss PPL may incur as a result of price changes associated with a particular financial or commodity instrument. PPL is exposed to market risk from:

·
commodity price risk for energy and energy-related products associated with the sale of electricity from its generating assets and other electricity marketing activities, the purchase of fuel for the generating assets and energy trading activities, and the purchase of certain metals necessary for the scrubbers PPL is installing at some of its coal-fired generating stations;
·
interest rate risk associated with variable-rate debt and the fair value of fixed-rate debt used to finance operations, as well as the fair value of debt securities invested in by PPL's nuclear decommissioning trust funds;
·
foreign currency exchange rate risk associated with investments in affiliates in Latin America and Europe, as well as purchases of equipment in currencies other than U.S. dollars; and
·
equity securities price risk associated with the fair value of equity securities invested in by PPL's nuclear decommissioning trust funds.

PPL has a risk management policy approved by its Board of Directors to manage market risk and counterparty credit risk. (Credit risk is discussed below.) The RMC, comprised of senior management and chaired by the Vice President-Risk Management, 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, sensitivity analyses, daily portfolio reporting, including open positions, mark-to-market valuations and other risk measurement metrics.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions, due to reliance on 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 reasonably possible losses.

Contract Valuation

PPL utilizes forward contracts, futures contracts, options, swaps and structured deals such as tolling agreements as part of its risk management strategy to minimize unanticipated fluctuations in earnings caused by commodity price, interest rate and foreign currency volatility. When available, quoted market prices are used to determine the fair value of a commodity or financial instrument. This may include exchange prices, quotes obtained from brokers, or an independent valuation by an external source, such as a bank. However, market prices for energy or energy-related contracts may not be readily determinable because of market illiquidity. If no active trading market exists, contract valuations may include the use of internally developed models, which are then reviewed by an independent, internal group. Although PPL believes that its valuation methods are reasonable, changes in the underlying assumptions could result in significantly different values and realization in future periods.

To record energy derivatives at their fair value, PPL discounts the forward values, as appropriate, using the U.S. Utility BBB+ Curve. Additionally, PPL adjusts derivative carrying values to recognize differences in counterparty credit quality and potential market illiquidity for net open positions, as follows:

·
The credit adjustment takes into account the probability of default, as calculated by an independent service, for each counterparty that has a net out-of-the money position with PPL.
   
·
The liquidity adjustment takes into account the fact that PPL might have to accept the "ask" price if it wants to close an open sales position or might have to accept the "bid" price if it wants to close an open purchase position.
   
·
The modeling adjustment takes into account market value for certain contracts when there is no external market to value the contract or when PPL is unable to find independent confirmation of the true market value of the contract.

Accounting and Reporting

To account for and report on contracts entered into to manage market risk, PPL follows the provisions of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted (together, "SFAS 133"); EITF 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities;" and EITF 03-11, "Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not 'Held for Trading Purposes' as Defined in Issue No. 02-3." In accordance with SFAS 133, all derivative instruments are recorded at fair value on the balance sheet as an asset or liability (unless they meet SFAS 133's criteria for exclusion), and changes in the derivatives' fair value are recognized currently in earnings unless specific hedge accounting criteria are met.

In accordance with EITF 02-3, PPL reflects its 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.

In accordance with EITF 03-11, 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.

These contracts are recorded as "Price risk management assets" and "Price risk management liabilities" on the Balance Sheets. Short-term derivative contracts are included in "Current Assets" and "Current Liabilities." Long-term derivative contracts are included in "Regulatory and Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities."

Accounting Designation

Energy contracts that do not qualify as derivatives receive accrual accounting treatment. For commodity contracts that meet the definition of a derivative, the circumstances and intent existing at the time that energy transactions are entered into determine their accounting designation. In addition to commodity transactions, PPL enters into financial interest rate and foreign currency swap contracts to hedge interest expense and foreign currency risk associated with both existing and anticipated debt issuances. PPL also enters into foreign currency swap contracts to hedge the fair value of firm commitments denominated in foreign currency and net investments in foreign operations. As with commodity transactions, the circumstances and intent existing at the time of the transaction determine a contract's accounting designation. These designations are verified by an independent internal group on a daily basis. See Note 18 to the Financial Statements for a summary of the guidelines used for the designation of derivative energy contracts.

Commodity Price Risk (Non-trading)

Commodity price risk is one of PPL's most significant risks due to the level of investment that PPL maintains in its generation assets. 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 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 segregates its non-trading activities as either hedge or economic. Transactions that are accounted for as hedge activity qualify for hedge accounting treatment under SFAS 133. The majority of PPL's energy transactions qualify for accrual or hedge accounting. The non-trading economic category includes transactions that address a specific risk, but are not eligible for hedge accounting or hedge accounting is not elected. Included in the non-trading economic category are certain load-following energy obligations and related supply contracts, FTRs, crude oil swaps to hedge rail transportation charges and hedges of synthetic fuel tax credits. Although they do not receive hedge accounting treatment, these contracts are considered non-trading.

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 reduces the maximum potential output that a plant may produce by three factors - planned maintenance, unplanned outages and economic conditions. The potential output of a plant is first reduced by the amount of unavailable generation due to planned maintenance on a particular unit. Another reduction, representing the unplanned outage rate, is 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 because 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 that qualify for accrual accounting. 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 and seasonality. PPL analyzes historical on-peak and off-peak usage patterns, expected load changes, regional economic drivers, and weather patterns, among other factors, to determine a monthly level of a block of electricity that best fits the usage patterns in order to minimize earnings volatility. To satisfy its full requirements obligations, PPL may enter into contracts to purchase unbundled products of electricity, capacity, renewable energy credits (RECs) and other ancillary products. Alternatively, PPL may reserve a block amount of generation for full requirements contracts that is expected to be the best match with their anticipated usage patterns and energy peaks.

Besides energy commodities, PPL implemented a program in 2006 to hedge its exposures to changes in market prices of certain metals necessary for the scrubbers PPL is installing at the Brunner Island and Montour generating plants. These contracts qualify for hedge accounting treatment.

PPL's non-trading commodity derivative contracts mature at various times through 2012. The fair value of the non-trading economic contracts that do not qualify for accrual or hedge accounting treatment as of December 31, 2006, including net premiums on options, was $19 million. The following chart sets forth PPL's net fair market value of all non-trading commodity derivative contracts as of December 31.

   
Gains (Losses)
   
2006
  
2005
             
Fair value of contracts outstanding at the beginning of the period
  
$
(284
)
  
$
(11
)
Contracts realized or otherwise settled during the period
    
38
      
(21
)
Fair value of new contracts at inception
    
(44
)
    
27
  
Other changes in fair values
    
179
      
(279
)
Fair value of contracts outstanding at the end of the period
  
$
(111
)
  
$
(284
)

The following chart segregates estimated fair values of PPL's non-trading commodity derivative contracts at December 31, 2006, based on whether the fair values are determined by quoted market prices or other more subjective means.

   
Fair Value of Contracts at Period-End
Gains (Losses)
   
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 actively quoted
  
$
(7
)
  
$
6
    
$
4
            
$
3
  
Prices provided by other external sources
    
(33
)
    
(177
)
    
9
    
$
1
      
(200
)
Prices based on models and other valuation methods
   
50
      
36
                      
86
  
Fair value of contracts outstanding at the end of the period
 
$
10
    
$
(135
)
  
$
13
    
$
1
    
$
(111
)

The "Prices actively quoted" category includes the fair value of exchange-traded natural gas futures contracts quoted on the NYMEX, which has quoted prices through 2012.

The "Prices provided by other external sources" category includes PPL's forward positions and options in natural gas and electricity and natural gas basis swaps at points for which over-the-counter (OTC) broker quotes are available.

The "Prices based on models and other valuation methods" category includes the value of transactions for which an internally developed price curve was constructed as a result of the long-dated nature of the transaction or the illiquidity of the market point, or the value of options not quoted by an exchange or OTC broker. This category includes the fair value of transactions completed in auction markets, where contract prices represent the market value for load-following bundled energy prices delivered at illiquid delivery points. The transaction prices associated with the contracts did not equal the wholesale bilateral market prices at inception (Day 1). However, EITF 02-3 does not generally permit Day 1 gains and losses to be recognized unless the fair value is derived principally from observable market inputs. Therefore, PPL recorded a reserve for the modeled Day 1 gain, which is netted against the above fair values.

Because of PPL's efforts to hedge the value of the energy from its generation assets, PPL sells electricity, capacity and related services and buys fuel on a forward basis, resulting in open contractual positions. If PPL is 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 damages. These damages would be based on the difference between the market price and the contract price of the commodity. Depending on price volatility in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, non-performance by counterparties (or their 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 non-performance in the future.

As of December 31, 2006, PPL estimated that a 10% adverse movement in market prices across all geographic areas and time periods would have decreased the value of the commodity contracts in its non-trading portfolio by approximately $303 million, compared with a decrease of $275 million at December 31, 2005. For purposes of this calculation, an increase in the market price for electricity is considered an adverse movement because PPL's electricity portfolio is generally in a net sales position, and the decrease in the market price for fuel is considered an adverse movement because PPL's commodity fuels portfolio is generally in a net purchase position. PPL enters into those commodity contracts to reduce the market risk inherent in the generation of electricity.

In accordance with its marketing strategy, PPL does not completely hedge its generation output or fuel requirements. PPL estimates that for its entire portfolio, including all generation, emissions and physical and financial energy positions, a 10% adverse change in power prices across all geographic zones and time periods would decrease expected 2007 gross margins by $13 million. Similarly, a 10% adverse movement in all fossil fuel prices would decrease expected 2007 gross margins by $57 million.

The data in the above tables includes the activity for PPL's synthetic fuel tax credit hedges. Additional information regarding these hedges can be found in the "Synthetic Fuel Tax Credit Risk" section below.

Commodity Price Risk (Trading)

PPL also executes 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. The margins from these trading activities are shown in the Statements of Income as "Net energy trading margins."

PPL's trading contracts mature at various times through 2010. The following chart sets forth PPL's net fair market value of trading contracts as of December 31.

   
Gains (Losses)
   
2006
  
2005
             
Fair value of contracts outstanding at the beginning of the period
  
$
5
    
$
10
  
Contracts realized or otherwise settled during the period
    
(10
)
    
(30
)
Fair value of new contracts at inception
    
(2
)
    
3
  
Other changes in fair values
    
48
      
22
  
Fair value of contracts outstanding at the end of the period
  
$
41
    
$
5
  

PPL will reverse a gain of approximately $11 million of the $41 million unrealized trading gains over the first three months of 2007 as the transactions are realized.

The following chart segregates estimated fair values of PPL's trading portfolio at December 31, 2006, based on whether the fair values are determined by quoted market prices or other more subjective means.

   
Fair Value of Contracts at Period-End
Gains (Losses)
   
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 actively quoted
  
$
(9
)
  
$
1
                    
$
(8
)
Prices provided by other external sources
    
20
      
2
                      
22
  
Prices based on models and other valuation methods
   
11
      
15
    
$
1
              
27
  
Fair value of contracts outstanding at the end of the period
 
$
22
    
$
18
    
$
1
            
$
41
  

See "Commodity Price Risk (Non-trading)" for information on the various sources of fair value.

As of December 31, 2006, PPL estimated that a 10% adverse movement in market prices across all geographic areas and time periods would have decreased the value of the commodity contracts in its trading portfolio by $37 million, compared with a decrease of $23 million at December 31, 2005.

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 products to adjust the mix of fixed and floating interest rates in its debt portfolio, adjust the duration of its debt portfolio and lock in treasury rates (and interest rate spreads over treasuries) in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of PPL's debt portfolio due to changes in the absolute level of interest rates.

At December 31, 2006, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was $10 million, compared with $7 million at December 31, 2005.

PPL is also exposed to changes in the fair value of its domestic and international debt portfolios. At December 31, 2006, PPL estimated that its potential exposure to a change in the fair value of its debt portfolio, through a 10% adverse movement in interest rates, was $336 million, compared with $200 million at December 31, 2005.

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. At December 31, 2006, the market value of these instruments, representing the amount PPL would pay upon their termination, was $6 million. At December 31, 2006, PPL estimated that its potential exposure to a change in the fair value of these instruments, through a 10% adverse movement in the hedged exposure, was $19 million, compared with $7 million at December 31, 2005.

PPL also utilizes various risk management instruments to adjust the mix of fixed and floating interest rates in its debt portfolio. While PPL is exposed to changes in the fair value of these instruments, any change in market value is recorded with an equal and offsetting change in the value of the debt being hedged. At December 31, 2006, PPL estimated that its potential additional exposure to a change in the fair value of these instruments, through a 10% adverse movement in interest rates, was $18 million, compared with $12 million at December 31, 2005.

WPDH Limited holds a net position in cross-currency swaps totaling $784 million to hedge the interest payments and principal of its U.S. dollar-denominated bonds with maturity dates ranging from February 2007 to December 2028. The estimated value of this position at December 31, 2006, being the amount PPL would pay to terminate it, including accrued interest, was $205 million. At December 31, 2006, PPL estimated that its potential additional exposure to a change in the market value of these instruments was $115 million for a 10% adverse movement in foreign currency exchange rates and interest rates. At December 31, 2005, the potential additional exposure for the cross-currency swaps outstanding at that time was $143 million for a 10% adverse movement in foreign currency exchange rates and interest rates.

Foreign Currency Risk

PPL is exposed to foreign currency risk, primarily through investments in affiliates in the U.K. and Latin America. In addition, PPL may make purchases of equipment in currencies other than U.S. dollars.

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

To protect 2007 expected income in Chilean pesos, PPL entered into average rate forwards for 12.4 billion Chilean pesos. The settlement date of these forwards is November 2007. At December 31, 2006, the market value of these positions, representing the amount PPL would receive upon their termination, was not significant. PPL estimated that its potential additional exposure to a change in the market value of these instruments, through a 10% adverse movement in foreign currency exchange rates, was $2 million at December 31, 2006.

PPL has entered into forward contracts to purchase 10.2 million Euros in order to protect against fluctuations in the Euro exchange rate, in connection with the purchase of equipment. The settlement dates of these contracts are January 2007 and January 2008. At December 31, 2006, the market value of these positions, representing the amount PPL would receive upon their termination, was not significant. PPL estimated that its potential additional exposure to a change in the market value of these instruments, through a 10% adverse movement in foreign currency exchange rates, was $1 million at December 31, 2006.

On the Statements of Income, gains and losses associated with hedges of interest payments denominated in foreign currencies are reflected in "Interest Expense." Gains and losses associated with the purchase of equipment are reflected in "Depreciation." Gains and losses associated with net investment hedges remain in "Accumulated other comprehensive loss" on the Balance Sheets until the investment is sold or substantially liquidated.

Nuclear Decommissioning Trust 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. As of December 31, 2006, 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 to be used to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are exposed to changes in interest rates. PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At December 31, 2006, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $38 million reduction in the fair value of the trust assets, compared with a $33 million reduction at December 31, 2005. See Note 21 to the Financial Statements for more information regarding the nuclear decommissioning trust funds.

Synthetic Fuel Tax Credit Risk

At this time, PPL expects that the current level and the volatility of crude oil prices may reduce the amount of synthetic fuel tax credits that PPL receives through its synthetic fuel production. The tax credits are reduced if the annual average wellhead price of domestic crude oil falls within a phase-out range. The tax credits are eliminated if this reference price exceeds the phase-out range. See "Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note 15 to the Financial Statements for more information regarding the phase-out of the tax credits and shutdown of synfuel projects.

PPL implemented a risk management strategy to hedge a portion of the variability of cash flows associated with its 2006 and 2007 synthetic fuel tax credits by hedging the risk that the 2006 and 2007 annual average wellhead price for domestic crude oil will be within the phase-out range.

At the end of 2006, PPL settled net purchased options which mitigated some of the reductions in 2006 synthetic fuel tax credits since the annual average wellhead price for 2006 is expected to fall within the applicable phase-out range. Additionally, PPL has net purchased options for 2007 that are expected to mitigate PPL's tax credit phase-out risk due to an increase of the average wellhead price in 2007. These positions did not qualify for hedge accounting treatment. The fair value of these positions at December 31, 2006 and 2005, was a gain of $8 million and $10 million. These amounts are reflected in "Energy-related businesses" revenues on the Statements of Income.

As of December 31, 2006, PPL estimated that a 10% adverse movement in market prices of crude oil would have an immaterial impact on the value of the synthetic fuel hedges. For purposes of this calculation, a decrease in the market price for crude oil is considered an adverse movement.

Credit Risk 

Credit risk relates to the risk of loss that PPL would incur as a result of non-performance by counterparties of their contractual obligations. PPL maintains credit policies and procedures with respect to counterparties (including requirements that counterparties maintain certain credit ratings criteria) and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk. However, PPL has concentrations of suppliers and customers among electric utilities, natural gas distribution companies and other energy marketing and trading companies. These concentrations of counterparties may impact PPL's overall exposure to credit risk, either positively or negatively, in that counterparties may be similarly affected by changes in economic, regulatory or other conditions. As discussed above in "Contract Valuation," PPL records certain non-performance reserves to reflect the probability that a counterparty with contracts that are out of the money (from the counterparty's standpoint) will default in its performance. In this case, PPL would have to sell into a lower-priced market or purchase from a higher-priced market. These reserves are reflected in the fair value of assets recorded in "Price risk management assets" on the Balance Sheets. PPL also records reserves to reflect the probability that a counterparty will not make payments for deliveries PPL has made but not yet billed. These reserves 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 15 to the Financial Statements.

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 16 to the Financial Statements.

Acquisitions, Development and Divestitures

From time to time, PPL and its subsidiaries are involved in negotiations with third parties regarding acquisitions and dispositions of businesses and assets, joint ventures and development projects, which may or may not result in definitive agreements. Any such transactions may impact future financial results. See Note 9 to the Financial Statements for information regarding recent acquisition, development and divestiture activities.

At December 31, 2006, PPL Global had investments in foreign facilities, including consolidated investments in WPD, Emel, EC and others. See Note 3 to the Financial Statements for information on unconsolidated investments accounted for under the equity method.

In connection with the ongoing review of its non-core international minority ownership investments, PPL Global sold certain minority interests in 2006, 2005 and 2004. See Note 9 to the Financial Statements for additional information.

PPL is currently planning incremental capacity increases of 349 MW at several existing domestic generating facilities. Offsetting this increase is an expected 30 MW reduction in generation capability at each of the Brunner Island and Montour plants, due to the estimated increases in station service usage during the scrubber operation. See Note 15 to the Financial Statements for additional information, as well as information regarding the planned shut down of two 150 MW generating units at PPL Martins Creek in September 2007.

PPL is continuously reexamining development projects based on market conditions and other factors to determine whether to proceed with these projects, sell them, cancel them, expand them, execute tolling agreements or pursue other opportunities.

Environmental Matters

See Note 15 to the Financial Statements for a discussion of environmental matters.

Competition

See "Item 1. Business - Competition" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL.

New Accounting Standards

See Note 23 to the Financial Statements for a discussion of new accounting standards recently adopted or 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.

In September 2006, the FASB issued SFAS 157, "Fair Value Measurements." Among other things, SFAS 157 provides a definition of fair value as well as a framework for measuring fair value. PPL must adopt SFAS 157 no later than January 1, 2008. The adoption of SFAS 157 is expected to impact the fair value component of PPL's critical accounting policies related to "Price Risk Management," "Pension and Other Postretirement Benefits," "Asset Impairment," "Leasing" and "Asset Retirement Obligations." See Note 23 to the Financial Statements for additional information regarding SFAS 157.

1)  Price Risk Management

See "Risk Management - Energy Marketing & Trading and Other" in Financial Condition.

2)  Pension and Other Postretirement Benefits

PPL and certain of its subsidiaries sponsor various pension and other postretirement benefit plans applicable to the majority of the employees of PPL and its subsidiaries. PPL follows the guidance of SFAS 87, "Employers' Accounting for Pensions," and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," when accounting for these benefits. In addition, PPL adopted the recognition and measurement date provisions of SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," effective December 31, 2006. See Note 13 to the Financial Statements for additional information about the plans and for additional information regarding the accounting for pension and other postretirement benefits. Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and the performance of plan assets. Delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle of these standards. This delayed recognition of actual results 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 are 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 future return on plan assets considering prior performance, but primarily based upon the plans' mix of assets and expectations for the long-term returns on those 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 domestic pension and other postretirement 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 over 500 Moody's Aa-graded non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $370 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 in conjunction with other economic data and consideration of movements in the Moody's Aa bond index to determine the discount rate assumption. At December 31, 2006, PPL increased the discount rate for its domestic pension plans from 5.70% to 5.94% as a result of this assessment and increased the discount rate for its other postretirement benefit plans from 5.70% to 5.88%.

A similar process is used to select the discount rate for the WPD pension plans, which uses an iBoxx British pounds sterling denominated corporate bond index as its base. At December 31, 2006, PPL increased the discount rate for its international pension plans from 4.75% to 5.17% as a result of this assessment.

In selecting an expected return on plan assets, PPL considers tax implications, past performance and economic forecasts for the types of investments held by the plans. At December 31, 2006, PPL's expected return on plan assets remained at 8.50% for its domestic pension plans and decreased to 7.75% from 8.00% for its other postretirement benefit plans. For its international plans, PPL's expected return on plan assets remained at 8.09% at December 31, 2006.

In selecting a rate of compensation increase, PPL considers past experience in light of movements in inflation rates. At December 31, 2006, PPL's rate of compensation increase remained at 4.75% for its domestic plans. For its international plans, PPL's rate of compensation increase was changed to 4.0% from 3.75% at December 31, 2006.

In selecting health care cost trend rates, PPL considers past performance and forecasts of health care costs. At December 31, 2006, PPL's health care cost trend rates were 9.0% for 2007, gradually declining to 5.5% for 2012.

A variance in the assumptions listed above could have a significant impact on accrued pension and other postretirement benefit liabilities, reported annual net periodic pension and other postretirement benefit cost and other comprehensive income (OCI). The following chart reflects the sensitivities in the 2006 financial statements associated with a change in certain assumptions based on PPL's primary pension and other postretirement benefit plans. While the chart below reflects either an increase or decrease in each assumption, the inverse of this change would impact the accrued pension and other postretirement benefit liabilities, reported annual net periodic pension and other postretirement benefit cost and OCI by a similar amount in the opposite direction. Each sensitivity below reflects an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

   
 Increase (Decrease)
Actuarial Assumption
  
Change in Assumption
  
Impact on Liabilities
  
Impact on Cost
  
Impact on OCI
                           
Discount Rate
      
(0.25)%
    
$
201
    
$
15
    
$
186
  
Expected Return on Plan Assets
      
(0.25)%
      
N/A
      
11
      
(12
)
Rate of Compensation Increase
      
0.25%
      
27
      
5
      
22
  
Health Care Cost Trend Rate (a)
      
1.0%
      
20
      
2
      
18
  

(a)
  
Only impacts other postretirement benefits.

The total net pension and other postretirement benefit obligations recognized by PPL, including the impact of adoption of SFAS 158, were $604 million as of December 31, 2006.

In 2006, PPL recognized net periodic pension and other postretirement costs charged to operating expenses of $85 million. This amount represents a $34 million increase from 2005. This increase in expense was partially attributable to PPL's international plans and increased recognition of prior losses. Increased expense for PPL's domestic pension plans was attributable to updated demographic assumptions, primarily due to updating the mortality table used to measure the obligations and costs.

3)  
Asset Impairment

PPL performs impairment analyses for long-lived assets, including intangibles, that are subject to depreciation or amortization in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." PPL tests for impairment whenever events or changes in circumstances indicate that a long-lived asset's carrying value may not be recoverable. Examples of 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, an impairment exists when the carrying value exceeds the sum of the estimated 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.

In determining asset impairments, management must make significant judgments to estimate future cash flows, the useful lives of long-lived assets, the fair value of the assets and management's intent to use the assets. Changes in assumptions and estimates included within the impairment reviews could result in significantly different results than those identified and recorded in the financial statements. For determining fair value, the FASB has indicated that quoted market prices in active markets are the best evidence of fair value. However, when market prices are unavailable, other valuation techniques may be used. PPL has generally used discounted cash flow to estimate fair value. Discounted cash flow is calculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.

PPL has determined that, when alternative courses of action to recover the carrying value of a long-lived asset are being considered, it uses estimated cash flows from the most likely approach to assess impairment whenever one scenario is clearly the most likely outcome. If no scenario is clearly most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternative scenarios. 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 the future sale of the assets. That assessment made as of the balance sheet date is not revised based on events that occur after the balance sheet date.

During 2006, PPL and its subsidiaries evaluated certain gas-fired generation assets for impairment, as events and circumstances indicated that the carrying value of these assets may not be recoverable. PPL did not record an impairment of these gas-fired generation assets in 2006. For these impairment analyses, the most significant assumption was the estimate of future cash flows. PPL estimates future cash flows using information from its corporate business plan adjusted for any recent sale or purchase commitments. Key factors that impact cash flows include projected prices for electricity and gas as well as firm sale and purchase commitments. A 10% decrease in estimated future cash flows for the gas-fired generation assets would not have resulted in an impairment charge.

In 2006, PPL recorded impairments of certain long-lived assets. See Note 15 to the Financial Statements for a discussion of the impairment of PPL Energy Supply's synfuel projects and Note 9 to the Financial Statements for a discussion of an impairment recorded by PPL Global.

PPL performs impairment analyses for goodwill in accordance with SFAS 142, "Goodwill and Other Intangible Assets." PPL performs an annual impairment test for goodwill, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

SFAS 142 requires goodwill to be tested for impairment at the reporting unit level. PPL has determined its reporting units to be one level below its operating segments.

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 value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired. If the carrying value 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 goodwill is then compared with the carrying value of that goodwill. If the carrying value exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying value of the reporting unit's goodwill.

In 2006, PPL was required to complete the second step of the assessment for its U.K. reporting unit. This assessment did not result in an impairment charge, as the implied fair value of the goodwill exceeded the reporting unit's carrying value of the goodwill. PPL's most significant assumptions surrounding the goodwill impairment tests relate to the estimates of reporting unit fair values. PPL estimated fair values primarily based upon discounted cash flows. For the U.K. reporting unit, an increase of the discount rate by 25 basis points would not have resulted in an impairment of goodwill; however, a 10% reduction in the forecasted cash flows would have resulted in a $68 million impairment of goodwill.

In 2006, no other second-step assessments were required for goodwill in other reporting units. A decrease in the forecasted cash flows of 10% or an increase of the discount rates by 25 basis points also would not have resulted in an impairment of goodwill in other reporting units.

PPL also performs a review of the residual value of leased assets in accordance with SFAS 13, "Accounting for Leases." PPL tests the residual value of these assets annually or more frequently whenever events or changes in circumstances indicate that a leased asset's residual value may have declined. The residual value is defined by SFAS 13 as the estimated fair value of the leased property at the end of the lease term. If the review produces a lower estimate of residual value than was originally recorded, PPL is required to determine whether the decline is other than temporary. If it is other than temporary, the residual value will be revised using the new estimate. This reduction in the residual value will be recognized as a loss in the period in which the estimate was changed. If the review provides a higher estimate of residual value than was originally recorded, no adjustment will be made.

In testing the residual value of leased assets, management must make significant assumptions to estimate: future cash flows; the useful lives of the leased assets; the fair value of the assets; and management's intent to use the assets. Changes in assumptions used in the tests could result in significantly different outcomes than those identified and recorded in the financial statements. PPL used discounted cash flow to determine the estimated fair value of the leased assets at the end of the lease term.

In 2006, PPL and its subsidiaries evaluated the residual value of certain leased assets. This analysis did not indicate any necessary changes to the residual value. PPL's estimate was based on using projections of electric and fuel prices and any firm sale and purchase agreements. An increase of the discount rate by 25 basis points or a 10% reduction in the forecasted cash flows would have resulted in a reduction of the residual value of these leased assets of $1 million and $6 million, if it was determined that the reduction was other than temporary.

4)  
Leasing

PPL applies the provisions of SFAS 13, "Accounting for Leases," to all leasing transactions. In addition, PPL applies the provisions of numerous other accounting pronouncements issued by the FASB and the EITF that provide specific guidance and additional requirements related to accounting for various leasing arrangements. In general, there are two types of leases from a lessee's perspective: operating leases (leases accounted for off-balance sheet); and capital leases (leases capitalized on the balance sheet).

In accounting for leases, management makes various assumptions, including the discount rate, the fair market value of the leased assets and the estimated useful life, in determining whether a lease should be classified as operating or capital. Changes in these assumptions could result in the difference between whether a lease is determined to be an operating lease or a capital lease, thus significantly impacting the amounts to be recognized in the financial statements.

In addition to uncertainty inherent in management's assumptions, leasing transactions and the related accounting rules become increasingly complex when they involve: real estate and/or related integral equipment; sale/leaseback accounting (leasing transactions where the lessee previously owned the leased assets); synthetic leases (leases that qualify for operating lease treatment for book accounting purposes and financing treatment for tax accounting purposes); and lessee involvement in the construction of leased assets.

At December 31, 2006, PPL continued to participate in a significant sale/leaseback transaction. In July 2000, PPL Montana sold its interest in the Colstrip generating plant to owner lessors who are leasing the assets back to PPL Montana under four 36-year leases. This transaction is accounted for as an operating lease in accordance with current accounting pronouncements related to sale/leaseback arrangements. If for any reason this transaction did not meet the requirements for off-balance sheet operating lease treatment as a sale/leaseback, PPL would have recorded approximately $250 million of additional assets and approximately $305 million of additional liabilities on its balance sheet at December 31, 2006, and would have recorded additional expenses currently estimated at $7 million, after-tax, in 2006.

See Note 11 to the Financial Statements for additional information related to operating leases.

5)  
Loss Accruals

PPL periodically accrues losses for the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. PPL's accounting for such events is prescribed by SFAS 5, "Accounting for Contingencies," and other related accounting guidance. SFAS 5 defines a contingency as "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur."

For loss contingencies, the loss must be accrued if (1) information is available that indicates it is "probable" that the loss has been incurred, given the likelihood of the uncertain future events and (2) the amount of the loss can be reasonably estimated. The FASB defines "probable" as cases in which "the future event or events are likely to occur." SFAS 5 does not permit the accrual of contingencies that might result in gains. PPL continuously assesses potential loss contingencies for environmental remediation, litigation claims, income taxes, regulatory penalties and other events.

PPL also has accrued estimated losses on long-term purchase commitments when significant events have occurred. For example, estimated losses were accrued when long-term purchase commitments were assumed under asset acquisition agreements and when PPL Electric's generation business was deregulated. Under regulatory accounting, PPL Electric recorded the above-market cost of energy purchases from NUGs as part of its purchased power costs on an as-incurred basis, since these costs were recovered in regulated rates. When the generation business was deregulated, the estimated loss associated with these long-term purchase commitments to make above-market NUG purchases was recorded because PPL Electric was committed to purchase electricity at above market prices but it could no longer recover these costs in regulated rates. PPL considers these losses to be similar to an asset impairment or inventory write-downs.

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 of accounting for loss accruals require significant judgment by PPL's management.

Initial Identification and Recording of the Loss Accrual

PPL uses its internal expertise and outside experts (such as lawyers, tax specialists and engineers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

Two significant loss accruals were initially recorded in 2005. One was the loss accrual related to the PJM billing dispute. Another involved the accrual of remediation expenses in connection with the ash basin leak at the Martins Creek generating station. Significant judgment was required by PPL's management to perform the initial assessment of these contingencies.

·
In 2004, Exelon Corporation, on behalf of its subsidiary, PECO Energy, Inc. (PECO), filed a complaint against PJM and PPL Electric with the FERC, alleging that PJM had overcharged PECO from April 1998 through May 2003 as a result of an error by PJM. The complaint requested the FERC, among other things, to direct PPL Electric to refund to PJM $39 million, plus interest of $8 million, and for PJM to refund these same amounts to PECO. In April 2005, the FERC issued an Order Establishing Hearing and Settlement Judge Proceedings (the Order). In the Order, the FERC determined that PECO was entitled to reimbursement for the transmission congestion charges that PECO asserted PJM erroneously billed. The FERC ordered settlement discussions, before a judge, to determine the amount of the overcharge to PECO and the parties responsible for reimbursement to PECO.
   
 
Based on an evaluation of the FERC Order, PPL's management concluded that it was probable that a loss had been incurred in connection with the PJM billing dispute. PPL Electric recorded a loss accrual of $47 million, the amount of PECO's claim, in the first quarter of 2005.
   
·
In August 2005, there was a leak of water containing fly ash from a disposal basin at the Martins Creek plant. This resulted in ash being deposited onto adjacent roadways and fields, and into a nearby creek and the Delaware River. PPL immediately began to work with the Pennsylvania DEP and appropriate agencies and consultants to assess the extent of environmental damage caused by the discharge and to remediate the damage. At that time, PPL had, and still has, no reason to believe that the Martins Creek fly ash leak has caused any danger to human health or any adverse biological impact on the river aquatic life. However, at that time, PPL expected that it would be subject to an enforcement action by the Pennsylvania DEP and that claims may be brought against it by several state agencies and private litigants.
   
 
PPL's management assessed the contingency in the third quarter of 2005. The ultimate cost of the remediation effort was difficult to estimate due to a number of uncertainties, such as the scope of the project, the impact of weather conditions on the ash recovery effort, and the ultimate outcome of enforcement actions and private litigation. PPL's management concluded, at the time, that $33 million was the best estimate of the cost of the remediation effort. PPL recorded this loss accrual in the third quarter of 2005.

See Note 15 to the Financial Statements for additional information on both of these contingencies and see "Ongoing Assessment of Recorded Loss Accruals" for a discussion of the year-end assessments of these contingencies.

PPL has identified certain other events that could give rise to a loss, but that do not meet the conditions for accrual under SFAS 5. SFAS 5 requires disclosure, but not a recording, of potential losses when it is "reasonably possible" that a loss has been incurred. The FASB defines "reasonably possible" as cases in which "the chance of the future event or events occurring is more than remote but less than likely." See Note 15 to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual under SFAS 5.

Reducing Recorded Loss Accruals

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:

·
Certain loss accruals are systematically reduced based on the expiration of contract terms. An example of this is the loss accrual for above-market NUG purchase commitments, which is described below. This loss accrual is being reduced over the lives of the NUG purchase contracts.
   
·
Allowances for excess or obsolete inventory are reduced as the inventory items are pulled from the warehouse shelves and sold as scrap or otherwise disposed.
   
·
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 when 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.

The largest loss accrual on PPL's balance sheet, and the loss accrual that changed most significantly in 2006, was for an impairment of above-market NUG purchase commitments. This loss accrual reflects the estimated difference between the above-market contract terms, under the purchase commitments, and the expected fair value of the electricity to be purchased at the date these contracts were impaired. This loss accrual was originally recorded at $879 million in 1998, when PPL Electric's generation business was deregulated.

When the loss accrual related to NUG purchases was recorded in 1998, PPL Electric established the triggering events for when the loss accrual would be reduced. A schedule was established to reduce the liability based on projected purchases over the lives of the NUG contracts. This loss accrual was transferred to PPL EnergyPlus in the July 1, 2000, corporate realignment. PPL EnergyPlus continues to reduce the above-market NUG liability based on the aforementioned schedule. As PPL EnergyPlus reduces the liability for the above-market NUG purchases, it offsets the actual cost of NUG purchases, thereby bringing the net power purchase expense more in line with expected market prices. The above-market loss accrual was $136 million at December 31, 2006. This loss accrual will be significantly reduced by 2009, when all but one of the NUG contracts expires. The then-remaining NUG contract will expire in 2014.

Ongoing Assessment of Recorded Loss Accruals

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

As part of the year-end preparation of its financial statements, PPL's management re-assessed the loss accruals recorded in 2005, for the two contingencies described above under "Initial Identification and Recording of the Loss Accrual." See Note 15 to the Financial Statements for additional information.

·
In March 2006, the FERC rejected the proposed settlement agreement that was filed with the FERC in September 2005. Subsequently, in March 2006, PPL Electric and Exelon filed with the FERC a new proposed settlement agreement. In November 2006, the FERC entered an order accepting the March 2006 proposed settlement agreement, upon the condition that PPL Electric agree to certain modifications. In December 2006, PPL Electric and Exelon filed with the FERC a modified offer of settlement (Compliance Filing). Under the Compliance Filing, which must be approved by the FERC, PPL Electric would make a single payment through its monthly PJM bill of $38 million, plus interest through the date of payment, and PJM would include a single credit for this amount in PECO's monthly PJM bill. Through December 31, 2006, the estimated interest on this payment would be $4 million, for a total payment of $42 million. As a result, at December 31, 2006, the loss accrual was reduced to $42 million. PPL's management will continue to assess the loss accrual for this contingency in future periods.
   
·
In 2005, PPL also re-assessed the contingency for the Martins Creek ash basin remediation. Based on the ongoing remediation efforts and communications with the Pennsylvania DEP and other appropriate agencies, at December 31, 2005, PPL's management concluded that $48 million was the best estimate of the cost of the remediation effort.
 
In 2006, PPL reduced the estimate of costs to $37 million, primarily due to an insurance claim settlement. This amount represents management's best estimate of the probable loss associated with the Martins Creek ash basin leak. At December 31, 2006, the remaining contingency for this remediation was $9 million. PPL cannot predict the final cost of the remediation, the outcome of the action initiated by the Pennsylvania DEP, the outcome of the natural resource damage assessment, the outcome of the lawsuit brought by the citizens and businesses and the exact nature of any other regulatory or other legal actions that may be initiated against PPL as a result of the disposal basin leak. PPL also cannot predict with certainty the extent of the fines or damages that may be sought in connection with any such actions or the ultimate financial impact on PPL. PPL's management will continue to assess the loss accrual for this contingency in future periods.

Income Tax Uncertainties

Significant management judgment is required in developing PPL's contingencies, or reserves, for income taxes and valuation allowances for deferred tax assets. The ongoing assessment of tax contingencies is intended to result in management's best estimate of the ultimate settled tax position for each tax year. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns by taxing authorities. However, the amount ultimately paid upon resolution of any issues raised by such authorities may differ from the amount accrued. In evaluating the exposure associated with various filing positions, PPL accounts for changes in probable exposures based on management's best estimate of the amount of benefit that should be recognized in the financial statements. An allowance is maintained for the tax contingencies, the balance of which management believes to be adequate. The ongoing assessment of valuation allowances is based on an assessment of whether deferred tax assets will ultimately be realized. Management considers a number of factors in assessing the ultimate realization of deferred tax assets, including forecasts of taxable income in future periods.

In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109." PPL adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 alters the methodology PPL currently uses to account for income tax uncertainties. Effective with the adoption of FIN 48, uncertain tax positions are no longer considered to be contingencies assessed in accordance with SFAS 5. See Note 23 to the Financial Statements for a more detailed discussion of FIN 48 and for information regarding the expected impact of adoption.

6)  
Asset Retirement Obligations

SFAS 143, "Accounting for Asset Retirement Obligations," requires legal obligations associated with the retirement of long-lived assets to be recognized as a liability in the financial statements. The initial obligation should be measured at the 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.

FIN 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143," clarifies the term conditional ARO as used in SFAS 143. FIN 47 specifies that 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 through consideration of estimated retirement costs in current period dollars, 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. Changes in 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, 2006, PPL had AROs totaling $336 million recorded on the Balance Sheet. Of this amount, $276 million or 82% relates to PPL's nuclear decommissioning ARO. PPL's 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 the nuclear decommissioning ARO liability at PPL as of December 31, 2006, 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. Each sensitivity below reflects an evaluation of the change based solely on a change in that assumption.

   
Change in
Assumption
  
Impact on
ARO Liability
         
Retirement Cost
  
10%/(10)%
  
$25/$(25)
Discount Rate
  
0.25%/(0.25)%
  
$(26)/$29
Inflation Rate
  
0.25%/(0.25)%
  
$32/$(29)

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit and audit-related services and other services permitted by the Sarbanes-Oxley Act of 2002 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, PA. Please refer to Exhibit 99(a) in Item 15 for a listing of its principal subsidiaries and to "Item 1. Business - Background," for descriptions of PPL Energy Supply's domestic and international businesses. Through its subsidiaries, PPL Energy Supply's reportable segments are Supply and International Delivery. 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. and Latin America. 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 regulated international delivery businesses 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 movements in energy and fuel prices and counterparty credit risk. PPL Energy Supply's strategy for its international electricity delivery businesses is to own and operate these businesses at the most efficient cost while maintaining high levels of customer service and reliability.

PPL Energy Supply faces several risks in its generation business. The principal risks are electricity and capacity wholesale price risk, fuel supply and price 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 currently expects to expand its generation capacity over the next several years through power uprates at certain of its existing power plants, 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, and other means to mitigate the 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. 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 and the market conditions at that time will affect its future profitability. Currently, PPL Energy Supply's commitments for energy sales are substantially satisfied through its own generation assets - i.e., PPL Energy Supply primarily markets and trades around its physical portfolio of generating assets through integrated generation, marketing and trading functions. However, PPL Energy Supply's future marketing efforts may rely less on PPL Energy Supply's generation assets and more on supply contracted from others. PPL Energy Supply has in place risk management programs that, among other things, are designed to monitor and manage its exposure to volatility of earnings and cash flows related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operational performance of its generating units.

PPL Energy Supply's international electricity delivery businesses are rate-regulated. Accordingly, these businesses are subject to regulatory risk in terms of the costs that they may recover and the investment returns that they may collect in customer rates. The principal challenge that PPL Energy Supply faces in its international electricity delivery businesses is to maintain high standards of customer service and reliability in a cost-effective manner. PPL Energy Supply faces additional financial risks in conducting international operations, such as fluctuations in currency exchange rates. PPL Energy Supply attempts to manage these financial risks through its risk management programs.

A key challenge for PPL Energy Supply's business as a whole is to maintain a strong credit profile. Investors, analysts and rating agencies that follow companies in the energy industry continue to be focused on the credit quality and liquidity position of these companies. PPL Energy Supply continually focuses on maintaining an appropriate capital structure and liquidity position, thereby appropriately managing its target credit profile.

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

The purpose of "Management's Discussion and Analysis of Financial Condition and Results of Operations" is to provide information concerning PPL Energy Supply's past and expected future 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 2006, 2005 and 2004, including a review of earnings, with details of results by reportable segment. It also provides a brief outlook for 2007.
   
·
"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 commitments 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 Financial Statements and the accompanying Notes.

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

Results of Operations

Earnings

Net income was:
   
2006
    
2005
    
2004
  
                   
   
$
698
    
$
542
    
$
651
  

The changes in net income from year to year were, in part, attributable to several significant items that management considers unusual. Details of these unusual 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 2006 are subject to various risks and uncertainties. See "Forward-Looking Information," "Item 1A. Risk Factors," the rest of this Item 7 and Note 15 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 by segment was:

   
2006
  
2005
  
2004
                         
Supply
  
$
430
    
$
327
    
$
454
  
International Delivery
    
268
      
215
      
197
  
Total
  
$
698
    
$
542
    
$
651
  

Supply Segment

The Supply segment primarily consists of the domestic energy marketing, domestic generation and domestic development operations of PPL Energy Supply.

The Supply segment results in 2006, 2005 and 2004 reflect the reclassification of the Griffith plant revenues and expenses from certain income statement line items to "Loss from Discontinued Operations." The Supply segment results in 2005 and 2004 also reflect the reclassification of the Sundance plant revenues and expenses from certain income statement line items to "Loss from Discontinued Operations." See Notes 9 and 10 to the Financial Statements for further discussion.

Supply segment net income was:

   
2006
  
2005
  
2004
                         
Energy revenues
  
$
3,366
    
$
2,814
    
$
2,819
  
Energy-related businesses
    
559
      
521
      
445
  
Total operating revenues
    
3,925
      
3,335
      
3,264
  
Fuel and energy purchases
    
1,718
      
1,315
      
1,262
  
Other operation and maintenance
    
755
      
774
      
669
  
Depreciation
    
148
      
135
      
138
  
Taxes, other than income
    
34
      
36
      
39
  
Energy-related businesses
    
605
      
589
      
498
  
Total operating expenses
    
3,260
      
2,849
      
2,606
  
Other Income - net
    
43
      
27
      
18
  
Interest Expense
    
87
      
81
      
64
  
Income Taxes
    
168
      
42
      
146
  
Minority Interest
    
3
      
2
      
2
  
Loss from Discontinued Operations
    
20
      
53
      
10
  
Cumulative Effect of Change in Accounting Principle
            
(8
)
        
Total
  
$
430
    
$
327
    
$
454
  

The after-tax changes in net income were due to the following factors, including discontinued operations.

   
2006 vs. 2005
  
2005 vs. 2004
             
Eastern U.S. non-trading margins
  
$
94
    
$
(45
)
Western U.S. non-trading margins
    
7
      
(5
)
Net energy trading margins
    
1
      
8
  
Depreciation
    
(7
)
    
4
  
Operation and maintenance expenses
    
(29
)
    
(26
)
Interest income on 2004 IRS tax settlement
            
(9
)
Realized earnings on nuclear decommissioning trust (Note 17)
    
4
      
7
  
Interest expense
    
(2
)
    
(5
)
Earnings from synfuel projects
    
(32
)
    
25
  
Income tax reserve and intercompany state tax allocation adjustments (Note 5)
            
15
  
Other
    
5
      
(5
)
Unusual items
    
62
      
(91
)
   
$
103
    
$
(127
)

·
See "Domestic Gross Energy Margins" for an explanation of non-trading margins by geographic region and for an explanation of net energy trading margins.
   
·
Higher operation and maintenance expenses in 2006 compared with 2005 were primarily due to increased outage and non-outage expenses at the Susquehanna nuclear facility and certain of PPL Energy Supply's coal plants and the timing of other planned outages. Higher operation and maintenance expenses in 2005 compared with 2004 were primarily due to higher levels of planned maintenance and plant outages in 2005.
   
·
The decline in earnings contributions from synfuel projects in 2006 compared with 2005 resulted primarily from the anticipated phase-out of synthetic fuel tax credits starting in 2006 and lower production levels due to high crude oil prices. See Note 15 to the Financial Statements for more information on the temporary shutdown of the Somerset facility. The improved earnings contribution from synfuel projects in 2005 compared with 2004 resulted primarily from higher synthetic fuel tax credits due to higher output at the Tyrone facility, which went into commercial operation in August 2004. Also contributing to the 2005 synthetic fuel earnings increase were unrealized gains on options purchased to hedge the risk associated with synthetic fuel tax credits for 2006 and 2007.

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

   
2006
  
2005
  
2004
                         
Sale of interest in the Griffith plant (Note 10)
  
$
(16
)
                
Reduction in Enron reserve (Note 1)
    
11
                  
Impairment of synfuel-related assets (Note 15)
    
(6
)
                
Off-site remediation of ash basin leak (Note 15)
    
6
    
$
(27
)
        
Susquehanna workforce reduction (Note 13)
    
(3
)
                
PJM billing dispute (Note 15)
    
(18
)
                
Impairment of nuclear decommissioning trust investments (Note 21)
    
(3
)
                
Sale of the Sundance plant (Note 9)
            
(47
)
        
Acceleration of stock-based compensation expense for periods prior to 2005 (Note 1)
            
(3
)
        
Settlement of NorthWestern litigation (a)
            
(6
)
        
Recording of conditional AROs (Note 21)
            
(8
)
        
Total
  
$
(29
)
  
$
(91
)
        

(a)
  
In the first quarter of 2005, PPL Energy Supply recognized a charge for a loss contingency related to litigation with NorthWestern. In September 2005, PPL Energy Supply and NorthWestern reached a final agreement to settle this litigation.

2007 Outlook

PPL Energy Supply projects significantly higher earnings in its supply business segment in 2007 compared with 2006. Based on current forward energy prices and hedges already in place, PPL Energy Supply is projecting higher energy margins, driven primarily by the replacement of expiring fixed-price supply obligations with higher-margin wholesale energy contracts, and an increase in generation prices under the PUC-approved PLR contracts between PPL Electric and PPL EnergyPlus for customers who choose not to shop for an energy supplier.


While PPL Energy Supply expects improved baseload power plant performance in 2007, this performance will be somewhat offset by the retirement in September of two coal units at the Martins Creek power plant in Pennsylvania and by more planned outages, including the Susquehanna Unit 1 outage to address the remaining control rod friction issues. PPL Energy Supply believes these planned outages will improve the overall long-term reliability of PPL Energy Supply's generation fleet. PPL Energy Supply also expects a modest increase in fuel-related expenses and increased operation and maintenance expenses.

International Delivery Segment

The International Delivery segment includes operations of the international energy businesses of PPL Global that are primarily focused on the distribution of electricity. Substantially all of PPL Global's international businesses are located in the U.K., Chile, El Salvador and Bolivia.

International Delivery segment net income was:

   
2006
  
2005
  
2004
                         
Utility revenues
  
$
1,260
    
$
1,130
    
$
1,032
  
Energy-related businesses
    
87
      
76
      
70
  
Total operating revenues
    
1,347
      
1,206
      
1,102
  
Energy purchases
    
337
      
266
      
215
  
Other operation and maintenance
    
286
      
250
      
208
  
Depreciation
    
161
      
157
      
146
  
Taxes, other than income
    
58
      
58
      
56
  
Energy-related businesses
    
38
      
28
      
41
  
Total operating expenses
    
880
      
759
      
666
  
Other Income - net
    
33
      
10
      
31
  
Interest Expense
    
203
      
203
      
203
  
Income Taxes
    
21
      
34
      
59
  
Minority Interest
    
8
      
5
      
6
  
Loss from Discontinued Operations
                    
2
  
Total
  
$
268
    
$
215
    
$
197
  

The after-tax changes in net income were due to the following factors, including discontinued operations.

   
2006 vs. 2005
  
2005 vs. 2004
U.K.
                
Delivery margins
  
$
32
    
$
23
  
Operation and maintenance expenses
    
(15
)
    
(30
)
Depreciation
    
(9
)
    
(6
)
Income taxes
    
34
          
Impact of changes in foreign currency exchange rates
    
(5
)
    
2
  
Impairment of investment in U.K. real estate (Note 9)
    
(6
)
        
Gain on transfer of equity investment (Note 9)
    
5
          
Hyder liquidation distributions (Note 9)
    
27
          
Other
    
5
      
5
  
Latin America
                
Delivery margins
    
10
      
6
  
Operation and maintenance expenses
    
(1
)
    
(4
)
Income taxes
    
11
      
(1
)
Impact of changes in foreign currency exchange rates
    
2
      
2
  
Other
    
(1
)
    
(2
)
U.S. income taxes
    
(38
)
    
36
  
Other
    
1
      
1
  
Unusual items
    
1
      
(14
)
   
$
53
    
$
18
  
                 

·
The U.K.'s earnings in both periods were positively impacted by higher margins. Favorable margins in 2006 compared with 2005 were primarily due to price increases and changes in customer mix. For 2005 compared with 2004, higher margins were partially due to a favorable customer mix and an incentive revenue award from the regulator for outstanding customer service.
   
·
Higher U.K. operation and maintenance expenses in both periods were due primarily to increased pension costs.
   
·
Higher depreciation in both periods was, in part, due to a reduction in meter lives during 2005.
   
·
Lower U.K. income taxes in 2006 compared with 2005 were primarily due to the transfer of a future tax liability from WPD and certain surplus tax losses from Hyder to a former Hyder affiliate. See Note 5 to the Financial Statements for additional information.
   
·
Changes in foreign exchange rates decreased WPD's portion of revenue and expense line items by 2% in 2006 compared with 2005, and increased them by about 1% in 2005 compared with 2004.
   
·
U.S. income taxes increased in 2006 compared with 2005 due to a 2005 tax true-up, 2006 WPD dividend planning, and lower utilization of foreign tax credits. U.S. income taxes decreased in 2005 compared with 2004, partly due to greater utilization of foreign tax credits.
   
·
Latin America earnings were positively impacted in 2006 compared with 2005 by higher margins, primarily due to a 7% increase in sales volumes at Emel and accounting adjustments related to Chilean deferred taxes and depreciation related to prior periods. See Note 2 to the Financial Statements for additional information on the accounting adjustments.

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

   
2006
  
2005
  
2004
                         
Reduction in Enron reserve
 
$
1
                  
Sale of CGE (Note 9)
                  
$
(7
)
Sale of CEMAR (Note 9)
                    
23
  
Sale of Latin American telecommunications company
(Note 9)
                    
(2
)
Total
  
$
1
            
$
14
  

2007 Outlook
 
PPL Energy Supply projects the earnings from its international delivery business segment to decline in 2007 compared with 2006. Higher delivery margins, due to higher unit sales in Latin America and higher unit prices in the U.K., are expected to be offset by increased operating expenses in the majority of these delivery businesses and a significantly higher effective tax rate in the U.K. due to the favorable resolution of several tax-related items in 2006. In addition, PPL Energy Supply does not expect gains from the sale or liquidation of U.K. non-electricity delivery businesses to continue at the same level in 2007 as occurred in 2006.

Statement of Income Analysis --

Domestic Gross Energy Margins

The following table provides pre-tax changes in the income statement line items that comprise domestic gross energy margins.

   
2006 vs. 2005
  
2005 vs. 2004
             
Wholesale energy marketing
  
$
441
    
$
(93
)
Wholesale energy marketing to affiliate
   
118
      
90
  
Unregulated retail electric and gas
    
(10
)
    
(13
)
Net energy trading margins
    
3
      
11
  
Other revenue adjustments (a)
    
1
      
30
  
Total revenues
    
553
      
25
  
Fuel
    
(33
)
    
147
  
Energy purchases
    
498
      
(37
)
Energy purchases from affiliate
    
9
      
(6
)
Other cost adjustments (a)
    
(107
)
    
(6
)
Total cost of sales
    
367
      
98
  
Domestic gross energy margins
  
$
186
    
$
(73
)

(a)
  
Adjusted to exclude the impact of any revenues and costs not associated with domestic gross energy margins, consistent with the way management reviews domestic gross energy margins internally. These exclusions include revenues and energy costs related to the international operations of PPL Global and an accrual for the loss contingency related to the PJM billing dispute in 2005 and 2006 (see Note 15 to the Financial Statements for additional information). Also adjusted to include the margins of the Griffith and Sundance plants prior to their sales in June 2006 and May 2005, which are included in "Loss from Discontinued Operations," and gains or losses on sales of emission allowances, which are included in "Other operation and maintenance" expenses on the Statements of Income.

Changes in 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. Additionally, beginning in 2006, PPL Energy Supply further segregates non-trading activities into two categories: hedge activity and economic activity. Economic activity represents the net unrealized effect of derivative transactions that are entered into as economic hedges, but do not qualify for hedge accounting, or hedge accounting was not elected, under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted.

   
2006 vs. 2005
  
2005 vs. 2004
Non-trading
                
Eastern U.S.
 
$
161
    
$
(77
)
Western U.S.
   
12
      
(9
)
Net energy trading
    
13
      
13
  
Domestic gross energy margins
  
$
186
    
$
(73
)

Eastern U.S.

Eastern U.S. non-trading margins were higher in 2006 compared with 2005, primarily due to higher PLR sales prices and higher wholesale prices. PLR sales prices were 8.4% higher in 2006, in accordance with the schedule established by the PUC Final Order. Partially offsetting these higher margins was lower nuclear generation of 3%, as well as higher coal and nuclear fuel prices, which were up 12% and 10%.

In 2005, PPL Energy Supply began participating in the Midwest ISO (MISO), an independent transmission system operator that serves the electric transmission needs of much of the Midwest. PPL Energy Supply records its business activities within MISO consistent with its accounting for activities in other RTOs.

Eastern U.S. non-trading margins were lower in 2005 compared with 2004, primarily due to higher fuel costs. Average coal prices increased by 12% over 2004, while average gas and oil prices increased by 24%. Despite record high generation in 2005, the increased use of higher-cost oil and gas units to cover retail volumes, which were up 5% over 2004, and generation output lost during coal and nuclear plant outages contributed to lower margins. Due to market price increases and changes in fuel mix, average fuel prices increased 22% over 2004. Partially offsetting the effects of higher fuel costs was a 2% increase in PLR sales prices, in accordance with the schedule established by the PUC Final Order.

The amount of Eastern non-trading margins from unrealized mark-to-market transactions that did not qualify for hedge accounting treatment, or for which hedge accounting was not elected, and from hedge ineffectiveness was a loss of $8 million in 2006, compared with a loss of $4 million in 2005, and an immaterial loss in 2004.

Western U.S.

Northwestern U.S. non-trading margins were higher in 2006 compared with 2005, primarily due to higher wholesale prices. Also contributing to the increase was a 6% increase in hydroelectric generation. Partially offsetting these improvements were higher coal prices, which were up 14%.

Southwestern U.S. non-trading margins were lower in 2006 compared with 2005, as well as in 2005 compared with 2004, primarily due to the sale of PPL Energy Supply's 50% interest in the Griffith plant in June 2006 and the sale of PPL Energy Supply's Sundance plant in May 2005.

The amount of Western non-trading margins from unrealized mark-to-market transactions that did not qualify for hedge accounting treatment, or for which hedge accounting was not elected, and from hedge ineffectiveness was immaterial in 2006, 2005 and 2004.

Net Energy Trading

PPL Energy Supply enters into certain energy contracts that meet the criteria of trading derivatives as defined by EITF Issue 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities." These physical and financial contracts cover trading activity associated with electricity, gas and oil.

Net energy trading margins increased by $13 million in 2006 compared to 2005 primarily due to contracts reclassified as trading activity for hedge (non-trading) transactions related to the Griffith plant after the announced plan to sell PPL Energy Supply's interest in the plant. See Note 10 to the Financial Statements for additional information.

Net energy trading margins increased by $13 million in 2005 compared with 2004, primarily due to the inclusion of FTRs. As of July 1, 2005, FTRs were deemed to meet the definition of a derivative and were accounted for as such prospectively. Therefore, the forward and realized value for FTRs entered into for speculative purposes is accounted for as part of "Net energy trading margins" on the Statement of Income. From July 1 through December 31, 2005, gains on speculative FTRs totaled $10 million.

The amount of energy trading margins from unrealized mark-to-market transactions was a $9 million gain in 2006, a $5 million loss in 2005, and a $13 million gain in 2004.

The physical volumes for electricity and gas associated with energy trading were:

   
2006
  
2005
  
2004
                         
GWh
    
7,724
      
5,800
      
5,700
  
Bcf
    
21.5
      
13.4
      
11.7
  

Utility Revenues

The increases in utility revenues were attributable to:

   
2006 vs. 2005
  
2005 vs. 2004
International:
                
Retail electric revenue
               
U.K.
  
$
45
    
$
26
  
Latin America
                
Chile
    
46
      
36
  
El Salvador
    
24
      
10
  
Bolivia
    
5
      
2
  
Foreign currency exchange rates
    
10
      
24
  
   
$
130
    
$
98
  

The increases in utility revenues for 2006 compared with 2005, excluding foreign currency exchange rate impacts, were primarily due to:

·
an increase in the U.K. due to higher average prices and changes in customer mix; and
·
increases in Latin America due to a 7.3% increase in sales volumes in Chile and an 8.6% increase in sales volume in El Salvador and higher generation supply average prices in both countries.

The increases in utility revenues for 2005 compared with 2004, excluding foreign currency exchange rates impacts, were primarily due to:

·
increases in the U.K. primarily due to favorable customer mix and an incentive revenue award for outstanding customer service; and
·
increases in Latin America due to a 6% increase in sales volumes in El Salvador and a 7% increase in sales volumes in Chile and higher generation supply average prices in both countries.

Energy-related Businesses

Energy-related businesses contributed $23 million more to operating income in 2006 compared with 2005. The increase was primarily attributable to:

·
$18 million of lower pre-tax losses from synfuel projects. This reflects $29 million of lower operating losses due to lower production levels, partially offset by an impairment charge of $10 million on the synfuel-related assets;
·
a $3 million increase from PPL Telcom due to an increase in transport-related sales, as well as reduced spending on a product line (before depreciation, interest expense, and income taxes); and
·
a $3 million increase from WPD's telecommunications business.

Energy-related businesses contributed $4 million more to operating income in 2005 compared with 2004. The increase was attributable to:

·
a $15 million pre-tax loss in 2004, related to the sale of CGE (see Note 9 to the Financial Statements for additional information); and
·
an aggregate increase of $4 million from various international subsidiary businesses; partially offset by
·
additional pre-tax losses in 2005 of $16 million on synfuel projects. This reflects $26 million of additional operating losses due to higher production levels, offset by a $10 million net unrealized gain on options purchased to hedge a portion of the risk associated with the phase-out of the synthetic fuel tax credits for 2006 and 2007.

See Note 15 to the Financial Statements for an overall assessment of synthetic fuel tax credits and a further discussion of the impairment of these facilities and the temporary shutdown of one of these facilities.

Other Operation and Maintenance

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

   
2006 vs. 2005
  
2005 vs. 2004
             
Martins Creek ash basin remediation (Note 15)
  
$
(37
)
  
$
48
  
Increase in pension and postretirement costs (Note 13)
    
22
      
43
  
Accelerated amortization of stock-based compensation (Note 1)
    
(13
)
    
13
  
Increase (decrease) in allocation of corporate service costs
(Note 16)
    
18
      
(1
)
NorthWestern litigation payment
   
(9
)
    
9
  
Outage costs at Eastern U.S. fossil/hydro stations
    
13
      
14
  
Outage costs at Susquehanna nuclear station
    
24
      
6
  
Outage costs at Western U.S. fossil/hydro stations
    
3
      
4
  
U.K. metering expense
   
4
      
5
  
Changes in U.K. reserve related to contractor dispute
    
4
      
(8
)
Latin America vendor dispute
    
5
          
Reduction in Enron reserve (Note 1)
    
(19
)
        
Union contract ratification bonus
    
2
          
Trademark license fees from a PPL subsidiary (Note 16)
    
5
      
(3
)
Increase in employee benefits due to transfer of field services employees from PPL Electric
            
7
  
Stock-based compensation expense
    
9
      
(1
)
PJM system control and dispatch services
   
(7
)
    
(2
)
Change in foreign currency exchange rates
    
3
      
5
  
Other
    
(10
)
    
8
  
   
$
17
    
$
147
  

Depreciation

Increases in depreciation expense were due to:

   
2006 vs. 2005
  
2005 vs. 2004
                 
Additions to PP&E
  
$
16
    
$
6
  
Contribution of assets from parent (Note 8)
    
5
          
Reduction of useful lives of certain distribution assets (Note 1)
    
3
      
7
  
Purchase of equipment previously leased (Note 11)
    
1
          
Lower Mt. Bethel generation facility, which began commercial operation in May 2004
           
6
  
Extension of useful lives of certain generation assets (Note 1)
    
(2
)
    
(12
)
Chilean depreciation accounting adjustment (Note 2)
    
(7
)
        
Changes in foreign currency exchange rates
    
1
      
1
  
   
$
17
    
$
8
  

Taxes, Other Than Income

Taxes, other than income, decreased by $1 million in 2005 compared with 2004. The decrease was primarily due to a $4 million decrease in domestic capital stock tax expense, partially offset by a $2 million increase in local real estate taxes.

Other Income - net

See Note 17 to the Financial Statements for details of other income and deductions.

Interest Expense

The increases in interest expense, which includes "Interest Expense with Affiliates" were due to:

   
2006 vs. 2005
  
2005 vs. 2004
             
Increase in long-term debt interest expense
  
$
39
          
Interest accrued for PJM billing dispute (Note 15)
    
3
          
Expense related to the University Park generation facility (a)
          
$
(13
)
Change in capitalized interest
    
(15
)
    
11
  
Change in interest expense with affiliate
    
(9
)
    
1
  
Write-off in 2005 of financing costs associated with PPL Energy Supply's 2.625% Convertible Senior Notes due to the market trigger price being met
    
(6
)
    
 
6
  
Change in short-term debt interest expense
    
(4
)
    
5
  
Change in foreign currency exchange rates
    
(2
)
    
1
  
Change in amortization expense
    
(1
)
    
6
  
Other
   
1
          
   
$
6
    
$
17
  

(a)
  
In June 2004, a subsidiary of PPL Energy Supply purchased the University Park generation facility from the lessor that was consolidated by PPL Energy Supply under FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." In connection with the purchase, the related financing was repaid and the deferred financing costs were written off. See Note 22 to the Financial Statements for additional information.

Income Taxes

The changes in income taxes were due to:

   
2006 vs. 2005
  
2005 vs. 2004
             
Higher (lower) pre-tax book income
  
$
75
    
$
(60
)
Nonconventional fuel tax credits
    
49
      
(33
)
Tax on foreign earnings
    
8
      
(19
)
Chilean tax benefit related to monetary indexation (Note 2)
    
(9
)
        
Transfer of WPD tax items in the first quarter 2006 (Note 5)
    
(20
)
        
Tax return adjustments
    
3
      
(6
)
Tax reserve adjustments
    
7
      
(14
)
Other
            
3
  
   
$
113
    
$
(129
)

See Note 5 to the Financial Statements for details on effective income tax rates.

Discontinued Operations

In 2006, PPL Energy Supply recorded a $23 million loss, which is net of a tax benefit of $16 million, in connection with the sale of its ownership interest in the Griffith plant. The "Loss from Discontinued Operations" also includes the acceleration of net unrealized gains on derivatives associated with the Griffith plant of $7 million after tax. See Note 10 to the Financial Statements for information on this sale, along with information regarding operating results recorded prior to the sale.

In 2005, PPL Energy Supply recorded a $47 million loss, which is net of a tax benefit of $26 million, in connection with the sale of its Sundance power plant. See "Discontinued Operations" in Note 9 to the Financial Statements for information on this sale, along with information regarding operating losses recorded prior to the sale of the Sundance plant and for operating losses recorded in 2004 related to the sale of PPL Global's investment in a Latin American telecommunications company.

Cumulative Effect of a Change in Accounting Principle

PPL Energy Supply adopted FIN 47, "Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143," in 2005. FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional ARO when incurred if the fair value of the ARO can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO. Application of the interpretation resulted in a cumulative effect of a change in accounting principle that decreased net income by $8 million in 2005. See Note 21 to the Financial Statements for additional information.

Financial Condition

Liquidity and Capital Resources

PPL Energy Supply is focused on maintaining an appropriate liquidity position and strengthening its balance sheet, thereby continuing to improve its credit profile. PPL Energy Supply believes that its cash on hand, short-term investments, operating cash flows, access to debt and equity capital markets and borrowing capacity, taken as a whole, provide sufficient resources to fund its ongoing operating requirements, future security maturities and estimated future capital expenditures. PPL Energy Supply currently expects cash, cash equivalents and short-term investments at the end of 2007 to be approximately $500 million and expects to increase its credit facilities from $3.2 billion to greater than $4.0 billion in 2007. However, PPL Energy Supply's cash flows from operations and its 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, price and credit risks associated with selling and marketing products in the wholesale power markets;
·
significant switching by PPL Electric's customers to or from alternative suppliers that would impact the level of sales under the PLR contracts;
·
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 transmission and 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;
·
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; and
·
a downgrade in PPL Energy Supply's or its rated subsidiaries' credit ratings that could negatively affect their ability to access capital and increase the cost of maintaining credit facilities and any new debt.

At December 31, PPL Energy Supply had the following:

   
2006
  
2005
  
2004
                         
Cash and cash equivalents
 
$
524
    
$
227
    
$
357
  
Short-term investments
    
328
      
33
      
51
  
     
852
      
260
      
408
  
Short-term debt
            
180
          

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

   
2006
  
2005
  
2004
                   
Net Cash Provided by Operating Activities
  
$
1,240
    
$
838
    
$
616
  
Net Cash Used in Investing Activities
    
(1,261
)
    
(537
)
    
(525
)
Net Cash Provided by (Used in) Financing Activities
    
315
      
(437
)
    
35
  
Effect of Exchange Rates on Cash and Cash Equivalents
    
3
      
6
      
9
  
Net Increase (Decrease) in Cash and Cash Equivalents
  
$
297
    
$
(130
)
  
$
135
  

Operating Activities

Net cash from operating activities increased by 48%, or $402 million, in 2006 compared with 2005, primarily as a result of an 8.4% increase in sales prices under the PLR contracts and increased international delivery revenues, predominantly related to price increases and changes in customer mix. The increase from 2005 to 2006 was also due, to a lesser extent, to reduced expenditures for oil in 2006 as a result of building up inventory in 2005. These increases were partially offset by a decrease in revenues under the PLR contracts resulting from a decrease in sales volumes, due in part to milder weather in 2006, increased expenditures for coal and increased U.S. income tax payments, primarily due to lower utilization of foreign tax credits in 2006.

Net cash from operating activities increased by 36%, or $222 million, in 2005 compared with 2004, primarily as a result of the posting of $300 million in cash collateral to PPL Electric in 2004 related to the PLR energy supply agreements and a decrease in income tax payments, partially offset by an increase of $95 million in fuel expenditures due to increased prices and inventory build-up in anticipation of price increases in 2006. 

PPL Energy Supply expects to continue to maintain stable cash provided by operating activities as a result of its long-term and intermediate-term power sales commitments from wholesale and retail customers and long-term purchase contracts. PPL Energy Supply estimates that, on average, approximately 89% of its expected annual generation output for the period 2007 through 2009 is committed under long-term and intermediate-term power sales contracts. PPL Energy Supply has started and will continue to layer in sales contracts in the wholesale markets for the capacity and energy currently committed under the PLR supply contracts with PPL Electric, which expire at the end of 2009. Based on the way in which the wholesale markets have developed to this point, new contracts may be of a shorter duration than the PLR supply contracts, which at inception had terms of approximately nine years.

PPL Energy Supply's contracts for the sale and purchase of electricity and fuel often require cash collateral or other credit enhancement, 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 energy prices increased by 10%, PPL Energy Supply estimates that, based on its December 31, 2006 positions, it would have had to post additional collateral of approximately $387 million, compared with $611 million at December 31, 2005. 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 prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operational 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 2006 and projected expenditures for the years 2007 through 2011.

Net cash used in investing activities increased 135%, or $724 million, in 2006 compared with 2005. There were a few items that contributed to this increase. Capital expenditures increased $440 million, primarily as a result of the construction of pollution control equipment at coal-fired plants in Pennsylvania, as discussed in Note 15 to the Financial Statements, and $29 million related to the purchase of leased equipment. See Note 11 to the Financial Statements for further discussion of the purchase of leased equipment in connection with the termination of the related master lease agreements. Additionally, there was an increase of $312 million in net purchases of short-term investments, and PPL Energy Supply received $80 million less in proceeds from the sale of power plants in 2006 compared with 2005. The impact of the above items was partially offset by a decrease of $75 million in net purchases of emission allowances.

Although net cash used in investing activities remained stable in 2005 compared with 2004, there were significant changes in the components. PPL Energy Supply received $190 million in proceeds from the sale of the Sundance power plant in 2005, compared to $123 million of proceeds from the sale of PPL Energy Supply's minority interest in CGE in 2004. Additionally, there was an increase of $63 million in net proceeds from sales of short-term investments, an increase of $72 million in capital expenditures and an increase of $63 million in net purchases of emission allowances, in anticipation of future generation.

Financing Activities

Net cash provided by financing activities was $315 million in 2006, compared with net cash used in financing activities of $437 million in 2005 and net cash provided by financing activities of $35 million in 2004. The change from 2005 to 2006 primarily reflects increased issuance of long-term debt. In 2006, cash provided by financing activities primarily consisted of net debt issuances of $950 million and $115 million of contributions from Member, partially offset by $712 million in distributions to Member.

Net cash used in financing activities increased by $472 million in 2005 compared with 2004, primarily as a result of the repayment in 2005 of a $495 million note that was issued to an affiliate in 2004 and a decrease of $308 million of contributions from Member, partially offset by an increase of $692 million in net proceeds from non-affiliate debt and a decrease of $132 million in distributions to 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 2006 was:

   
Issuances
  
Retirements
             
PPL Energy Supply Senior Unsecured Notes
  
$
997
          
PPL Energy Supply Convertible Senior Notes (a)
          
$
(298
)
PPL Energy Supply Note Payable to Affiliate
            
(8
)
WPD Senior Unsecured Notes (b)(c)
    
887
      
(450
)
Emel UF denominated Bonds
    
101
      
(103
)
Elfec Bolivian Bonds
            
(3
)
PPL Energy Supply Commercial Paper (net change)
            
(100
)
WPD short-term debt (net change)
            
(73
)
Total
  
$
1,985
    
$
(1,035
)
Net increase
  
$
950
          

(a)
  
Convertible Senior Notes in an aggregate principal amount of $298 million were presented for conversion in 2006. The total conversion premium related to these conversions was $121 million, which was settled with 3,448,109 shares of PPL common stock, along with an insignificant amount of cash in lieu of fractional shares. After such conversions, approximately $102 million of Convertible Senior Notes remain outstanding and are eligible for conversion in the first quarter of 2007. See Notes 4 and 8 to the Financial Statements for discussion of the terms of the Convertible Senior Notes and further discussion of the conversions.
(b)
  
Issuance includes $446 million of index-linked notes.
(c)
  
Retirement includes $118 million to settle related cross-currency swaps.

Long-term debt issued during 2006 had stated interest rates ranging from 1.541% to 7.0% and maturities from 2011 through 2056. See Note 8 to the Financial Statements for more detailed information regarding PPL Energy Supply's financing activities.

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, a commercial paper program, operating leases and contributions from Member. PPL Energy Supply also expects to continue to have access to debt capital markets, as necessary, for its long-term financing needs.

Credit Facilities

At December 31, 2006, 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 (c)
  
Available Capacity
                         
PPL Energy Supply Credit Facilities (a)
  
$
2,400
            
$
320
    
$
2,080
  
WPD (South West) Credit Facilities (b)
    
792
              
3
      
789
  
Total
  
$
3,192
            
$
323
    
$
2,869
  

(a)
  
PPL Energy Supply has the ability to borrow $2.2 billion under its credit facilities. Such borrowings 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 $2.4 billion of letters of credit under these facilities, which issuances reduce available borrowing capacity.
 
These credit facilities contain a financial covenant requiring debt to total capitalization to not exceed 65%. At December 31, 2006 and 2005, PPL Energy Supply's consolidated debt to total capitalization percentage, as calculated in accordance with its credit facilities, was 35%. The credit facilities also contain standard representations and warranties that must be made for PPL Energy Supply to borrow under them.
     
(b)
  
Borrowings under WPD (South West)'s credit facilities bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating. WPD (South West) also has the capability to cause the lenders to issue up to £3 million (approximately $5 million at December 31, 2006) of letters of credit under one of its facilities, which can only be used for letters of credit.
 
These credit facilities contain 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 a regulatory asset base (RAB) at £150 million greater than total gross debt, in each case as calculated in accordance with the credit facilities. At December 31, 2006 and 2005, WPD (South West)'s interest coverage ratios, as calculated in accordance with its credit lines, were 5.3 and 6.0. At December 31, 2006 and 2005, WPD (South West)'s RAB, as calculated in accordance with the credit facilities, exceeded its total gross debt by £247 million and £407 million.
     
(c)
  
PPL Energy Supply and WPD (South West) have a reimbursement obligation to the extent any letters of credit are drawn upon. The letters of credit issued as of December 31, 2006, expire as follows: $318 million in 2007 and $5 million in 2008.

In addition to the financial covenants noted in the table above, these credit agreements contain various other covenants. Failure to meet the covenants beyond applicable grace periods could result in acceleration of due dates of borrowings and/or termination of the agreements. PPL Energy Supply monitors the covenants on a regular basis. At December 31, 2006, 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.

During 2007, PPL Energy Supply intends to maintain the existing $3.2 billion of credit facility capacity, which may require the renewal and extension or replacement of certain facilities. In addition, PPL Energy Supply expects to increase its credit facility capacity by up to $1.0 billion in 2007 to support potential collateral requirements under contracts that it expects to enter into in connection with expanding its wholesale marketing and trading business. See Note 8 to the Financial Statements for further discussion of PPL Energy Supply's credit facilities, including the termination and replacement of a £150 million credit facility of WPD (South West) with a new £150 million credit facility at WPDH Limited in January 2007.

Commercial Paper

PPL Energy Supply maintains a commercial paper program for up to $500 million to provide it with an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by certain credit agreements of PPL Energy Supply. PPL Energy Supply had no commercial paper outstanding at December 31, 2006, and $100 million of commercial paper outstanding at December 31, 2005. During 2007, PPL Energy Supply may issue commercial paper from time to time to facilitate short-term cash flow needs.

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 with 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 Sheet, which is in accordance with applicable accounting guidance. 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 8 to the Financial Statements for a discussion of other dividend restrictions related to PPL Global subsidiaries.

See Note 11 to the Financial Statements for further discussion of the operating leases.

Long-Term Debt Securities and Contributions from Member

Subject to market conditions in 2007, PPL Energy Supply currently plans to issue up to $250 million in long-term debt securities. PPL Energy Supply expects to use the proceeds primarily to fund capital expenditures, to fund maturities of existing debt 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, including funding maturities of existing debt.

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 and distributions to Member.

Capital Expenditures

The table below shows PPL Energy Supply's actual spending for the year 2006 and current capital expenditure projections for the years 2007 through 2011.

   
Actual
  
Projected
  
   
2006
  
2007
  
2008
  
2009
  
2010
  
2011
  
Construction expenditures (a)
                                      
Generating facilities
 
$
275
  
$
329
  
$
231
  
$
294
  
$
314
  
$
313
  
Transmission and distribution facilities
    
339
    
317
    
329
    
337
    
342
    
351
  
Environmental
    
320
    
612
    
408
    
129
    
37
    
77
  
Other
    
25
    
41
    
26
    
27
    
26
    
26
  
Total Construction Expenditures
    
959
    
1,299
    
994
    
787
    
719
    
767
  
Nuclear fuel
    
74
    
92
    
112
    
113
    
128
    
130
  
Total Capital Expenditures
  
$
1,033
  
$
1,391
  
$
1,106
  
$
900
  
$
847
  
$
897
  

(a)
  
Construction expenditures include capitalized interest, which is expected to be approximately $229 million for the 2007-2011 period.

PPL Energy Supply's capital expenditure projections for the years 2007-2011 total approximately $5.1 billion. Capital expenditure plans are revised periodically to reflect changes in operational, market and asset regulatory conditions. This table includes projected costs related to the planned 349 MW incremental capacity increases. See Note 15 to the Financial Statements for additional information regarding the installation cost of sulfur dioxide scrubbers and other pollution control equipment, which comprise most of the "Environmental" expenditures noted above.

PPL Energy Supply plans to fund all of its capital expenditures in 2007 with cash on hand, cash from operations, contributions from Member and 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, 2006, the estimated contractual cash obligations of PPL Energy Supply were:

Contractual Cash Obligations
  
Total
  
Less
Than
1 Year
  
1-3
Years
  
4-5
Years
  
After 5
Years
                               
Long-term Debt (a)
  
$
5,381
    
$
270
    
$
233
    
$
551
    
$
4,327
  
Capital Lease Obligations
    
16
      
1
      
2
      
2
      
11
  
Operating Leases
   
608
      
49
      
101
      
104
      
354
  
Purchase Obligations (b)
    
5,433
      
1,322
      
1,693
      
674
      
1,744
  
Other Long-term Liabilities Reflected on the Balance Sheet under GAAP (c)
    
13
              
13
                  
Total Contractual Cash Obligations
  
$
11,451
    
$
1,642
    
$
2,042
    
$
1,331
    
$
6,436
  

(a)
  
Reflects principal maturities only. See Note 4 to the Financial Statements for a discussion of conversion triggers related to PPL Energy Supply's 2.625% Convertible Senior Notes. Also, see Statements of Long-term Debt for a discussion of the remarketing feature related to PPL Energy Supply's 5.70% REset Put Securities.
(b)
  
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.
(c)
  
The amounts reflected represent WPD’s contractual deficit pension funding requirements arising from an actuarial valuation performed in March 2004 and do not include pension funding requirements for future service or a contingent funding requirement of $59 million payable by March 31, 2008, if certain conditions are not met by March 31, 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 review period, which extends to March 31, 2010.
 
Based on the current funded status of PPL Energy Supply's U.S. qualified pension plans, no contributions are required. See Note 13 to the Financial Statements for a discussion of expected contributions.

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, which uses the distributions for general corporate purposes, including meeting its cash flow needs.

Credit Ratings

Moody's, S&P and Fitch periodically review the credit ratings on the debt and preferred 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 key subsidiaries at December 31, 2006.

   
Moody's
 
S&P
  
Fitch (a)
PPL Energy Supply
            
 
Issuer Rating
      
BBB
  
BBB
 
Senior Unsecured Notes
  
Baa2
  
BBB
  
BBB+
 
Commercial Paper
  
P-2
  
A-2
  
F2
 
Outlook
  
STABLE
  
STABLE
  
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
  
STABLE
  
STABLE
               
WPD LLP
            
 
Issuer Rating
      
BBB-
  
BBB
 
Short-term Debt
  
 
  
A-3
    
 
Preferred Stock (b)
  
Baa3
  
BB
  
BBB
 
Outlook
  
STABLE
  
STABLE
  
STABLE
               
WPD (South Wales)
            
 
Issuer Rating
      
BBB+
  
BBB+
 
Senior Unsecured Debt
  
Baa1
  
BBB+
  
A-
 
Short-term Debt
      
A-2
  
F2
 
Outlook
  
STABLE
  
STABLE
  
STABLE
               
WPD (South West)
            
 
Issuer Rating
  
Baa1
  
BBB+
  
BBB+
 
Senior Unsecured Debt
  
Baa1
  
BBB+
  
A-
 
Short-term Debt
  
P-2
  
A-2
  
F2
 
Outlook
  
STABLE
  
STABLE
  
STABLE

(a)
  
All Issuer Ratings for Fitch are "Issuer Default Ratings."
(b)
  
Securities were redeemed in February 2007.

The rating agencies took the following actions related to PPL Energy Supply and its key subsidiaries in 2006.

Moody's

In March 2006, Moody's reviewed the credit ratings of PPL Energy Supply and concluded that its ratings remain unchanged.

S&P

In November 2006, S&P completed its annual review of its credit ratings for PPL Energy Supply and PPL Montana. At that time, S&P affirmed its credit ratings and stable outlook for PPL Energy Supply and PPL Montana.

Fitch

In February 2006, Fitch's Europe, Middle East and Africa group implemented Issuer Default Ratings (IDRs) based on its new IDR methodology. This implementation led to Fitch's assignment of the following IDRs and Fitch's upgrading of its ratings on the following securities of WPD and its affiliates.

·
WPDH Limited IDR of BBB- and senior unsecured rating to BBB from BBB-;
·
WPD LLP IDR of BBB, senior unsecured rating to BBB+ from BBB and preferred stock rating to BBB from BBB-; and
·
WPD (South Wales) and WPD (South West) IDR of BBB+ and senior unsecured debt rating to A- from BBB+.

In August 2006, Fitch affirmed its credit ratings and stable outlook for PPL Energy Supply.

In November 2006, Fitch affirmed its credit ratings and stable outlook for WPDH Limited, WPD LLP, WPD (South Wales) and WPD (South West).

Ratings Triggers

PPL Energy Supply's 2.625% Convertible Senior Notes due 2023 are convertible upon the occurrence of certain events, including if the long-term credit ratings assigned to the notes by Moody's and S&P are lower than BB and Ba2, or either Moody's or S&P no longer rates the notes. The terms of the notes require cash settlement of the principal amount upon conversion of the notes. See Note 4 to the Financial Statements for more information concerning the Convertible Senior Notes.

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 Ba1or 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 $885 million at December 31, 2006.

PPL Energy Supply and its subsidiaries do not have additional material liquidity exposures caused by a ratings downgrade below "investment grade" that would accelerate the due dates of borrowings. However, if PPL Energy Supply's debt ratings had been below investment grade at December 31, 2006, PPL Energy Supply and its subsidiaries would have had to post an additional $128 million of collateral to counterparties.

Off-Balance Sheet Arrangements

PPL Energy Supply provides guarantees for certain consolidated affiliate financing arrangements that enable certain transactions. 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 the relevant funding sources.

PPL Energy Supply has entered into certain guarantee agreements that are within the scope of FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." See Note 15 to the Financial Statements for a discussion on guarantees.

Risk Management - Energy Marketing & Trading and Other

Market Risk

Background

Market risk is the potential loss PPL Energy Supply may incur as a result of price changes associated with a particular financial or commodity instrument. PPL Energy Supply is exposed to market risk from:

·
commodity price risk for energy and energy-related products associated with the sale of electricity from its generating assets and other electricity marketing activities, the purchase of fuel for the generating assets and energy trading activities, and the purchase of certain metals necessary for the scrubbers PPL is installing at some of its coal-fired generating stations;
·
interest rate risk associated with variable-rate debt and the fair value of fixed-rate debt used to finance operations, as well as the fair value of debt securities invested in by PPL Energy Supply's nuclear decommissioning trust funds;
·
foreign currency exchange rate risk associated with investments in affiliates in Latin America and Europe, as well as purchases of equipment in currencies other than U.S. dollars; and
·
equity securities price risk associated with the fair value of equity securities invested in by PPL Energy Supply's nuclear decommissioning trust funds.

PPL Energy Supply has a risk management policy approved by PPL's Board of Directors to manage market risk and counterparty credit risk. (Credit risk is discussed below.) The RMC, comprised of senior management and chaired by the Vice President-Risk Management, 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, sensitivity analyses, daily portfolio reporting, including open positions, mark-to-market valuations and other risk measurement metrics.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions, due to reliance on 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 reasonably possible losses.

Contract Valuation

PPL Energy Supply utilizes forward contracts, futures contracts, options, swaps and structured deals such as tolling agreements as part of its risk management strategy to minimize unanticipated fluctuations in earnings caused by commodity price, interest rate and foreign currency volatility. When available, quoted market prices are used to determine the fair value of a commodity or financial instrument. This may include exchange prices, quotes obtained from brokers, or an independent valuation by an external source, such as a bank. However, market prices for energy or energy-related contracts may not be readily determinable because of market illiquidity. If no active trading market exists, contract valuations may include the use of internally developed models, which are then reviewed by an independent, internal group. Although PPL Energy Supply believes that its valuation methods are reasonable, changes in the underlying assumptions could result in significantly different values and realization in future periods.

To record energy derivatives at their fair value, PPL Energy Supply discounts the forward values, as appropriate, using the U.S. Utility BBB+ Curve. Additionally, PPL Energy Supply adjusts derivative carrying values to recognize differences in counterparty credit quality and potential market illiquidity for net open positions, as follows:

·
The credit adjustment takes into account the probability of default, as calculated by an independent service, for each counterparty that has a net out-of-the money position with PPL Energy Supply.
   
·
The liquidity adjustment takes into account the fact that PPL Energy Supply might have to accept the "ask" price if it wants to close an open sales position or might have to accept the "bid" price if it wants to close an open purchase position.
   
·
The modeling adjustment takes into account market value for certain contracts when there is no external market to value the contract or when PPL Energy Supply is unable to find independent confirmation of the true market value of the contract.

Accounting and Reporting

To account for and report on contracts entered into to manage market risk, PPL Energy Supply follows the provisions of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted (together, "SFAS 133"); EITF 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities;" and EITF 03-11, "Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not 'Held for Trading Purposes' as Defined in Issue No. 02-3." In accordance with SFAS 133, all derivative instruments are recorded at fair value on the balance sheet as an asset or liability (unless they meet SFAS 133's criteria for exclusion), and changes in the derivatives' fair value are recognized currently in earnings unless specific hedge accounting criteria are met.

In accordance with EITF 02-3, PPL Energy Supply reflects its 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.

In accordance with EITF 03-11, 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.

These contracts are recorded as "Price risk management assets" and "Price risk management liabilities" on the Balance Sheets. Short-term derivative contracts are included in "Current Assets" and "Current Liabilities." Long-term derivative contracts are included in "Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities."

Accounting Designation

Energy contracts that do not qualify as derivatives receive accrual accounting treatment. For commodity contracts that meet the definition of a derivative, the circumstances and intent existing at the time that energy transactions are entered into determine their accounting designation. In addition to commodity transactions, PPL Energy Supply enters into financial interest rate and foreign currency swap contracts to hedge interest expense and foreign currency risk associated with both existing and anticipated debt issuances. PPL Energy Supply also enters into foreign currency swap contracts to hedge the fair value of firm commitments denominated in foreign currency and net investments in foreign operations. As with commodity transactions, the circumstances and intent existing at the time of the transaction determine a contract's accounting designation. These designations are verified by an independent internal group on a daily basis. See Note 18 to the Financial Statements for a summary of the guidelines used for the designation of derivative energy contracts.

Commodity Price Risk (Non-trading)

Commodity price risk is one of PPL Energy Supply's most significant risks due to the level of investment that PPL Energy Supply maintains in its generation assets, coupled with the volatility of prices for energy and energy-related products. 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 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 segregates its non-trading activities as either hedge or economic. Transactions that are accounted for as hedge activity qualify for hedge accounting treatment under SFAS 133. The majority of PPL Energy Supply's energy transactions qualify for accrual or hedge accounting. The non-trading economic category includes transactions that address a specific risk, but are not eligible for hedge accounting or hedge accounting is not elected. Included in the non-trading economic category are certain load-following energy obligations and related supply contracts, FTRs, crude oil swaps to hedge rail transportation charges and hedges of synthetic fuel tax credits. Although they do not receive hedge accounting treatment, these contracts are considered non-trading.

Within PPL Energy Supply'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 reduces the maximum potential output that a plant may produce by three factors - planned maintenance, unplanned outages and economic conditions. The potential output of a plant is first reduced by the amount of unavailable generation due to planned maintenance on a particular unit. Another reduction, representing the unplanned outage rate, is 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 because 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 that qualify for accrual accounting. 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 and seasonality. 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 a monthly level of a block of electricity that best fits the usage patterns in order to minimize earnings volatility. To satisfy its full requirements obligations, PPL Energy Supply may enter into contracts to purchase unbundled products of electricity, capacity, renewable energy credits (RECs) and other ancillary products. Alternatively, PPL Energy Supply may reserve a block amount of generation for full requirements contracts that is expected to be the best match with their anticipated usage patterns and energy peaks.

Besides energy commodities, PPL Energy Supply implemented a program in 2006 to hedge its exposures to changes in market prices of certain metals necessary for the scrubbers PPL Energy Supply is installing at the Brunner Island and Montour generating plants. These contracts qualify for hedge accounting treatment.

PPL Energy Supply's non-trading commodity derivative contracts mature at various times through 2012. The fair value of the non-trading economic contracts that do not qualify for accrual or hedge accounting treatment as of December 31, 2006, including net premiums on options, was $19 million. The following chart sets forth PPL Energy Supply's net fair market value of all non-trading commodity derivative contracts as of December 31.

   
Gains (Losses)
   
2006
  
2005
             
Fair value of contracts outstanding at the beginning of the period
  
$
(278
)
  
$
(9
)
Contracts realized or otherwise settled during the period
    
22
      
(26
)
Fair value of new contracts at inception
    
(44
)
    
27
  
Other changes in fair values
    
189
      
(270
)
Fair value of contracts outstanding at the end of the period
  
$
(111
)
  
$
(278
)

The following chart segregates estimated fair values of PPL Energy Supply's non-trading commodity derivative contracts at December 31, 2006, based on whether the fair values are determined by quoted market prices or other more subjective means.

   
Fair Value of Contracts at Period-End
Gains (Losses)
   
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 actively quoted
  
$
(7
)
  
$
6
    
$
4
            
$
3
  
Prices provided by other external sources
    
(33
)
    
(177
)
    
9
    
$
1
      
(200
)
Prices based on models and other valuation methods
   
50
      
36
                      
86
  
Fair value of contracts outstanding at the end of the period
 
$
10
    
$
(135
)
  
$
13
    
$
1
    
$
(111
)

The "Prices actively quoted" category includes the fair value of exchange-traded natural gas futures contracts quoted on the NYMEX, which has quoted prices through 2012.

The "Prices provided by other external sources" category includes PPL Energy Supply's forward positions and options in natural gas and electricity and natural gas basis swaps at points for which over-the-counter (OTC) broker quotes are available.

The "Prices based on models and other valuation methods" category includes the value of transactions for which an internally developed price curve was constructed as a result of the long-dated nature of the transaction or the illiquidity of the market point, or the value of options not quoted by an exchange or OTC broker. This category includes the fair value of transactions completed in auction markets, where contract prices represent the market value for load-following bundled energy prices delivered at illiquid delivery points. The transaction prices associated with the contracts did not equal the wholesale bilateral market prices at inception (Day 1). However, EITF 02-3 does not generally permit Day 1 gains and losses to be recognized unless the fair value is derived principally from observable market inputs. Therefore, PPL Energy Supply recorded a reserve for the modeled Day 1 gain, which is netted against the above fair values.

Because of PPL Energy Supply's efforts to hedge the value of the energy from its generation assets, PPL Energy Supply sells electricity, capacity and related services and buys fuel on a forward basis, resulting in open contractual positions. 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 damages. These damages would be based on the difference between the market price and the contract price of the commodity. Depending on price volatility in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, non-performance by counterparties (or their 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 non-performance in the future.

As of December 31, 2006, PPL Energy Supply estimated that a 10% adverse movement in market prices across all geographic areas and time periods would have decreased the value of the commodity contracts in its non-trading portfolio by approximately $303 million, compared with a decrease of $275 million at December 31, 2005. For purposes of this calculation, an increase in the market price for electricity is considered an adverse movement because PPL Energy Supply's electricity portfolio is generally in a net sales position, and the decrease in the market price for fuel is considered an adverse movement because PPL Energy Supply's commodity fuels portfolio is generally in a net purchase position. PPL Energy Supply enters into those commodity contracts to reduce the market risk inherent in the generation of electricity.

In accordance with its marketing strategy, PPL Energy Supply does not completely hedge its generation output or fuel requirements. PPL Energy Supply estimates that for its entire portfolio, including all generation, emissions and physical and financial energy positions, a 10% adverse change in power prices across all geographic zones and time periods would decrease expected 2007 gross margins by $13 million. Similarly, a 10% adverse movement in all fossil fuel prices would decrease expected 2007 gross margins by $57 million.

The data in the above tables includes the activity for PPL Energy Supply's synthetic fuel tax credit hedges. Additional information regarding these hedges can be found in the "Synthetic Fuel Tax Credit Risk" section below.

Commodity Price Risk (Trading)

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. The margins from these trading activities are shown in the Statements of Income as "Net energy trading margins."

PPL Energy Supply's trading contracts mature at various times through 2010. The following chart sets forth PPL Energy Supply's net fair market value of trading contracts as of December 31.

   
Gains (Losses)
   
2006
  
2005
             
Fair value of contracts outstanding at the beginning of the period
  
$
5
    
$
9
  
Contracts realized or otherwise settled during the period
    
(10
)
    
(29
)
Fair value of new contracts at inception
    
(2
)
    
3
  
Other changes in fair values
    
48
      
22
  
Fair value of contracts outstanding at the end of the period
  
$
41
    
$
5
  

PPL Energy Supply will reverse a gain of approximately $11 million of the $41 million unrealized trading gains over the first three months of 2007 as the transactions are realized.

The following chart segregates estimated fair values of PPL Energy Supply's trading portfolio at December 31, 2006, based on whether the fair values are determined by quoted market prices or other more subjective means.

   
Fair Value of Contracts at Period-End
Gains (Losses)
   
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 actively quoted
  
$
(9
)
  
$
1
                    
$
(8
)
Prices provided by other external sources
    
20
      
2
                      
22
  
Prices based on models and other valuation methods
   
11
      
15
    
$
1
              
27
  
Fair value of contracts outstanding at the end of the period
 
$
22
    
$
18
    
$
1
            
$
41
  

See "Commodity Price Risk (Non-trading)" for information on the various sources of fair value.

As of December 31, 2006, PPL Energy Supply estimated that a 10% adverse movement in market prices across all geographic areas and time periods would have decreased the value of the commodity contracts in its trading portfolio by $37 million, compared with a decrease of $23 million at December 31, 2005.

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 interest rate risk for PPL Energy Supply by using various financial derivative products to adjust the mix of fixed and floating interest rates in PPL Energy Supply's debt portfolio, adjust the duration of its debt portfolio and lock in treasury rates (and interest rate spreads over treasuries) in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and 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, 2006, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was $4 million, compared with $2 million at December 31, 2005.

PPL Energy Supply is also exposed to changes in the fair value of its domestic and international debt portfolios. At December 31, 2006, PPL Energy Supply estimated that its potential exposure to a change in the fair value of its debt portfolio, through a 10% adverse movement in interest rates, was $296 million, compared with $151 million at December 31, 2005.

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 its 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. At December 31, 2006, PPL Energy Supply had none of these instruments outstanding. At December 31, 2005, PPL Energy Supply estimated that its potential exposure to a change in the fair value of these instruments, through a 10% adverse movement in the hedged exposure, was $2 million.

PPL and PPL Energy Supply also utilize various risk management instruments to adjust the mix of fixed and floating interest rates in PPL Energy Supply's debt portfolio. While PPL Energy Supply is exposed to changes in the fair value of these instruments, any change in market value is recorded with an equal and offsetting change in the value of the debt being hedged. At December 31, 2006, PPL Energy Supply estimated that its potential exposure to a change in the fair value of these instruments, through a 10% adverse movement in interest rates, was $1 million, compared with $2 million at December 31, 2005.

WPDH Limited holds a net position in cross-currency swaps totaling $784 million to hedge the interest payments and principal of its U.S. dollar-denominated bonds with maturity dates ranging from February 2007 to December 2028. The estimated value of this position at December 31, 2006, being the amount PPL Energy Supply would pay to terminate it, including accrued interest, was $205 million. At December 31, 2006, PPL Energy Supply estimated that its potential additional exposure to a change in the market value of these instruments was $115 million for a 10% adverse movement in foreign currency exchange rates and interest rates. At December 31, 2005, the potential additional exposure for the cross-currency swaps outstanding at that time was $143 million for a 10% adverse movement in foreign currency exchange rates and interest rates.

Foreign Currency Risk

PPL Energy Supply is exposed to foreign currency risk, primarily through investments in affiliates in the U.K. and Latin America. In addition, PPL Energy Supply 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 and net investments. In addition, PPL and PPL Energy Supply enter into financial instruments to protect against foreign currency translation risk of expected earnings.

To protect 2007 expected income in Chilean pesos, PPL Energy Supply entered into average rate forwards for 12.4 billion Chilean pesos. The settlement date of these forwards is November 2007. At December 31, 2006, the market value of these positions, representing the amount PPL Energy Supply would receive upon their termination, was not significant. PPL Energy Supply estimated that its potential additional exposure to a change in the market value of these instruments, through a 10% adverse movement in foreign currency exchange rates, was $2 million at December 31, 2006.

PPL Energy Supply has entered into forward contracts to purchase 10.2 million Euros in order to protect against fluctuations in the Euro exchange rate, in connection with the purchase of equipment. The settlement dates of these contracts are January 2007 and January 2008. At December 31, 2006, the market value of these positions, representing the amount PPL Energy Supply would receive upon their termination, was not significant. PPL Energy Supply estimated that its potential additional exposure to a change in the market value of these instruments, through a 10% adverse movement in foreign currency exchange rates, was $1 million at December 31, 2006.

On the Statements of Income, gains and losses associated with hedges of interest payments denominated in foreign currencies are reflected in "Interest Expense." Gains and losses associated with the purchase of equipment are reflected in "Depreciation." Gains and losses associated with net investment hedges remain in accumulated other comprehensive loss, a component of "Member's Equity" on the Balance Sheets, until the investment is sold or substantially liquidated.

Nuclear Decommissioning Trust 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. As of December 31, 2006, 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 to be used to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are exposed to changes in interest rates. PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At December 31, 2006, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $38 million reduction in the fair value of the trust assets, compared with a $33 million reduction at December 31, 2005. See Note 21 to the Financial Statements for more information regarding the nuclear decommissioning trust funds.

Synthetic Fuel Tax Credit Risk

At this time, PPL Energy Supply expects that the current level and the volatility of crude oil prices may reduce the amount of synthetic fuel tax credits that PPL Energy Supply receives through its synthetic fuel production. The tax credits are reduced if the annual average wellhead price of domestic crude oil falls within a phase-out range. The tax credits are eliminated if this reference price exceeds the phase-out range. See "Regulatory Issues - IRS Synthetic Fuels Tax Credits" in Note 15 to the Financial Statements for more information regarding the phase-out of the tax credits and shutdown of synfuel projects.

PPL Energy Supply implemented a risk management strategy to hedge a portion of the variability of cash flows associated with its 2006 and 2007 synthetic fuel tax credits by hedging the risk that the 2006 and 2007 annual average wellhead price for domestic crude oil will be within the phase-out range.

At the end of 2006, PPL Energy Supply settled net purchased options which mitigated some of the reductions in 2006 synthetic fuel tax credits since the annual average wellhead price for 2006 is expected to fall within the applicable phase-out range. Additionally, PPL Energy Supply has net purchased options for 2007 that are expected to mitigate PPL Energy Supply's tax credit phase-out risk due to an increase of the average wellhead price in 2007. These positions did not qualify for hedge accounting treatment. The fair value of these positions at December 31, 2006 and 2005, was a gain of $8 million and $10 million. These amounts are reflected in "Energy-related businesses" revenues on the Statements of Income.

As of December 31, 2006, PPL Energy Supply estimated that a 10% adverse movement in market prices of crude oil would have an immaterial impact on the value of the synthetic fuel hedges. For purposes of this calculation, a decrease in the market price for crude oil is considered an adverse movement.

Credit Risk

Credit risk relates to the risk of loss that PPL Energy Supply would incur as a result of non-performance by counterparties of their contractual obligations. PPL Energy Supply maintains credit policies and procedures with respect to counterparties (including requirements that counterparties maintain certain credit ratings criteria) and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk. However, PPL Energy Supply has concentrations of suppliers and customers among electric utilities, natural gas distribution companies and other energy marketing and trading companies. These concentrations of counterparties may impact PPL Energy Supply's overall exposure to credit risk, either positively or negatively, in that counterparties may be similarly affected by changes in economic, regulatory or other conditions. As discussed above in "Contract Valuation," PPL Energy Supply records certain non-performance reserves to reflect the probability that a counterparty with contracts that are out of the money (from the counterparty's standpoint) will default in its performance. In this case, PPL Energy Supply would have to sell into a lower-priced market or purchase from a higher-priced market. These reserves are reflected in the fair value of assets recorded in "Price risk management assets" on the Balance Sheets. PPL Energy Supply also records reserves to reflect the probability that a counterparty will not make payments for deliveries PPL Energy Supply has made but not yet billed. These reserves 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 15 to the Financial Statements.

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 16 to the Financial Statements.

Acquisitions, Development and Divestitures

From time to time, PPL Energy Supply and its subsidiaries are involved in negotiations with third parties regarding acquisitions and dispositions of businesses and assets, joint ventures and development projects which may or may not result in definitive agreements. Any such transactions may impact future financial results. See Note 9 to the Financial Statements for information regarding recent acquisition, development and divestiture activities.

At December 31, 2006, PPL Global had investments in foreign facilities, including consolidated investments in WPD, Emel, EC and others. See Note 3 to the Financial Statements for information on unconsolidated investments accounted for under the equity method.

In connection with the ongoing review of its non-core international minority ownership investments, PPL Global sold certain minority interests in 2006, 2005 and 2004. See Note 9 to the Financial Statements for additional information.

PPL Energy Supply is currently planning incremental capacity increases of 349 MW at several existing domestic generating facilities. Offsetting this increase is an expected 30 MW reduction in generation capability at each of the Brunner Island and Montour plants, due to the estimated increases in station service usage during the scrubber operation. See Note 15 to the Financial Statements for additional information, as well as information regarding the planned shut down of two 150 MW generating units at PPL Martins Creek in September 2007.

PPL Energy Supply is continuously reexamining development projects based on market conditions and other factors to determine whether to proceed with these projects, sell them, cancel them, expand them, execute tolling agreements or pursue other opportunities.

Environmental Matters

See Note 15 to the Financial Statements for a discussion of environmental matters.

Competition

See "Item 1. Business - Competition" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL Energy Supply.

New Accounting Standards

See Note 23 to the Financial Statements for a discussion of new accounting standards recently adopted or 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.

In September 2006, the FASB issued SFAS 157, "Fair Value Measurements." Among other things, SFAS 157 provides a definition of fair value as well as a framework for measuring fair value. PPL Energy Supply must adopt SFAS 157 no later than January 1, 2008. The adoption of SFAS 157 is expected to impact the fair value component of PPL Energy Supply's critical accounting policies related to "Price Risk Management," "Pension and Other Postretirement Benefits," "Asset Impairment," "Leasing" and "Asset Retirement Obligations." See Note 23 to the Financial Statements for additional information regarding SFAS 157.

1)  Price Risk Management

See "Risk Management - Energy Marketing & Trading and Other" in Financial Condition.

2)  Pension and Other Postretirement Benefits

As described in Note 13 to the Financial Statements, PPL Energy Supply subsidiaries sponsor various pension and other postretirement plans and participate in, and are allocated a significant portion of the liability and net periodic pension and other postretirement costs of plans sponsored by PPL Services based on participation in those plans. PPL and PPL Energy Supply follow the guidance of SFAS 87, "Employers' Accounting for Pensions," and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," when accounting for these pension and other postretirement benefits. In addition, PPL Energy Supply adopted the recognition and measurement date provisions of SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," effective December 31, 2006. See Note 13 to the Financial Statements for further details. Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and the performance of plan assets. Delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle of these standards. This delayed recognition of actual results 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 are 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 future return on plan assets considering prior performance, but primarily based upon the plans' mix of assets and expectations for the long-term returns on those 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 domestic pension and other postretirement plans, PPL Energy Supply 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 over 500 Moody's Aa-graded non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $370 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 in conjunction with other economic data and consideration of movements in the Moody's Aa bond index to determine the discount rate assumption. At December 31, 2006, PPL Energy Supply increased the discount rate for its domestic pension plans from 5.70% to 5.94% as a result of this assessment and increased the discount rate for its other postretirement benefit plans from 5.55% to 5.79%.

A similar process is used to select the discount rate for the WPD pension plans, which uses an iBoxx British pounds sterling denominated corporate bond index as its base. At December 31, 2006, PPL Energy Supply increased the discount rate for its international pension plans from 4.75% to 5.17% as a result of this assessment.

In selecting an expected return on plan assets, PPL Energy Supply considers tax implications, past performance and economic forecasts for the types of investments held by the plans. At December 31, 2006, PPL Energy Supply's expected return on plan assets was increased from 8.22% to 8.27% for its domestic pension plans. For its international plans, PPL Energy Supply's expected return on plan assets remained at 8.09% at December 31, 2006.

In selecting a rate of compensation increase, PPL Energy Supply considers past experience in light of movements in inflation rates. At December 31, 2006, PPL Energy Supply's rate of compensation increase remained at 4.75% for its domestic plans. For the international plans, the rate of compensation increase was changed to 4.0% from 3.75% at December 31, 2006.

In selecting health care cost trend rates, PPL Energy Supply considers past performance and forecasts of health care costs. At December 31, 2006, the health care cost trend rates were 9.0% for 2007, gradually declining to 5.5% for 2012.

A variance in the assumptions listed above could have a significant impact on accrued pension and other postretirement benefit liabilities, reported annual net periodic pension and other postretirement benefit cost and other comprehensive income (OCI). The following chart reflects the sensitivities in the 2006 financial statements associated with a change in certain assumptions based on PPL's and PPL Energy Supply's primary pension and other postretirement plans. While the chart below reflects either an increase or decrease in each assumption, the inverse of this change would impact the accrued pension and other postretirement benefit liabilities, reported annual net periodic pension and other postretirement benefit cost and OCI by a similar amount in the opposite direction. Each sensitivity below reflects an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

   
Increase (Decrease)
Actuarial Assumption
  
Change in Assumption
  
Impact on Liabilities
  
Impact on Cost
  
Impact on OCI
                         
Discount Rate
    
(0.25)%
    
$
153
    
$
14
    
$
138
  
Expected Return on Plan Assets
    
(0.25)%
      
N/A
      
8
      
(9
)
Rate of Compensation Increase
    
0.25%
      
17
      
3
      
13
  
Health Care Cost Trend Rate (a)
    
1.0%
      
8
      
1
      
7
  

(a)
  
Only impacts other postretirement benefits.

The total net pension and other postretirement benefit obligations recognized by PPL Energy Supply, including the impact of adoption of SFAS 158, as of December 31, 2006, were $380 million, including pension other postretirement benefit liabilities allocated from plans sponsored by PPL Services.

In 2006, PPL Energy Supply was allocated and recognized net periodic pension and other postretirement costs charged to operating expenses of $47 million. This amount represents a $22 million increase compared with the amounts recognized during 2005. This increase in expense was partially attributable to PPL's international plans, and increased recognition of prior losses. Increased expense for PPL's domestic pension plans was attributable to updated demographic assumptions, primarily due to updating the mortality table used to measure the obligations and costs.

Refer to Note 13 to the Financial Statements for additional information regarding pension and other postretirement benefits.

3)  Asset Impairment

PPL Energy Supply performs impairment analyses for long-lived assets, including intangibles that are subject to depreciation or amortization in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." PPL Energy Supply tests for impairment whenever events or changes in circumstances indicate that a long-lived asset's carrying value may not be recoverable. Examples of 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, an impairment exists when the carrying value exceeds the sum of the estimated 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.

In determining asset impairments, management must make significant judgments to estimate future cash flows, the useful lives of long-lived assets, the fair value of the assets and management's intent to use the assets. Changes in assumptions and estimates included within the impairment reviews could result in significantly different results than those identified and recorded in the financial statements. For determining fair value, the FASB has indicated that quoted market prices in active markets are the best evidence of fair value. However, when market prices are unavailable, other valuation techniques may be used. PPL Energy Supply has generally used discounted cash flows to estimate fair value. Discounted cash flow is calculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.

PPL Energy Supply has determined that, when alternative courses of action to recover the carrying value of a long-lived asset are being considered, it uses estimated cash flows from the most likely approach to assess impairment whenever one scenario is clearly the most likely outcome. If no scenario is clearly most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternative scenarios. 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 the future sale of the assets. That assessment made as of the balance sheet date is not revised based on events that occur after the balance sheet date.

During 2006, PPL Energy Supply and its subsidiaries evaluated certain gas-fired generation assets for impairment, as events and circumstances indicated that the carrying value of these assets may not be recoverable. PPL Energy Supply did not record an impairment of these gas-fired generation assets in 2006. For these impairment analyses, the most significant assumption was the estimate of future cash flows. PPL Energy Supply estimates future cash flows using information from its corporate business plan adjusted for any recent sale or purchase commitments. Key factors that impact cash flows include projected prices for electricity and gas as well as firm sale and purchase commitments. A 10% decrease in estimated future cash flows for the gas-fired generation assets would not have resulted in an impairment charge.

In 2006, PPL Energy Supply recorded impairments of certain long-lived assets. See Note 15 to the Financial Statements for a discussion of the impairment of PPL Energy Supply's synfuel projects and Note 9 to the Financial Statements for a discussion of an impairment recorded by PPL Global.

PPL Energy Supply performs impairment analyses for goodwill in accordance with SFAS 142, "Goodwill and Other Intangible Assets." PPL Energy Supply performs an annual impairment test for goodwill, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

SFAS 142 requires goodwill to be tested for impairment at the reporting unit level. PPL Energy Supply has determined its reporting units to be one level below its operating segments.

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 value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired. If the carrying value 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 goodwill is then compared with the carrying value of that goodwill. If the carrying value exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying value of the reporting unit's goodwill.

In 2006, PPL Energy Supply was required to complete the second step of the assessment for its U.K. reporting unit. This assessment did not result in an impairment charge, as the implied fair value of the goodwill exceeded the reporting unit's carrying value of the goodwill. PPL Energy Supply's most significant assumptions surrounding the goodwill impairment tests relate to the estimates of reporting unit fair values. PPL Energy Supply estimated fair values primarily based upon discounted cash flows. For the U.K. reporting unit, an increase of the discount rate by 25 basis points would not have resulted in an impairment of goodwill; however, a 10% reduction in the forecasted cash flows would have resulted in a $68 million impairment of goodwill.

In 2006, no other second-step assessments were required for goodwill in other reporting units. A decrease in the forecasted cash flows of 10% or an increase of the discount rates by 25 basis points also would not have resulted in an impairment of goodwill in other reporting units.

PPL Energy Supply also performs a review of the residual value of leased assets in accordance with SFAS 13, "Accounting for Leases." PPL Energy Supply tests the residual value of these assets annually or more frequently whenever events or changes in circumstances indicate that a leased asset's residual value may have declined. The residual value is defined by SFAS 13 as the estimated fair value of the leased property at the end of the lease term. If the review produces a lower estimate of residual value than was originally recorded, PPL Energy Supply is required to determine whether the decline is other than temporary. If it is other than temporary, the residual value will be revised using the new estimate. This reduction in the residual value will be recognized as a loss in the period in which the estimate was changed. If the review provides a higher estimate of residual value than was originally recorded, no adjustment will be made.

In testing the residual value of leased assets, management must make significant assumptions to estimate: future cash flows; the useful lives of the leased assets; the fair value of the assets; and management's intent to use the assets. Changes in assumptions used in the tests could result in significantly different outcomes than those identified and recorded in the financial statements. PPL Energy Supply used discounted cash flow to determine the estimated fair value of the leased assets at the end of the lease term.

In 2006, PPL Energy Supply and its subsidiaries evaluated the residual value of certain leased assets. This analysis did not indicate any necessary changes to the residual value. PPL Energy Supply's estimate was based on using projections of electric and fuel prices and any firm sale and purchase agreements. An increase of the discount rate by 25 basis points or a 10% reduction in the forecasted cash flows would have resulted in a reduction of the residual value of these leased assets of $1 million and $6 million, if it was determined that the reduction was other than temporary.

4)  Leasing

PPL Energy Supply applies the provisions of SFAS 13, "Accounting for Leases," to all leasing transactions. In addition, PPL Energy Supply applies the provisions of numerous other accounting pronouncements issued by the FASB and the EITF that provide specific guidance and additional requirements related to accounting for various leasing arrangements. In general, there are two types of leases from a lessee's perspective: operating leases (leases accounted for off-balance sheet); and capital leases (leases capitalized on the balance sheet).

In accounting for leases, management makes various assumptions, including the discount rate, the fair market value of the leased assets and the estimated useful life, in determining whether a lease should be classified as operating or capital. Changes in these assumptions could result in the difference between whether a lease is determined to be an operating lease or a capital lease, thus significantly impacting the amounts to be recognized in the financial statements.

In addition to uncertainty inherent in management's assumptions, leasing transactions and the related accounting rules become increasingly complex when they involve: real estate and/or related integral equipment; sale/leaseback accounting (leasing transactions where the lessee previously owned the leased assets); synthetic leases (leases that qualify for operating lease treatment for book accounting purposes and financing treatment for tax accounting purposes); and lessee involvement in the construction of leased assets.

At December 31, 2006, PPL Energy Supply continued to participate in a significant sale/leaseback transaction. In July 2000, PPL Montana sold its interest in the Colstrip generating plant to owner lessors who are leasing the assets back to PPL Montana under four 36-year leases. This transaction is accounted for as an operating lease in accordance with current accounting pronouncements related to sale/leaseback arrangements. If for any reason this transaction did not meet the requirements for off-balance sheet operating lease treatment as a sale/leaseback, PPL Energy Supply would have recorded approximately $250 million of additional assets and approximately $305 million of additional liabilities on its balance sheet at December 31, 2006, and would have recorded additional expenses currently estimated at $7 million, after-tax, in 2006.

See Note 11 to the Financial Statements for additional information related to operating leases.

5)  Loss Accruals

PPL Energy Supply periodically accrues losses for the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. PPL Energy Supply's accounting for such events is prescribed by SFAS 5, "Accounting for Contingencies," and other related accounting guidance. SFAS 5 defines a contingency as "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur."

For loss contingencies, the loss must be accrued if (1) information is available that indicates it is "probable" that the loss has been incurred, given the likelihood of the uncertain future events and (2) the amount of the loss can be reasonably estimated. The FASB defines "probable" as cases in which "the future event or events are likely to occur." SFAS 5 does not permit the accrual of contingencies that might result in gains. PPL Energy Supply continuously assesses potential loss contingencies for environmental remediation, litigation claims, income taxes, regulatory penalties and other events.

PPL Energy Supply also has accrued estimated losses on long-term purchase commitments when significant events have occurred. For example, estimated losses were accrued when long-term purchase commitments were assumed under asset acquisition agreements and when PPL Electric's generation business was deregulated. Under regulatory accounting, PPL Electric recorded the above-market cost of energy purchases from NUGs as part of its purchased power costs on an as-incurred basis, since these costs were recovered in regulated rates. When the generation business was deregulated, the estimated loss associated with these long-term purchase commitments to make above-market NUG purchases was recorded because PPL Electric was committed to purchase electricity at above market prices but it could no longer recover these costs in regulated rates. As described below, this loss accrual was transferred to PPL EnergyPlus in the July 1, 2000, corporate realignment. PPL Energy Supply's considers these losses to be similar to an asset impairment or inventory write-downs.

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 of accounting for loss accruals require significant judgment by PPL Energy Supply's management.

Initial Identification and Recording of the Loss Accrual

PPL Energy Supply uses its internal expertise and outside experts (such as lawyers, tax specialists and engineers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

Significant loss accruals were initially recorded in 2005 and 2006. One involved the accrual of remediation expenses in connection with the ash basin leak at the Martins Creek generating station. Another was the loss accrual related to the PJM billing dispute. Significant judgment was required by PPL's and PPL Energy Supply's management to perform the initial assessment of these contingencies.

·
In August 2005, there was a leak of water containing fly ash from a disposal basin at the Martins Creek plant. This resulted in ash being deposited onto adjacent roadways and fields, and into a nearby creek and the Delaware River. PPL Energy Supply immediately began to work with the Pennsylvania DEP and appropriate agencies and consultants to assess the extent of environmental damage caused by the discharge and to remediate the damage. At that time, PPL Energy Supply had, and still has, no reason to believe that the Martins Creek fly ash leak has caused any danger to human health or any adverse biological impact on the river aquatic life. However, at that time, PPL Energy Supply expected that it would be subject to an enforcement action by the Pennsylvania DEP and that claims may be brought against it by several state agencies and private litigants.
 
PPL Energy Supply's management assessed the contingency in the third quarter of 2005. The ultimate cost of the remediation effort was difficult to estimate due to a number of uncertainties, such as the scope of the project, the impact of weather conditions on the ash recovery effort, and the ultimate outcome of enforcement actions and private litigation. PPL Energy Supply's management concluded, at the time, that $33 million was the best estimate of the cost of the remediation effort. PPL Energy Supply recorded this loss accrual in the third quarter of 2005. See "Ongoing Assessment of Recorded Loss Accruals" for a discussion of the year-end assessments of this contingency.
   
·
In 2004, Exelon Corporation, on behalf of its subsidiary, PECO Energy, Inc. (PECO), filed a complaint against PJM and PPL Electric with the FERC, alleging that PJM had overcharged PECO from April 1998 through May 2003 as a result of an error by PJM. The complaint requested the FERC, among other things, to direct PPL Electric to refund to PJM $39 million, plus interest of $8 million, and for PJM to refund these same amounts to PECO. In April 2005, the FERC issued an Order Establishing Hearing and Settlement Judge Proceedings (the Order). In the Order, the FERC determined that PECO was entitled to reimbursement for the transmission congestion charges that PECO asserted PJM erroneously billed. The FERC ordered settlement discussions, before a judge, to determine the amount of the overcharge to PECO and the parties responsible for reimbursement to PECO.
 
Based on an evaluation of the FERC Order, PPL's management concluded that it was probable that a loss had been incurred in connection with the PJM billing dispute. PPL Electric recorded a loss accrual of $47 million, the amount of PECO's claim, in the first quarter of 2005.
 
In March 2006, the FERC rejected the proposed settlement agreement that was filed with the FERC in September 2005. Subsequently, in March 2006, PPL Electric and Exelon filed with the FERC a new proposed settlement agreement. In November 2006, the FERC entered an order accepting the March 2006 proposed settlement agreement, upon the condition that PPL Electric agree to certain modifications. In December 2006, PPL Electric and Exelon filed with the FERC a modified offer of settlement (Compliance Filing.) Under the Compliance Filing, which must be approved by the FERC, PPL Electric would make a single payment through its monthly PJM bill of $38 million, plus interest through the date of payment, and PJM would include a single credit for this amount in PECO's monthly PJM bill. Through December 31, 2006, the estimated interest on this payment would be $4 million, for a total payment of $42 million. As a result, PPL Electric reduced the recorded loss accrual to $42 million at December 31, 2006. Based on the terms of the Compliance Filing and the effective date and provisions of power supply agreements between PPL Electric and PPL EnergyPlus, PPL has determined that PPL EnergyPlus is responsible for the claims subsequent to July 1, 2000 (totaling $30 million), and that PPL Electric is responsible for claims prior to that date (totaling $12 million). Therefore, PPL EnergyPlus recorded a loss accrual of $30 million at December 31, 2006, for its share of the claims and a corresponding payable to PPL Electric. PPL EnergyPlus recorded $27 million of "Energy purchases" and $3 million of "Interest Expense" on the Statement of Income. PPL Energy Supply's management will continue to assess the loss accrual for this contingency in future periods.
   

See Note 15 to the Financial Statements for additional information on both of these contingencies.
 
PPL Energy Supply has identified certain other events that could give rise to a loss, but that do not meet the conditions for accrual under SFAS 5. SFAS 5 requires disclosure, but not a recording, of potential losses when it is "reasonably possible" that a loss has been incurred. The FASB defines "reasonably possible" as cases in which "the chance of the future event or events occurring is more than remote but less than likely." See Note 15 to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual under SFAS 5.

Reducing Recorded Loss Accruals

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:

·
Certain loss accruals are systematically reduced based on the expiration of contract terms. An example of this is the loss accrual for above-market NUG purchase commitments, which is described below. This loss accrual is being reduced over the lives of the NUG purchase contracts.
   
·
Allowances for excess or obsolete inventory are reduced as the inventory items are pulled from the warehouse shelves and sold as scrap or otherwise disposed.
   
·
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 when 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.

The largest loss accrual on PPL Energy Supply's balance sheet, and the loss accrual that changed most significantly in 2006, was for an impairment of above-market NUG purchase commitments. This loss accrual reflects the estimated difference between the above-market contract terms, under the purchase commitments, and the expected fair value of the electricity to be purchased at the date these contracts were impaired. This loss accrual was originally recorded at $879 million in 1998, when PPL Electric's generation business was deregulated.

When the loss accrual related to NUG purchases was recorded in 1998, PPL Electric established the triggering events for when the loss accrual would be reduced. A schedule was established to reduce the liability based on projected purchases over the lives of the NUG contracts. This loss accrual was transferred to PPL EnergyPlus in the July 1, 2000 corporate realignment. PPL EnergyPlus continues to reduce the above-market NUG liability based on the aforementioned schedule. As PPL EnergyPlus reduces the liability for the above-market NUG purchases, it offsets the actual cost of NUG purchases, thereby bringing the net power purchase expense more in line with expected market prices. The above-market loss accrual was $136 million at December 31, 2006. This loss accrual will be significantly reduced by 2009, when all but one of the NUG contracts expires. The then-remaining NUG contract will expire in 2014.

Ongoing Assessment of Recorded Loss Accruals

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

As part of the year-end preparation of its 2005 financial statements, PPL Energy Supply's management re-assessed the loss accrual related to the ash basin leak at Martins Creek, described above under "Initial Identification and Recording of the Loss Accrual." Based on the ongoing remediation efforts and communications with the Pennsylvania DEP and other appropriate agencies, PPL Energy Supply's management concluded that $48 million was the best estimate of the cost of the remediation effort.

In 2006, PPL Energy Supply reduced the estimate of costs to $37 million, primarily due to an insurance claim settlement. This amount represents management's best estimate of the probable loss associated with the Martins Creek ash basin leak. At December 31, 2006, the remaining contingency for this remediation was $9 million. PPL Energy Supply cannot predict the final cost of the remediation, the outcome of the action initiated by the Pennsylvania DEP, the outcome of the natural resource damage assessment, the outcome of the lawsuit brought by the citizens and businesses and the exact nature of any other regulatory or other legal actions that may be initiated against PPL Energy Supply as a result of the disposal basin leak. PPL Energy Supply also cannot predict with certainty the extent of the fines or damages that may be sought in connection with any such actions or the ultimate financial impact on PPL Energy Supply. PPL Energy Supply's management will continue to assess the loss accrual for this contingency in future periods.

Income Tax Uncertainties

Significant management judgment is required in developing PPL Energy Supply's contingencies, or reserves, for income taxes and valuation allowances for deferred tax assets. The ongoing assessment of tax contingencies is intended to result in management's best estimate of the ultimate settled tax position for each tax year. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns by taxing authorities. However, the amount ultimately paid upon resolution of any issues raised by such authorities may differ from the amount accrued. In evaluating the exposure associated with various filing positions, PPL Energy Supply accounts for changes in probable exposures based on management's best estimate of the amount of benefit that should be recognized in the financial statements. An allowance is maintained for the tax contingencies, the balance of which management believes to be adequate. The ongoing assessment of valuation allowances is based on an assessment of whether deferred tax assets will ultimately be realized. Management considers a number of factors in assessing the ultimate realization of deferred tax assets, including forecasts of taxable income in future periods.

In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109." PPL Energy Supply adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 alters the methodology PPL Energy Supply currently uses to account for income tax uncertainties. Effective with the adoption of FIN 48, uncertain tax positions are no longer considered to be contingencies assessed in accordance with SFAS 5. See Note 23 to the Financial Statements for a more detailed discussion of FIN 48 and for information regarding the expected impact of adoption.

6)  Asset Retirement Obligations

SFAS 143, "Accounting for Asset Retirement Obligations," requires legal obligations associated with the retirement of long-lived assets to be recognized as a liability in the financial statements. The initial obligation should be measured at the 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.

FIN 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143," clarifies the term conditional ARO as used in SFAS 143. FIN 47 specifies that 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 through consideration of estimated retirement costs in current period dollars, 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. Changes in 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, 2006, PPL Energy Supply had AROs totaling $336 million recorded on the Balance Sheet. Of this amount, $276 million or 82% relates to PPL Energy Supply's nuclear decommissioning ARO. PPL Energy Supply's 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 the nuclear decommissioning ARO liability at PPL Energy Supply as of December 31, 2006, 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. Each sensitivity below reflects an evaluation of the change based solely on a change in that assumption.
   
Change in
Assumption
  
Impact on
ARO Liability
         
Retirement Cost
  
10%/(10)%
  
$25/$(25)
Discount Rate
  
0.25%/(0.25)%
  
$(26)/$29
Inflation Rate
  
0.25%/(0.25)%
  
$32/$(29)

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit and audit-related services and other services permitted by the Sarbanes-Oxley Act of 2002 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.
 
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

PPL Electric provides electricity delivery service in eastern and central Pennsylvania. Its headquarters are in Allentown, PA. See "Item 1. Business - Background," for a description of PPL Electric's business. PPL Electric's strategy and principal challenge is to own and operate its electricity delivery business while maintaining high standards of customer service and reliability in a cost-effective manner.

PPL Electric's electricity delivery business is rate-regulated. Accordingly, this business is subject to regulatory risk in terms of the costs that they may recover and the investment returns that they may collect in customer rates. PPL Electric's PLR obligation and the associated recovery from customers of its energy supply costs after 2009, when PPL Electric's full requirements energy supply agreements with PPL EnergyPlus expire, will be determined by the PUC pursuant to rules that have not yet been promulgated. To address this risk, PPL Electric has filed a plan with the PUC detailing how it proposes to acquire its electricity supply for non-shopping customers after 2009. In February 2007, a PUC Administrative Law Judge issued a recommended decision approving PPL Electric's plan with minor modifications. PPL Electric cannot predict when the PUC will act on the recommended decision or what action it will take. Also, in February 2007, the PUC issued proposed PLR regulations and a policy statement regarding interpretation and implementation of those regulations. The PUC is requesting public comment on both the regulations and policy statement. At current forward market prices, PPL Electric currently estimates that customer rates could increase by about 20% in 2010.

A key challenge for PPL Electric is to maintain a strong credit profile. Investors, analysts and rating agencies that follow companies in the energy industry continue to be focused on the credit quality and liquidity position of these companies. PPL Electric continually focuses on maintaining an appropriate capital structure and liquidity position, thereby managing its target credit profile.

See "Item 1A. Risk Factors" for more information concerning 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 past and expected future performance in implementing the strategy and challenges mentioned above. Specifically:

·
"Results of Operations" provides an overview of PPL Electric's operating results in 2006, 2005 and 2004, including a review of earnings. It also provides a brief outlook for 2007.
   
·
"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 commitments 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 of PPL Electric's current credit ratings.
   
·
"Financial Condition - Risk Management" includes an explanation of PPL Electric's risk management activities regarding commodity price risk and interest rate 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 Financial Statements and the accompanying Notes.

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

Results of Operations

Earnings

Income available to PPL was:

   
2006
    
2005
    
2004
  
                   
   
$
180
    
$
145
    
$
74
  

The after-tax changes in income available to PPL were due to:

 
   
2006 vs. 2005
  
2005 vs. 2004
             
Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges)
  
$
(6
)
  
$
123
  
Operation and maintenance expenses
   
(13
)
    
(6
)
Taxes, other than income (excluding gross receipts tax)
    
1
      
(9
)
Depreciation
    
(4
)
    
(3
)
Change in tax reserves associated with stranded costs securitization (Note 5)
            
(15
)
Interest income on 2004 IRS tax settlement
            
(5
)
Financing costs (excluding transition bond interest expense)
    
(6
)
    
4
  
Interest income on loans to affiliates
    
4
      
6
  
Income tax return adjustments
    
(4
)
        
Income tax reserve adjustments
            
5
  
Other
    
(1
)
        
Unusual items
   
64
      
(29
)
   
$
35
    
$
71
  

 
PPL Electric's year-to-year earnings were impacted by a number of key factors, including:

·
Delivery revenues decreased in 2006 compared with 2005 primarily due to milder weather in 2006.
   
·
In December 2004, the PUC approved an increase in PPL Electric's distribution rates of $137 million (based on a return on equity of 10.7%), and approved PPL Electric's proposed mechanism for collecting an additional $57 million in transmission-related charges, for a total annual increase of $194 million, effective January 1, 2005. Additionally, delivery revenues increased in 2005 compared with 2004 due to a 4.3% increase in electricity delivery sales volumes.
   
·
Operation and maintenance expense increased in 2006 compared with 2005, primarily due to higher tree trimming costs, a union contract ratification bonus and storm restoration costs. Operation and maintenance expense increased in 2005 compared with 2004, primarily due to increased system reliability work and tree trimming costs. Operation and maintenance expenses were also impacted in 2005 due to the January 2005 ice storm costs and subsequent deferral as discussed below.
   
 
In January 2005, severe ice storms hit PPL Electric's service territory. The total cost of restoring service to 238,000 customers, excluding capitalized costs and regular payroll expenses, was $16 million.
 
In August 2005, the PUC issued an order granting PPL Electric's petition for authority to defer and amortize for regulatory accounting and reporting purposes a portion of the ice storm costs, subject to certain conditions. As a result of the PUC Order and in accordance with SFAS 71, "Accounting for the Effects of Certain Types of Regulation," in the third quarter of 2005, PPL Electric deferred $12 million of its previously expensed storm costs. The deferral was based on its assessment of the timing and likelihood of recovering the deferred costs in PPL Electric's next distribution base rate case.

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

   
2006
  
2005
  
2004
                         
Reversal of cost recovery - Hurricane Isabel (Note 1)
  
$
(7
)
                
Realization of benefits related to Black Lung Trust assets (Note 13)
    
21
                  
PJM billing dispute (Note 15)
    
21
    
$
(27
)
        
Acceleration of stock-based compensation expense for periods prior to 2005 (Note 1)
            
(2
)
        
Total
  
$
35
    
$
(29
)
        

PPL Electric's earnings beyond 2006 are subject to various risks and uncertainties. See "Forward-Looking Information," "Item 1A. Risk Factors," the rest of this Item 7 and Note 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact PPL Electric's future earnings.

2007 Outlook

PPL Electric expects to have flat earnings in 2007 compared with 2006, with modest load growth being offset by increased operation and maintenance expenses.

In late March 2007, PPL Electric expects to file a request with the PUC seeking an increase in its distribution rates beginning in January 2008.

Statement of Income Analysis --

Operating Revenues

Retail Electric

The increases in revenues from retail electric operations were attributable to:

     
2006 vs. 2005
  
2005 vs. 2004
               
 
PLR electric generation supply
  
$
127
    
$
122
  
 
Electric delivery
    
(38
)
    
201
  
 
Other
    
(1
)
    
1
  
     
$
88
    
$
324
  

The increases in revenues from retail electric operations for 2006 compared with 2005 were primarily due to increased PLR revenues resulting from an 8.4% rate increase, offset by a decrease in electric delivery revenues resulting from a decrease in sales volumes due in part to milder weather in 2006.

The increases in revenues from retail electric operations for 2005 compared with 2004 were primarily due to:

·
higher electric delivery revenues resulting from higher transmission and distribution customer rates effective January 1, 2005, and a 4.3% increase in sales volume; and
·
higher PLR revenues due to a 2% rate increase and a 6% increase in sales volume, in part due to the return of customers previously served by alternate suppliers.

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 $9 million increase in wholesale revenue to affiliate in 2006 compared with 2005 was primarily due to an unplanned outage at a NUG facility in 2005. PPL Electric therefore had more electricity to sell to PPL EnergyPlus in 2006.

The $6 million decrease in wholesale revenue to affiliate in 2005 compared with 2004 was also primarily due to the unplanned outage at a NUG facility in 2005.

Energy Purchases

Energy purchases decreased by $81 million for 2006 compared with 2005 primarily due to the $39 million loss accrual for the PJM billing dispute recorded in 2005 and the $28 million reduction of that accrual recorded in December 2006. See Note 15 to the Financial Statements for additional information regarding the PJM billing dispute. Also, the decrease reflects $14 million in lower ancillary costs and a reduction of $8 million resulting from the elimination of a charge to load-serving entities, which minimized the impacts of integrating into the Midwest ISO and PJM markets, contributed to the decrease. These decreases were partially offset by a $7 million increase due to an unplanned NUG outage in 2005.

Energy purchases increased by $49 million in 2005 compared with 2004 primarily due to the $39 million accrual for the PJM billing dispute. Also, the increase reflects a $6 million increase in ancillary costs and a $10 million charge to load-serving entities which began in May 2005, retroactive to December 2004. This charge minimized the revenue impacts to transmission owners that resulted from the integration of the Midwest ISO and PJM markets and continued until March 2006. These increases were partially offset by a $7 million decrease due to an unplanned NUG outage in 2005.

Energy Purchases from Affiliate

Energy purchases from affiliate increased by $118 million in 2006 compared with 2005. The increase is primarily the result of an 8.4% increase in prices for energy purchased under the power supply contracts with PPL EnergyPlus needed to support PLR load, offset by a slight decrease in that load.

Energy purchases from affiliate increased by $90 million in 2005 compared with 2004. The increase reflects an increase in PLR load, as well as higher prices for energy purchased under the power supply contracts with PPL EnergyPlus that was needed to support the PLR load.

Other Operation and Maintenance

For the year ended 2006, PPL Electric's other operation and maintenance expense was reduced by a $36 million pre-tax one-time credit in connection with the realization of benefits related to the ability to use excess Black Lung Trust assets to make future benefit payments for retired miners' medical benefits. See Note 13 to the Financial Statements for additional information.

Excluding this one-time credit, the increases in other operation and maintenance expenses were due to:

   
2006 vs. 2005
  
2005 vs. 2004
                 
Costs associated with severe ice storms in January 2005
(Note 1)
  
$
(16
)
  
$
16
  
Subsequent deferral of a portion of costs associated with January 2005 ice storms (Note 1)
    
12
      
(12
)
Increase in PUC-reportable storm costs
   
9
          
Increase in domestic system reliability work, including tree trimming
    
19
      
10
  
Accelerated amortization of stock-based compensation (Note 1)
    
(5
)
    
5
  
Increase in pension and postretirement benefit costs (Note 13)
    
4
      
1
  
Increase in allocation of certain corporate service costs
(Note 16)
    
2
      
1
  
Reversal of cost recovery - Hurricane Isabel (Note 1)
    
11
          
Decrease in employee benefits due to transfer of field services employees to PPL Generation
            
(7
)
Union contract ratification bonus
    
3
          
PJM system control and dispatch services
   
(5
)
    
(3
)
Change in retired miners' medical benefits
    
(7
)
    
5
  
Other
    
3
      
(6
)
   
$
30
    
$
10
  

Depreciation

Depreciation increased by $6 million in 2006 compared with 2005 and by $5 million in 2005 compared with 2004 primarily due to plant additions. 2006 compared with 2005 was impacted by the purchase of equipment previously leased. See Note 11 to the Financial Statements for additional information. 2005 compared with 2004 was impacted by the Automated Meter Reading project.

Taxes, Other Than Income

A $7 million increase in gross receipts tax expense, offset by a $2 million decrease in real estate tax expense, are the primary reasons for the $4 million increase in taxes, other than income, in 2006 compared with 2005.

In 2004, PPL Electric reversed a $14 million accrued liability for 1998 and 1999 PURTA taxes that had been accrued based on potential exposure in the proceedings regarding the Susquehanna nuclear station tax assessment. The rights of third-party intervenors to further appeal expired in 2004. The reversal and a $19 million increase in domestic gross receipts tax expense in 2005 are the primary reasons for the $33 million increase in taxes, other than income in 2005, compared with 2004.

Other Income - net

See Note 17 to the Financial Statements for details of other income and deductions.

Financing Costs

The decreases in financing costs, which include "Interest Expense," "Interest Expense with Affiliate" and "Dividends on Preferred Securities," were due to:

   
2006 vs. 2005
  
2005 vs. 2004
             
Dividends on 6.25% Series Preference Stock (Note 7)
  
$
12
          
Interest on PLR contract collateral (Note 16)
    
5
    
$
9
  
Decrease in long-term debt interest expense
    
(20
)
    
(24
)
Interest accrued for PJM billing dispute (Note 15)
    
(15
)
    
8
  
Other
    
(1
)
    
(1
)
   
$
(19
)
  
$
(8
)

Income Taxes

The changes in income taxes were due to:

   
2006 vs. 2005
  
2005 vs. 2004
             
Higher pre-tax book income
  
$
30
    
$
50
  
Tax return adjustments
    
4
          
Tax reserve adjustments
            
10
  
Other
    
1
      
1
  
   
$
35
    
$
61
  

See Note 5 to the Financial Statements for details on effective income tax rates.

Financial Condition

Liquidity and Capital Resources

PPL Electric is focused on maintaining an appropriate liquidity position and strengthening its balance sheet, thereby continuing to improve its credit profile. PPL Electric believes that its cash on hand, short-term investments, operating cash flows, access to debt and equity capital markets and borrowing capacity, taken as a whole, provide sufficient resources to fund its ongoing operating requirements, future security maturities and estimated future capital expenditures. PPL Electric currently expects cash, cash equivalents and short-term investments at the end of 2007 to be less than $100 million, while maintaining approximately $200 million in credit facility capacity and up to $150 million in short-term debt capacity related to an asset-backed commercial paper program. However, PPL Electric's cash flows from operations and its 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; and
·
a downgrade in PPL Electric's or its subsidiary's credit ratings that could negatively affect their ability to access capital and increase the cost of maintaining credit facilities and any new debt.

At December 31, PPL Electric had the following:

   
2006
  
2005
  
2004
                         
Cash and cash equivalents
 
$
150
    
$
298
    
$
151
  
Short-term investments
    
26
      
25
      
10
  
     
176
      
323
      
161
  
Short-term debt
    
42
      
42
      
42
  

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

   
2006
  
2005
  
2004
                         
Net Cash Provided by Operating Activities
  
$
578
    
$
580
    
$
898
  
Net Cash Used in Investing Activities
    
(287
)
    
(193
)
    
(523
)
Net Cash Used in Financing Activities
    
(439
)
    
(240
)
    
(386
)
Net (Decrease) Increase in Cash and Cash Equivalents
  
$
(148
)
  
$
147
    
$
(11
)

Operating Activities

PPL Electric's cash provided by operating activities remained flat in 2006 compared with 2005. Except for the items explained below, there were no other significant changes in the components of PPL Electric's cash provided by operating activities. Domestic retail electric revenues increased as a result of an 8.4% increase in PLR sales prices in 2006, but were partially offset by a decrease in domestic delivery revenues resulting from a decrease in sales volumes, due in part to milder weather in 2006. The net increase from revenues was offset by energy purchases PPL Electric made from PPL EnergyPlus under the PLR contracts. PPL Electric purchased less energy under the PLR contracts in 2006 but incurred a scheduled 8.4% increase in the price it pays under such contracts.

Net cash provided by operating activities decreased by $318 million in 2005 compared with 2004, primarily as a result of receipts in 2004 of $300 million in cash collateral related to the PLR energy supply agreements and a federal income tax refund in 2004. The decrease for 2005 compared with 2004 was partially mitigated by the 7.1% increase in distribution rates and transmission cost recoveries effective January 1, 2005.

An important element supporting the stability of PPL Electric's cash from operations is its long-term purchase contracts with PPL EnergyPlus. These contracts provide sufficient energy for PPL Electric to meet its PLR obligation through 2009, at the predetermined capped rates it is entitled to charge its customers over this period. These contracts require cash collateral or other credit enhancement, or reductions or terminations of a portion of the entire contract through cash settlement, in the event of adverse changes in market prices. Also under the contracts, PPL Energy Supply may request cash collateral or other credit enhancement, or reductions or terminations of a portion of the entire contract through cash settlement, in the event of a downgrade of PPL Electric's credit ratings. The maximum amount that PPL Electric would have to post under these contracts is $300 million, and PPL Electric estimates that it would not have had to post any collateral if energy prices decreased by 10% from year-end 2006 or 2005 levels.

Investing Activities

The primary use of cash in investing activities is capital expenditures. See "Forecasted Uses of Cash" for detail regarding capital expenditures in 2006 and projected expenditures for the years 2007 through 2011.

Net cash used in investing activities increased by $94 million in 2006 compared with 2005, primarily as a result of an increase of $115 million in capital expenditures, of which $52 million related to the purchase of leased equipment. See Note 11 to the Financial Statements for further discussion of the purchase of leased equipment in connection with the termination of the related master lease agreements.

Net cash used in investing activities decreased by $330 million in 2005 compared with 2004, primarily as a result of initiating a $300 million demand loan to an affiliate in 2004.

Financing Activities

Net cash used in financing activities increased $199 million in 2006 compared with 2005, primarily as a result of the repurchase of $200 million of common stock from PPL, an increase of $298 million in net debt retirements and an increase of $23 million in dividends paid to PPL, partially offset by net proceeds of $245 million from the issuance of preference stock and a $75 million contribution from PPL. A portion of the proceeds received from the issuance of the preference stock was used to fund the repurchase of common stock from PPL. See Note 7 to the Financial Statements for details regarding the preference stock. PPL Electric did not issue any long-term debt in 2006. See Note 8 to the Financial Statements for more detailed information regarding PPL Electric's debt retirements during 2006.

Net cash used in financing activities decreased by $146 million in 2005 compared with 2004, primarily due to a decrease of $217 million in net debt retirements, partially offset by an increase of $69 million in dividends paid to PPL.

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.

Forecasted Sources of Cash

PPL Electric expects to continue to have significant sources of cash available in the near term, including a credit facility, a commercial paper program and an asset-backed commercial paper program. PPL Electric also expects to continue to have access to debt and equity capital markets, as necessary, for its long-term financing needs.

Credit Facility

At December 31, 2006, PPL Electric's total committed borrowing capacity under its credit facility and the use of this borrowing capacity were:

   
Committed Capacity
    
Borrowed
    
Letters of Credit Issued (b)
    
Available Capacity
  
                                 
PPL Electric Credit Facility (a)
  
$
200
                    
$
200
  

(a)
  
Borrowings under PPL Electric's credit facility bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating. PPL Electric also has the capability to cause the lenders to issue up to $200 million of letters of credit under this facility, which issuances reduce available borrowing capacity.
 
The credit facility contains a financial covenant requiring debt to total capitalization to not exceed 70%. At December 31, 2006 and 2005, PPL Electric's consolidated debt to total capitalization percentages, as calculated in accordance with its credit facility, were 48% and 55%. The credit facility also contains standard representations and warranties that must be made for PPL Electric to borrow under it.
     
(b)
  
PPL Electric has a reimbursement obligation to the extent any letters of credit are drawn upon.

In addition to the financial covenants noted in the table above, the credit agreement contains various other covenants. Failure to meet the covenants beyond applicable grace periods could result in acceleration of due dates of borrowings and/or termination of the agreement. PPL Electric monitors the covenants on a regular basis. At December 31, 2006, 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 this funding source. PPL Electric intends to renew and extend its $200 million credit facility in 2007.

Commercial Paper

PPL Electric maintains a commercial paper program for up to $200 million to provide it with an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by the $200 million credit facility of PPL Electric. PPL Electric had no commercial paper outstanding at December 31, 2006 and 2005. During 2007, PPL Electric may issue commercial paper from time to time to facilitate short-term cash flow needs.

Asset-Backed Commercial Paper Program

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 pledges these assets to secure loans of up to an aggregate of $150 million from a commercial paper conduit sponsored by a financial institution. PPL Electric uses the proceeds from the program for general corporate purposes and to cash collateralize letters of credit. At December 31, 2006 and 2005, the loan balance outstanding was $42 million, all of which was used to cash collateralize letters of credit. See Note 8 to the Financial Statements for further discussion of the asset-backed commercial paper program.

Long-Term Debt and Equity Securities

Subject to market conditions in 2007, PPL Electric currently plans to issue up to $300 million in long-term debt securities. PPL Electric expects to use the proceeds to fund a maturity of existing debt and for general corporate purposes. PPL Electric currently does not plan to issue any equity securities in 2007.

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 and payment of dividends on its common and preferred securities.

Capital Expenditures

The table below shows PPL Electric's actual spending for the year 2006 and current capital expenditure projections for the years 2007 through 2011.

   
Actual
  
Projected
  
   
2006
  
2007
  
2008
  
2009
  
2010
  
2011
  
Construction expenditures (a)
                                      
Transmission and distribution facilities
  
$
268
  
$
272
  
$
234
  
$
260
  
$
268
  
$
317
  
Other
    
21
    
24
    
20
    
17
    
17
    
21
  
Total Capital Expenditures
  
$
289
  
$
296
  
$
254
  
$
277
  
$
285
  
$
338
  

(a)
  
Construction expenditures include AFUDC, which is expected to be approximately $13 million for the 2007-2011 period.

PPL Electric's capital expenditure projections for the years 2007-2011 total approximately $1.5 billion. Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.

PPL Electric plans to fund all of its capital expenditures in 2007 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, 2006, the estimated contractual cash obligations of PPL Electric were:

Contractual Cash Obligations
  
Total
  
Less
Than
1 Year
  
1-3
Years
  
4-5
Years
  
After 5
Years
                               
Long-term Debt (a)
  
$
1,979
    
$
555
    
$
881
    
 
      
$
543
  
Capital Lease Obligations
                                        
Operating Leases
                                       
Purchase Obligations (b)
    
5,370
      
1,737
      
3,633
                  
Other Long-term Liabilities Reflected on the Balance Sheets under GAAP
                                        
Total Contractual Cash Obligations
  
$
7,349
    
$
2,292
    
$
4,514
    
 
      
$
543
  

(a)
  
Reflects principal maturities only. Includes $605 million of transition bonds issued by PPL Transition Bond Company in 1999 to securitize a portion of PPL Electric's stranded costs. This debt is non-recourse to PPL Electric.
(b)
  
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.

Dividends

From time to time, as determined by its Board of Directors, PPL Electric pays dividends on its common stock to its parent, PPL, which uses the dividends for general corporate purposes, including meeting its cash flow needs. 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 expects to continue to pay quarterly dividends on its outstanding preferred securities, if and as declared by its Board of Directors.

PPL Electric's 2001 Senior Secured Bond Indenture restricts dividend payments in the event that PPL Electric fails to meet interest coverage ratios or fails to comply with certain requirements included in its Articles of Incorporation and Bylaws to maintain its separateness from PPL and PPL's other subsidiaries. PPL Electric does not, at this time, expect that any of such limitations would significantly impact its ability to declare dividends.

Credit Ratings

Moody's, S&P and Fitch periodically review the credit ratings on the debt and preferred securities of PPL Electric and PPL Transition Bond Company. 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 and PPL Transition Bond Company 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 or PPL Transition Bond Company. 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 their securities. A downgrade in PPL Electric's or PPL Transition Bond Company'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 and PPL Transition Bond Company at December 31, 2006.

   
Moody's
 
S&P
  
Fitch (b)
PPL Electric
           
 
Senior Unsecured/Issuer Rating
  
Baa1
  
A-
  
BBB
 
First Mortgage Bonds
  
A3
  
A-
  
A-
 
Pollution Control Bonds (a)
  
Aaa
  
AAA
    
 
Senior Secured Bonds
  
A3
  
A-
  
A-
 
Commercial Paper
  
P-2
  
A-2
  
F2
 
Preferred Stock
  
Baa3
  
BBB
  
BBB+
 
Preference Stock
  
Baa3
  
BBB
  
BBB
 
Outlook
  
STABLE
  
STABLE
  
STABLE
               
PPL Transition Bond Company
            
 
Transition Bonds
  
Aaa
  
AAA
  
AAA

(a)
  
Insured as to payment of principal and interest.
(b)
  
Issuer Rating for Fitch is an "Issuer Default Ratings."

In March 2006, Moody's upgraded the issuer rating of PPL Electric to Baa1 from Baa2, upgraded the ratings of its First Mortgage Bonds and Senior Secured Bonds to A3 from Baa1 and upgraded the rating of its preferred stock to Baa3 from Ba1.

In connection with PPL Electric's issuance of preference stock in April 2006, S&P affirmed all of PPL Electric's credit ratings.

In August 2006, Fitch affirmed its credit ratings and stable outlook for PPL Electric.

In November 2006, S&P completed its annual review of its credit ratings for PPL Electric. At that time, S&P affirmed its credit ratings and stable outlook for PPL Electric.

Off-Balance Sheet Arrangements

PPL Electric has entered into certain guarantee agreements that are within the scope of FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." See Note 15 to the Financial Statements for a discussion on guarantees.

Risk Management

Market Risk

Commodity Price Risk - PLR Contracts

PPL Electric and PPL EnergyPlus have power supply agreements under which PPL EnergyPlus sells to PPL Electric (under a predetermined pricing arrangement) energy and capacity to fulfill PPL Electric's PLR obligation through 2009. As a result, PPL Electric has shifted any electric price risk relating to its PLR obligation to PPL EnergyPlus through 2009. See Note 16 to the Financial Statements for information on the PLR contracts.

Interest Rate Risk

PPL Electric has issued debt to finance its operations, which increases its interest rate risk. At December 31, 2006 and 2005, PPL Electric's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL Electric is also exposed to changes in the fair value of its debt portfolio. At December 31, 2006, PPL Electric estimated that its potential exposure to a change in the fair value of its debt portfolio, through a 10% adverse movement in interest rates, was $37 million, compared with $43 million at December 31, 2005.

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 16 to the Financial Statements.

Environmental Matters

See Note 15 to the Financial Statements for a discussion of environmental matters.

Competition

See "Item 1. Business - Competition" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL Electric.

New Accounting Standards

See Note 23 to the Financial Statements for a discussion of new accounting standards recently adopted or 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.

In September 2006, the FASB issued SFAS 157, "Fair Value Measurements." Among other things, SFAS 157 provides a definition of fair value as well as a framework for measuring fair value. PPL Electric must adopt SFAS 157 no later than January 1, 2008. The adoption of SFAS 157 is expected to impact the fair value component of PPL Electric's critical accounting policy related to "Pension and Other Postretirement Benefits." See Note 23 to the Financial Statements for additional information regarding SFAS 157.

1)  Pension and Other Postretirement Benefits

As described in Note 13 to the Financial Statements, PPL Electric participates in, and is allocated a significant portion of the liability and net periodic pension and other postretirement costs of plans sponsored by PPL Services based on participation in those plans. PPL follows the guidance of SFAS 87, "Employers' Accounting for Pensions," and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," when accounting for these benefits. In addition, PPL adopted the recognition and measurement date provisions of SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," effective December 31, 2006. See Note 13 to the Financial Statements for further details. Under these accounting standards, assumptions are made regarding the valuation of benefit obligations and performance of plan assets. Delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle of these standards. This delayed recognition of actual results 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 are 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 future return on plan assets considering prior performance, but primarily based upon the plans' mix of assets and expectations for the long-term returns on those 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 domestic pension and other postretirement 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 over 500 Moody's Aa-graded non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $370 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 in conjunction with other economic data and consideration of movements in the Moody's Aa bond index to determine the discount rate assumption. At December 31, 2006, PPL increased the discount rate for its domestic plans from 5.70% to 5.94%.

In selecting an expected return on plan assets, PPL considers tax implications, past performance and economic forecasts for the types of investments held by the plans. At December 31, 2006, PPL's expected return on plan assets remained at 8.50% for its domestic pension plans and decreased to 7.75% from 8.00% 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, 2006, PPL's rate of compensation increase remained at 4.75% for its domestic plans.

In selecting health care cost trend rates, PPL considers past performance and forecasts of health care costs. At December 31, 2006, PPL's health care cost trend rates were 9.0% for 2007, gradually declining to 5.5% for 2012.

A variance in the assumptions listed above could have a significant impact on the accrued pension and other postretirement benefit liabilities and reported annual net periodic pension and other postretirement benefit cost allocated to PPL Electric. The following chart reflects the sensitivities in the 2006 financial statements associated with a change in certain assumptions based on PPL's primary pension and other postretirement plans. While the chart below reflects either an increase or decrease in each assumption, the inverse of this change would impact the accrued pension and other postretirement benefit liabilities and reported annual net periodic pension and other postretirement benefit cost by a similar amount in the opposite direction. Each sensitivity below reflects an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

   
Increase (Decrease)
Actuarial Assumption
  
Change in Assumption
  
Impact on Liabilities
  
Impact on Cost
  
Impact on OCI
                         
Discount Rate
    
(0.25)%
    
$
32
    
$
1
    
$
31
  
Expected Return on Plan Assets
    
(0.25)%
      
N/A
      
2
      
(2
)
Rate of Compensation Increase
    
0.25%
      
6
      
1
      
6
  
Health Care Cost Trend Rate (a)
    
1.0%
      
8
      
1
      
7
  

(a)
  
Only impacts other postretirement benefits.

At December 31, 2006, PPL Electric's Balance Sheet reflected a net liability of $133 million for pension and other postretirement benefits allocated from plans sponsored by PPL Services.

In 2006, PPL Electric was allocated net periodic pension and other postretirement costs charged to operating expense of $15 million. This amount represents a $4 million increase compared with the charge recognized during 2005. This increase was primarily due to updated demographic assumptions, primarily due to updating the mortality table used to measure obligation and cost.

Refer to Note 13 to the Financial Statements for additional information regarding pension and other postretirement benefits.

2)  Loss Accruals

PPL Electric periodically accrues losses for the estimated impacts of various conditions, situations or circumstances involving uncertain outcomes. PPL Electric's accounting for such events is prescribed by SFAS 5, "Accounting for Contingencies," and other related accounting guidance. SFAS 5 defines a contingency as "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur."

For loss contingencies, the loss must be accrued if (1) information is available that indicates it is "probable" that the loss has been incurred, given the likelihood of the uncertain future events and (2) the amount of the loss can be reasonably estimated. The FASB defines "probable" as cases in which "the future event or events are likely to occur." SFAS 5 does not permit the accrual of contingencies that might result in gains. PPL Electric continuously assesses potential loss contingencies for environmental remediation, litigation claims, income taxes, 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 of accounting for loss accruals require significant judgment by PPL Electric's management.

Initial Identification and Recording of the Loss Accrual

PPL Electric uses its internal expertise and outside experts (such as lawyers, tax specialists and engineers), as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

In 2005, a significant loss accrual was initially recorded for the PJM billing dispute. Significant judgment was required by PPL Electric's management to perform the initial assessment of this contingency. In 2004, Exelon Corporation, on behalf of its subsidiary, PECO Energy, Inc. (PECO), filed a complaint against PJM and PPL Electric with the FERC, alleging that PJM had overcharged PECO from April 1998 through May 2003 as a result of an error by PJM. The complaint requested the FERC, among other things, to direct PPL Electric to refund to PJM $39 million, plus interest of $8 million, and for PJM to refund these same amounts to PECO. In April 2005, the FERC issued an Order Establishing Hearing and Settlement Judge Proceedings (the Order). In the Order, the FERC determined that PECO was entitled to reimbursement for the transmission congestion charges that PECO asserted PJM erroneously billed. The FERC ordered settlement discussions, before a judge, to determine the amount of the overcharge to PECO and the parties responsible for reimbursement to PECO.

Based on an evaluation of the FERC Order, PPL Electric's management concluded that it was probable that a loss had been incurred in connection with the PJM billing dispute. PPL Electric recorded a loss accrual of $47 million, the amount of PECO's claim, in the first quarter of 2005. See Note 15 to the Financial Statements for additional information.

See "Ongoing Assessment of Recorded Loss Accruals" for a discussion of the year-end assessments of this contingency.

PPL Electric has identified certain other events that could give rise to a loss, but that do not meet the conditions for accrual under SFAS 5. SFAS 5 requires disclosure, but not a recording, of potential losses when it is "reasonably possible" that a loss has been incurred. The FASB defines "reasonably possible" as cases in which "the chance of the future event or events occurring is more than remote but less than likely." See Note 15 to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual under SFAS 5.

Reducing Recorded Loss Accruals

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 excess or obsolete inventory are reduced as the inventory items are pulled from the warehouse shelves and sold as scrap or otherwise disposed.
   
·
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 when 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.

Ongoing Assessment of Recorded Loss Accruals

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

As part of the year-end preparation of its financial statements, PPL Electric's management re-assessed the loss accrual related to the PJM billing dispute, described above under "Initial Identification and Recording of the Loss Accrual." See Note 15 to the Financial Statements for additional information.

In March 2006, the FERC rejected the proposed settlement agreement that was filed with the FERC in September 2005. Subsequently, in March 2006, PPL Electric and Exelon filed with the FERC a new proposed settlement agreement. In November 2006, the FERC entered an order accepting the March 2006 proposed settlement agreement, upon the condition that PPL Electric agree to certain modifications. In December 2006, PPL Electric and Exelon filed with the FERC a modified offer of settlement (Compliance Filing). Under the Compliance Filing, which must be approved by the FERC, PPL Electric would make a single payment through its monthly PJM bill of $38 million, plus interest through the date of payment, and PJM would include a single credit for this amount in PECO's monthly PJM bill. Through December 31, 2006, the estimated interest on this payment would be $4 million, for a total payment of $42 million. As a result, PPL Electric reduced the recorded loss accrual to $42 million at December 31, 2006. Based on the terms of the latest settlement agreement and the effective date and provisions of power supply agreements between PPL Electric and PPL EnergyPlus, PPL has determined that PPL Electric is responsible for the claims prior to July 1, 2000 (totaling $12 million), and that PPL EnergyPlus is responsible for the claims subsequent to that date (totaling $30 million). Therefore, PPL Electric recorded a receivable from PPL EnergyPlus of $30 million at December 31, 2006, for the portion of claims allocated to PPL EnergyPlus. As a result of the reduction of the loss accrual and allocation to PPL EnergyPlus, PPL Electric recorded credits to expense of $35 million, including $28 million of "Energy purchases" and $7 million of "Interest Expense" on the Statement of Income. PPL Electric's management will continue to assess the loss accrual for this contingency in future periods.

Income Tax Uncertainties

Significant management judgment is required in developing PPL Electric's contingencies, or reserves, for income taxes and valuation allowances for deferred tax assets. The ongoing assessment of tax contingencies is intended to result in management's best estimate of the ultimate settled tax position for each tax year. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns by taxing authorities. However, the amount ultimately paid upon resolution of any issues raised by such authorities may differ from the amount accrued. In evaluating the exposure associated with various filing positions, PPL Electric accounts for changes in probable exposures based on management's best estimate of the amount of benefit that should be recognized in the financial statements. An allowance is maintained for the tax contingencies, the balance of which management believes to be adequate. The ongoing assessment of valuation allowances is based on an assessment of whether deferred tax assets will ultimately be realized. Management considers a number of factors in assessing the ultimate realization of deferred tax assets, including forecasts of taxable income in future periods.

In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109." PPL Electric adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 alters the methodology PPL Electric currently uses to account for income tax uncertainties. Effective with the adoption of FIN 48, uncertain tax positions are no longer considered to be contingencies under SFAS 5. See Note 23 to the Financial Statements for a more detailed discussion of FIN 48 and for information regarding the expected impact of adoption.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit and audit-related services and other services permitted by the Sarbanes-Oxley Act of 2002 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 sheet and statement of long-term debt of PPL Corporation and subsidiaries as of December 31, 2006, and the related consolidated statements of income, shareowners' common equity and comprehensive income, and cash flows for the year then ended.  Our audit also included the financial statement schedule for the year ended December 31, 2006 listed in the accompanying Index to Item 15(a). These financial statements and schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and schedule 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 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 audit provides 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, 2006, and the consolidated results of their operations and their cash flows for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended December 31, 2006, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 23 to the consolidated financial statements, the Company adopted FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, effective December 31, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of PPL Corporation's internal control over financial reporting as of December 31, 2006, 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 26, 2007 expressed an unqualified opinion thereon.
 

 
                                                       /s/ Ernst  & Young LLP         
Philadelphia, Pennsylvania
February 26, 2007
 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowners of PPL Corporation:

We have audited management's assessment, included in the accompanying Management's Report on Internal Control over Financial Reporting, that PPL Corporation maintained effective internal control over financial reporting as of December 31, 2006, 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. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of 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, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, 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 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, management's assessment that PPL Corporation maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, PPL Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, 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 sheet and statement of long-term debt as of December 31, 2006 and the related consolidated statements of income, shareowners' common equity and comprehensive income, and cash flows for the year then ended of PPL Corporation and our report dated February 26, 2007 expressed an unqualified opinion thereon.
 
 
                                                       /s/ Ernst  & Young LLP         
Philadelphia, Pennsylvania
February 26, 2007
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowners of PPL Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of PPL Corporation and its subsidiaries (the “Company”) at December 31, 2005, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule "Schedule II - Valuation and Qualifying Accounts and Reserves" for the two years ended December 31, 2005, listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements 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 of financial statements 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.

As discussed in Note 21 to the consolidated financial statements, the Company adopted FIN No. 47, Accounting for Conditional Asset Retirement Obligations, in 2005. 
 
 
 
 
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 24, 2006, except for
  Note 10 which is as of December 13, 2006
Report of Independent Registered Public Accounting Firm

To the Board of Managers and Sole Member
of PPL Energy Supply, LLC:

We have audited the consolidated balance sheet and statement of long-term debt of PPL Energy Supply, LLC and subsidiaries as of December 31, 2006, and the related consolidated statements of income, members' equity and comprehensive income, and cash flows for the year then ended.  Our audit also included the financial statement schedule for the year ended December 31, 2006 listed in the accompanying Index to Item 15(a). These financial statements and schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and schedule 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 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 audit provides 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, 2006, and the consolidated results of their operations and their cash flows for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended December 31, 2006, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 23 to the consolidated financial statements, the Company adopted FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, effective December 31, 2006.


 
                                                       /s/ Ernst  & Young LLP         
Philadelphia, Pennsylvania
February 26, 2007
Report of Independent Registered Public Accounting Firm

To the Board of Managers and Sole Member
of PPL Energy Supply, LLC:
 
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of PPL Energy Supply, LLC and its subsidiaries (the “Company”) at December 31, 2005, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule, "Schedule II - Valuation and Qualifying Accounts and Reserves" for the two years ended December 31, 2005, listed in the accompanying index  presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements 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, 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.

As discussed in Note 21 to the consolidated financial statements, the Company adopted FIN No. 47, Accounting for Conditional Asset Retirement Obligations, in 2005.
 
 
 
 
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 24, 2006, except for
  Note 10 which is as of December 13, 2006
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 sheet and statement of long-term debt of PPL Electric Utilities Corporation and subsidiaries as of December 31, 2006, and the related consolidated statements of income, shareowners' equity, and cash flows for the year then ended.  Our audit also included the financial statement schedule for the year ended December 31, 2006 listed in the accompanying Index to Item 15(a). These financial statements and schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and schedule 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 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 audit provides 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, 2006, and the consolidated results of their operations and their cash flows for the year ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended December 31, 2006, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 23 to the consolidated financial statements, the Company adopted FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, effective December 31, 2006.


                                                       /s/ Ernst  & Young LLP         
Philadelphia, Pennsylvania
February 26, 2007
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowner
of PPL Electric Utilities Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of PPL Electric Utilities Corporation and its subsidiaries (the “Company”) at December 31, 2005, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule "Schedule II - Valuation and Qualifying Accounts and Reserves" for the two years ended December 31, 2005, listed in the accompanying index  presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements 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, 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.

As discussed in Note 21 to the consolidated financial statements, the Company adopted FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, in 2005.
 
 
 
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 24, 2006
 
 
 
Page
FINANCIAL STATEMENTS
  
 
PPL Corporation
  
   
94
   
95
   
96
   
98
   
99
     
 
PPL Energy Supply, LLC
  
   
102
   
103
   
104
   
106
   
107
         
 
PPL Electric Utilities Corporation
  
   
108
   
109
   
110
   
112
   
113
     
114
       
FINANCIAL STATEMENT SCHEDULES
  
 
178
 
179
  Quarterly Financial Data - PPL Supply, LLP
180
 
180
 
 
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, except per share data)
   
2006
  
2005
  
2004
Operating Revenues
                  
Utility
  
$
4,573
    
$
4,329
    
$
3,900
  
Unregulated retail electric
    
91
      
101
      
114
  
Wholesale energy marketing
    
1,532
      
1,091
      
1,184
  
Net energy trading margins
    
35
      
32
      
21
  
Energy-related businesses
    
668
      
626
      
535
  
Total
    
6,899
      
6,179
      
5,754
  
                         
Operating Expenses
                        
Operation
                        
Fuel
    
909
      
914
      
755
  
Energy purchases
    
1,310
      
893
      
881
  
Other operation and maintenance
    
1,411
      
1,407
      
1,247
  
Amortization of recoverable transition costs
    
282
      
268
      
257
  
Depreciation (Note 1)
    
446
      
420
      
404
  
Taxes, other than income (Note 5)
    
282
      
279
      
249
  
Energy-related businesses
    
660
      
649
      
566
  
Total
    
5,300
      
4,830
      
4,359
  
                         
Operating Income
    
1,599
      
1,349
      
1,395
  
                         
Other Income - net (Note 17)
    
68
      
29
      
39
  
                         
Interest Expense
    
482
      
508
      
513
  
                         
Income from Continuing Operations Before Income Taxes, Minority Interest and Dividends on Preferred Securities of a Subsidiary
    
1,185
      
870
      
921
  
                         
Income Taxes (Note 5)
    
275
      
122
      
201
  
                         
Minority Interest
    
11
      
7
      
8
  
                         
Dividends on Preferred Securities of a Subsidiary (Notes 7 and 8)
    
14
      
2
      
2
  
                         
Income from Continuing Operations
    
885
      
739
      
710
  
                         
Loss from Discontinued Operations (net of income taxes) (Notes 9 and 10)
    
20
      
53
      
12
  
                         
Income Before Cumulative Effect of a Change in Accounting Principle
    
865
      
686
      
698
  
                         
Cumulative Effect of a Change in Accounting Principle (net of income taxes) (Note 21)
            
(8
)
        
                         
Net Income
  
$
865
    
$
678
    
$
698
  
                         
Earnings Per Share of Common Stock (Note 4)
                        
Income from Continuing Operations:
                        
Basic
  
$
2.32
    
$
1.95
    
$
1.93
  
Diluted
  
$
2.29
    
$
1.93
    
$
1.92
  
Net Income:
                        
Basic
  
$
2.27
    
$
1.79
    
$
1.89
  
Diluted
  
$
2.24
    
$
1.77
    
$
1.89
  
                         
Dividends Declared Per Share of Common Stock
  
$
1.10
    
$
0.96
    
$
0.82
  

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
PPL Corporation and Subsidiaries
(Millions of Dollars)
   
2006
  
2005
  
2004
Cash Flows from Operating Activities
                  
Net income
  
$
865
    
$
678
    
$
698
  
Adjustments to reconcile net income to net cash provided by operating activities
                        
Cumulative effect of a change in accounting principle
            
8
          
Pre-tax loss from the sale of the Sundance plant
            
72
          
Pre-tax loss from the sale of interest in Griffith plant
    
39
                  
Depreciation
    
446
      
423
      
412
  
Stock compensation expense
    
24
      
32
      
12
  
Amortizations - recoverable transition costs and other
    
309
      
298
      
279
  
Pension expense (income) - net
    
54
      
26
      
(24
)
Pension funding
    
(169
)
    
(67
)
    
(10
)
Realization of benefits related to Black Lung Trust assets
    
(36
)
                
Deferred income taxes and investment tax credits
    
(25
)
    
(66
)
    
155
  
Accrual for remediation of ash basin leak
    
(11
)
    
32
          
Other
    
70
      
60
      
26
  
Change in current assets and current liabilities
                        
Accounts receivable
    
(31
)
    
(93
)
    
109
  
Accounts payable
    
116
      
141
      
(49
)
Fuel, materials and supplies
    
(31
)
    
(38
)
    
(52
)
Other
    
107
      
(101
)
    
3
  
Other operating activities
                        
Other assets
    
17
      
18
      
(4
)
Other liabilities
    
14
      
(35
)
    
(58
)
                         
Net cash provided by operating activities
    
1,758
      
1,388
      
1,497
  
                         
Cash Flows from Investing Activities
                        
Expenditures for property, plant and equipment
    
(1,394
)
    
(811
)
    
(734
)
Proceeds from the sale of the Sundance plant
            
190
          
Proceeds from the sale of interest in Griffith plant
    
110
                  
Proceeds from the sale of minority interest in CGE
                    
123
  
Purchases of emission allowances
    
(76
)
    
(169
)
    
(109
)
Proceeds from the sale of emission allowances
    
46
      
64
      
67
  
Purchases of nuclear decommissioning trust investments
    
(227
)
    
(239
)
    
(134
)
Proceeds from the sale of nuclear decommissioning trust investments
    
211
      
223
      
113
  
Purchases of short-term investments
    
(696
)
    
(116
)
    
(130
)
Proceeds from the sale of short-term investments
    
400
      
118
      
74
  
Net increase in restricted cash
    
(12
)
    
(34
)
    
(48
)
Other investing activities
    
21
      
(5
)
        
                         
Net cash used in investing activities
    
(1,617
)
    
(779
)
    
(778
)
                         
Cash Flows from Financing Activities
                        
Issuance of long-term debt
    
1,985
      
737
      
322
  
Retirement of long-term debt
    
(1,535
)
    
(1,261
)
    
(1,171
)
Issuance of preference stock, net of issuance costs
    
245
                  
Issuance of common stock
    
21
      
37
      
596
  
Payment of common stock dividends
    
(409
)
    
(347
)
    
(297
)
Net (decrease) increase in short-term debt
    
(173
)
    
184
      
(14
)
Other financing activities
    
(39
)
    
(26
)
    
(14
)
                         
Net cash provided by (used in) financing activities
    
95
      
(676
)
    
(578
)
                         
Effect of Exchange Rates on Cash and Cash Equivalents
    
3
      
6
      
9
  
                         
Net Increase (Decrease) in Cash and Cash Equivalents
    
239
      
(61
)
    
150
  
Cash and Cash Equivalents at Beginning of Period
    
555
      
616
      
466
  
Cash and Cash Equivalents at End of Period
  
$
794
    
$
555
    
$
616
  
                         
Supplemental Disclosures of Cash Flow Information
                        
Cash paid during the period for:
                        
Interest
  
$
449
    
$
466
    
$
488
  
Income taxes - net
  
$
270
    
$
149
    
$
14
  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
PPL Corporation and Subsidiaries
(Millions of Dollars)
   
2006
  
2005
Assets
                
                 
Current Assets
                
Cash and cash equivalents
  
$
794
    
$
555
  
Short-term investments
    
359
      
63
  
Restricted cash (Note 19)
    
102
      
93
  
Accounts receivable (less reserve: 2006, $50; 2005, $87)
    
591
      
544
  
Unbilled revenues
    
469
      
479
  
Fuel, materials and supplies (Note 1)
    
378
      
346
  
Prepayments
    
79
      
53
  
Deferred income taxes (Note 5)
    
162
      
192
  
Price risk management assets (Note 18)
    
551
      
488
  
Other acquired intangibles (Note 20)
    
124
      
46
  
Other
    
21
      
47
  
Total Current Assets
    
3,630
      
2,906
  
                 
Investments
                
Investment in unconsolidated affiliates - at equity (Note 3)
    
47
      
56
  
Nuclear plant decommissioning trust funds (Note 21)
    
510
      
444
  
Other
    
7
      
8
  
Total Investments
    
564
      
508
  
                 
Property, Plant and Equipment (Note 1)
                
Electric plant in service
               
Transmission and distribution
    
8,836
      
7,984
  
Generation
    
8,744
      
8,761
  
General
    
779
      
646
  
     
18,359
      
17,391
  
Construction work in progress
    
682
      
259
  
Nuclear fuel
    
354
      
327
  
Electric plant
    
19,395
      
17,977
  
Gas and oil plant
    
373
      
349
  
Other property
    
311
      
289
  
     
20,079
      
18,615
  
Less: accumulated depreciation
    
8,010
      
7,699
  
Total Property, Plant and Equipment
    
12,069
      
10,916
  
                 
Regulatory and Other Noncurrent Assets (Note 1)
                
Recoverable transition costs
    
884
      
1,165
  
Goodwill (Note 20)
    
1,154
      
1,070
  
Other acquired intangibles (Note 20)
    
367
      
416
  
Price risk management assets (Note 18)
    
144
      
84
  
Other
    
935
      
861
  
Total Regulatory and Other Noncurrent Assets
    
3,484
      
3,596
  
                 
Total Assets
  
$
19,747
    
$
17,926
  
 
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)
   
2006
  
2005
Liabilities and Equity
                
                 
Current Liabilities
                
Short-term debt (Note 8)
  
$
42
    
$
214
  
Long-term debt
    
1,018
      
1,126
  
Long-term debt with affiliate trust (Notes 8, 16 and 22)
    
89
          
Accounts payable
    
667
      
542
  
Above market NUG contracts (Note 15)
    
65
      
70
  
Taxes
   
194
      
168
  
Interest
   
109
      
112
  
Dividends
   
111
      
96
  
Price risk management liabilities (Note 18)
    
550
      
533
  
Other
   
503
      
493
  
Total Current Liabilities
    
3,348
      
3,354
  
                 
Long-term Debt
    
6,728
      
5,955
  
                 
Long-term Debt with Affiliate Trust (Notes 8, 16 and 22)
            
89
  
                 
Deferred Credits and Other Noncurrent Liabilities
                
Deferred income taxes and investment tax credits (Note 5)
    
2,331
      
2,197
  
Price risk management liabilities (Note 18)
    
459
      
541
  
Accrued pension obligations (Note 13)
    
364
      
374
  
Asset retirement obligations (Note 21)
    
336
      
298
  
Above market NUG contracts (Note 15)
    
71
      
136
  
Other
    
627
      
457
  
Total Deferred Credits and Other Noncurrent Liabilities
    
4,188
      
4,003
  
                 
Commitments and Contingent Liabilities (Note 15)
                
                 
Minority Interest
    
60
      
56
  
                 
Preferred Securities of a Subsidiary (Note 7)
    
301
      
51
  
                 
Shareowners' Common Equity
                
Common stock - $0.01 par value (a)
    
4
      
4
  
Capital in excess of par value (b)
    
2,810
      
3,602
  
Treasury stock (a) (b)
            
(838
)
Earnings reinvested
    
2,626
      
2,182
  
Accumulated other comprehensive loss (Note 1)
    
(318
)
    
(532
)
Total Shareowners' Common Equity
    
5,122
      
4,418
  
                 
Total Liabilities and Equity
  
$
19,747
    
$
17,926
  

(a)
  
780 million shares authorized; 385 million shares issued and outstanding at December 31, 2006, and 380 million shares issued and outstanding, excluding 62 million shares held as treasury stock, at December 31, 2005.
(b)
  
See Note 1 for additional information on the retirement of all treasury stock in 2006.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, except per share amounts)
   
2006
  
2005
  
2004
                   
Common stock at beginning of year
  
$
4
    
$
2
    
$
2
  
Common stock split
            
2
          
                         
Common stock at end of year
    
4
      
4
      
2
  
                         
Capital in excess of par value at beginning of year
    
3,602
      
3,528
      
2,913
  
Common stock split
            
(2
)
        
Retirement of treasury stock
    
(839
)
                
Common stock issued
    
26
      
42
      
596
  
Stock-based compensation
    
22
      
32
      
12
  
Other
    
(1
)
    
2
      
7
  
                         
Capital in excess of par value at end of year
    
2,810
      
3,602
      
3,528
  
                         
Treasury stock at beginning of year
    
(838
)
    
(838
)
    
(837
)
Treasury stock purchased
    
(1
)
            
(1
)
Retirement of treasury stock
    
839
                  
                         
Treasury stock at end of year
            
(838
)
    
(838
)
                         
Earnings reinvested at beginning of year
    
2,182
      
1,870
      
1,478
  
Net income
    
865
      
678
      
698
  
Dividends and dividend equivalents declared on common stock and
restricted stock units
    
(421
)
    
(366
)
    
(306
)
                         
Earnings reinvested at end of year
    
2,626
      
2,182
      
1,870
  
                         
Accumulated other comprehensive loss at beginning of year (c)
    
(532
)
    
(323
)
    
(297
)
Other comprehensive income (loss) (b)
    
414
      
(209
)
    
(26
)
Adjustment to initially apply SFAS 158, net of tax benefit of $103
(Note 13)
    
(200
)
                
                         
Accumulated other comprehensive loss at end of year
    
(318
)
    
(532
)
    
(323
)
                         
Total Shareowners' Common Equity
  
$
5,122
    
$
4,418
    
$
4,239
  
                         
                         
Common stock shares outstanding at beginning of year (a)
    
380,145
      
378,143
      
354,723
  
Common stock shares issued through the ICP, ICPKE, PEPS Units conversion, 2.625% Convertible Senior Notes and directors retirement plan, net of forfeitures
    
4,955
      
2,024
      
23,473
  
Treasury stock shares purchased
    
(61
)
    
(22
)
    
(53
)
                         
Common stock shares outstanding at end of year
    
385,039
      
380,145
      
378,143
  

(a)
  
Shares in thousands. Each share entitles the holder to one vote on any question presented to any shareowners' meeting.
(b)
  
Statement of Comprehensive Income (Note 1):
                        
   
Net income
  
$
865
    
$
678
    
$
698
  
   
Other comprehensive income (loss):
                        
   
Foreign currency translation adjustments
    
155
      
(53
)
    
110
  
   
Net unrealized gains on available-for-sale securities, net of tax expense of $33, $5, $18
    
10
      
8
      
20
  
   
Additional minimum pension liability adjustments, net of tax expense (benefit) of $26, $8, $(24)
    
54
      
19
      
(52
)
   
Net unrealized gains (losses) on qualifying derivatives, net of tax expense (benefit) of $124, $(115), $(60)
    
195
      
(183
)
    
(104
)
   
Total other comprehensive income (loss)
    
414
      
(209
)
    
(26
)
   
Comprehensive Income
  
$
1,279
    
$
469
    
$
672
  
                   
(c)
  
See Note 1 for disclosure of balances for each component of Accumulated other comprehensive loss.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

PPL Corporation and Subsidiaries
(Millions of Dollars)
   
Outstanding
    
   
2006
    
2005
  
Maturity (a)
                   
U.S.
                      
6.84% - 8.375% Medium-term Notes
  
$
283
      
$
283
    
2007
Senior Floating Rate Notes (b)
              
99
    
2006
7.29% Subordinated Notes
              
148
    
2006
4.33% - 7.0% Senior Unsecured Notes
    
2,301
  
(k)(l)
    
1,301
    
2009-2046
2.625% Convertible Senior Notes (c)
    
102
        
400
    
2023
8.05% - 8.30% Senior Secured Notes (d)
    
437
        
437
    
2013
8.70% Unsecured Promissory Notes
    
10
        
10
    
2022
6.55% - 7.7% First Mortgage Bonds (e)
    
10
        
156
    
2006-2014
4.30% - 6-1/4% Senior Secured Bonds (e)
    
1,041
        
1,041
    
2007-2020
3.125% - 4.75% Senior Secured Bonds (Pollution Control Series) (f)
    
314
        
314
    
2008-2029
7.05% - 7.15% Series 1999-1 Transition Bonds
    
605
        
892
    
2006-2008
Floating Rate Pollution Control Revenue Bonds (g)
    
9
        
9
    
2027
     
5,112
        
5,090
      
                       
U.K.
                      
4.80436% - 9.25% Senior Unsecured Notes (h)
    
1,987
  
(m)(n)
    
1,784
    
2006-2037
1.541% Index-linked Senior Unsecured Notes (h)(i)
    
443
  
(o)
          
2053-2056
     
2,430
        
1,784
      
                       
Latin America
                      
3.75% - 9.0 % Inflation-linked Debt
    
205
  
(m)(p)
    
204
    
2006-2027
4.00% - 8.57% Other
    
18
        
22
    
2006-2011
     
223
        
226
      
     
7,765
        
7,100
      
Fair value adjustments from hedging activities
    
(9
)
      
(15
)
    
Unamortized premium
    
12
        
13
      
Unamortized discount
    
(22
)
      
(17
)
    
     
7,746
        
7,081
      
Less amount due within one year
    
(1,018
)
      
(1,126
)
    
Total Long-term Debt
  
$
6,728
      
$
5,955
      
                   
Long-term Debt with Affiliate Trust:
                      
8.23% Subordinated Debentures (j)
  
$
89
      
$
89
    
2027
Less amount due within one year
    
(89
)
              
Total Long-term Debt with Affiliate Trust
  
$
        
$
89
      
                   
See Note 8 for information on debt issuances, debt retirements and other changes in long-term debt.

(a)
  
Aggregate maturities of long-term debt, including long-term debt with affiliate trust, are (millions of dollars): 2007, $1,107; 2008, $624; 2009, $691; 2010, $12; 2011, $539; and $4,881 thereafter. There are no debt securities outstanding that have sinking fund requirements.
(b)
  
Rate at December 31, 2005, was 5.42%.
(c)
  
The Convertible Senior Notes may be redeemed beginning on May 20, 2008. Additionally, the holders have the right to require PPL Energy Supply to purchase the notes at par value on every fifth anniversary of the issuance, with such first date being May 15, 2008. See Notes 4 and 8 for a discussion of conversion terms.
(d)
  
Represents lease financing consolidated through a variable interest entity. See Note 22 for additional information.
(e)
  
The First Mortgage Bonds were issued under, and are secured by, the lien of the 1945 First Mortgage Bond Indenture. The lien of the 1945 First Mortgage Bond Indenture covers substantially all electric distribution plant and certain transmission plant owned by PPL Electric. The Senior Secured Bonds were issued under the 2001 Senior Secured Bond Indenture. The Senior Secured Bonds are secured by (i) an equal principal amount of First Mortgage Bonds issued under the 1945 First Mortgage Bond Indenture and (ii) the lien of the 2001 Senior Secured Bond Indenture, which covers substantially all electric distribution plant and certain transmission plant owned by PPL Electric and which is junior to the lien of the 1945 First Mortgage Bond Indenture.
(f)
  
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 Lehigh County Industrial Development Authority (LCIDA) on behalf of PPL Electric. These Senior Secured Bonds were issued in the same principal amount 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 (e) above. $224 million of these Senior Secured Bonds may be redeemed at par beginning in 2015.
(g)
  
Rate was 3.97% at December 31, 2006, and 3.58% at December 31, 2005.
(h)
  
Although financial information of foreign subsidiaries is recorded on a one-month lag, WPD's December 2006 bond issuances and bond retirement are reflected in the 2006 Financial Statements due to the materiality of these transactions. See Note 8 for further discussion.
(i)
  
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.
(j)
  
Represents debt with a wholly-owned trust that was deconsolidated effective December 31, 2003. See Note 22 for further discussion. See Note 8 for a discussion of the redemption of these debentures in February 2007.
(k)
  
Includes $300 million of 5.70% REset Put Securities due 2035 (REPSSM). 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.
(l)
  
Includes $250 million of notes that may be redeemed at par beginning in July 2011.
(m)
  
Increase is due to or partially due to an increase in foreign currency exchange rates.
(n)
  
Includes $443 million 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 $443 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.
(o)
  
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.
(p)
  
Includes $87 million of debt that may be redeemed at par beginning in 2008, $35 million of debt that may be redeemed at par beginning in 2009 and $70 million of debt that may be redeemed at a specified calculated value beginning in 2014.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
 
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
2006
  
2005
  
2004
Operating Revenues
                        
Wholesale energy marketing
  
$
1,532
    
$
1,091
    
$
1,184
  
Wholesale energy marketing to affiliate (Note 16)
    
1,708
      
1,590
      
1,500
  
Utility
    
1,260
      
1,130
      
1,032
  
Unregulated retail electric
    
91
      
101
      
114
  
Net energy trading margins
    
35
      
32
      
21
  
Energy-related businesses
    
646
      
597
      
515
  
Total
    
5,272
      
4,541
      
4,366
  
                         
Operating Expenses
                        
Operation
                        
Fuel
    
763
      
796
      
649
  
Energy purchases
    
1,135
      
637
      
674
  
Energy purchases from affiliate (Note 16)
    
157
      
148
      
154
  
Other operation and maintenance
    
1,041
      
1,024
      
877
  
Depreciation (Note 1)
    
309
      
292
      
284
  
Taxes, other than income (Note 5)
    
92
      
94
      
95
  
Energy-related businesses
    
643
      
617
      
539
  
Total
    
4,140
      
3,608
      
3,272
  
                         
Operating Income
    
1,132
      
933
      
1,094
  
                         
Other Income - net (Note 17)
    
76
      
37
      
49
  
                         
Interest Expense
    
278
      
263
      
247
  
                         
Interest Expense with Affiliates (Note 16)
    
12
      
21
      
20
  
                         
Income from Continuing Operations Before Income Taxes and Minority Interest
    
918
      
686
      
876
  
                         
Income Taxes (Note 5)
    
189
      
76
      
205
  
                         
Minority Interest
    
11
      
7
      
8
  
                         
Income from Continuing Operations
    
718
      
603
      
663
  
                         
Loss from Discontinued Operations (net of income taxes) (Notes 9 and 10)
    
20
      
53
      
12
  
                         
Income Before Cumulative Effect of a Change in Accounting Principle
    
698
      
550
      
651
  
                         
Cumulative Effect of a Change in Accounting Principle (net of income taxes) (Note 21)
            
(8
)
        
                         
Net Income
  
$
698
    
$
542
    
$
651
  
                   
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
2006
  
2005
  
2004
Cash Flows from Operating Activities
                        
Net income
  
$
698
    
$
542
    
$
651
  
Adjustments to reconcile net income to net cash provided by operating activities
                        
Cumulative effect of a change in accounting principle
            
8
          
Pre-tax loss from the sale of the Sundance plant
            
72
          
Pre-tax loss from the sale of interest in Griffith plant
    
39
                  
Depreciation
    
309
      
295
      
292
  
Stock compensation expense
    
17
      
21
      
9
  
Pension expense (income) - net
    
33
      
15
      
(30
)
Pension funding
    
(133
)
    
(56
)
    
(7
)
Deferred income taxes and investment tax credits
    
70
      
30
      
155
  
Accrual for PJM billing dispute
    
30
                  
Accrual for remediation of ash basin leak
    
(11
)
    
32
          
Other
    
49
      
27
      
5
  
Change in current assets and current liabilities
                        
Accounts receivable
    
(67
)
    
(54
)
    
14
  
Accounts payable
    
103
      
88
      
(54
)
Collateral on PLR energy supply (Note 16)
                    
(302
)
Fuels, materials and supplies
    
(34
)
    
(40
)
    
(57
)
Other
    
138
      
(106
)
    
(22
)
Other operating activities
                        
Other assets
    
(1
)
    
13
      
(5
)
Other liabilities
            
(49
)
    
(33
)
                         
Net cash provided by operating activities
    
1,240
      
838
      
616
  
                         
Cash Flows from Investing Activities
                        
Expenditures for property, plant and equipment
    
(1,033
)
    
(593
)
    
(521
)
Proceeds from the sale of the Sundance plant
            
190
          
Proceeds from the sale of interest in Griffith plant
    
110
                  
Proceeds from the sale of minority interest in CGE
                    
123
  
Purchases of emission allowances
    
(76
)
    
(169
)
    
(109
)
Proceeds from the sale of emission allowances
    
46
      
64
      
67
  
Purchases of nuclear decommissioning trust investments
    
(227
)
    
(239
)
    
(134
)
Proceeds from the sale of nuclear decommissioning trust investments
    
211
      
223
      
113
  
Purchases of short-term investments
    
(535
)
    
(73
)
    
(60
)
Proceeds from the sale of short-term investments
    
240
      
90
      
14
  
Net increase in restricted cash
    
(14
)
    
(17
)
    
(15
)
Other investing activities
    
17
      
(13
)
    
(3
)
                         
Net cash used in investing activities
    
(1,261
)
    
(537
)
    
(525
)
                         
Cash Flows from Financing Activities
                        
Issuance of long-term debt
    
1,985
      
313
      
322
  
Retirement of long-term debt
    
(854
)
    
(210
)
    
(671
)
Contributions from Member
    
115
      
50
      
358
  
Distributions to Member
    
(712
)
    
(278
)
    
(410
)
Net (decrease) increase in short-term debt
    
(173
)
    
184
      
(56
)
Net (decrease) increase in note payable to affiliate
    
(8
)
    
(487
)
    
495
  
Other financing activities
    
(38
)
    
(9
)
    
(3
)
                         
Net cash provided by (used in) financing activities
    
315
      
(437
)
    
35
  
                         
Effect of Exchange Rates on Cash and Cash Equivalents
    
3
      
6
      
9
  
                         
Net Increase (Decrease) in Cash and Cash Equivalents
    
297
      
(130
)
    
135
  
Cash and Cash Equivalents at Beginning of Period
    
227
      
357
      
222
  
Cash and Cash Equivalents at End of Period
  
$
524
    
$
227
    
$
357
  
                         
Supplemental Disclosures of Cash Flow Information
                       
Cash paid during the period for:
                        
Interest
  
$
268
    
$
234
    
$
209
  
Income taxes - net
  
$
40
    
$
30
    
$
34
  
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
2006
  
2005
Assets
                
                 
Current Assets
                
Cash and cash equivalents
  
$
524
    
$
227
  
Short-term investments
    
328
      
33
  
Restricted cash (Note 19)
    
51
      
39
  
Accounts receivable (less reserve: 2006, $29; 2005, $65)
    
354
      
291
  
Unbilled revenues
    
301
      
300
  
Accounts receivable from affiliates
    
136
      
149
  
Collateral on PLR energy supply to affiliate (Note 16)
    
300
      
300
  
Fuel, materials and supplies (Note 1)
    
330
      
295
  
Prepayments
    
66
      
39
  
Deferred income taxes (Note 5)
    
117
      
166
  
Price risk management assets (Note 18)
   
551
      
487
  
Other acquired intangibles (Note 20)
    
124
      
46
  
Other
    
10
      
8
  
Total Current Assets
    
3,192
      
2,380
  
                 
Investments
                
Investment in unconsolidated affiliates - at equity (Note 3)
    
47
      
56
  
Nuclear plant decommissioning trust funds (Note 21)
    
510
      
444
  
Other
    
4
      
3
  
Total Investments
    
561
      
503
  
                 
Property, Plant and Equipment (Note 1)
                
Electric plant in service
                
Transmission and distribution
    
4,673
      
3,950
  
Generation
    
8,744
      
8,761
  
General
    
318
      
272
  
     
13,735
      
12,983
  
Construction work in progress
    
578
      
210
  
Nuclear fuel
    
354
      
327
  
Electric plant
    
14,667
      
13,520
  
Gas and oil plant
    
64
      
64
  
Other property
    
309
      
198
  
     
15,040
      
13,782
  
Less: accumulated depreciation
    
6,115
      
5,871
  
Total Property, Plant and Equipment
    
8,925
      
7,911
  
                 
Other Noncurrent Assets
                
Goodwill (Note 20)
    
1,099
      
1,015
  
Other acquired intangibles (Note 20)
    
245
      
287
  
Price risk management assets (Note 18)
    
135
      
80
  
Other
    
498
      
488
  
Total Other Noncurrent Assets
    
1,977
      
1,870
  
                 
Total Assets
  
$
14,655
    
$
12,664
  
                 
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)
   
2006
  
2005
Liabilities and Equity
                
                 
Current Liabilities
                
Short-term debt (Note 8)
          
$
172
  
Note payable to affiliate (Note 16)
            
8
  
Long-term debt
  
$
181
      
445
  
Long-term debt with affiliate trust (Notes 8, 16 and 22)
    
89
          
Accounts payable
    
571
      
445
  
Accounts payable to affiliates
    
36
      
27
  
Above market NUG contracts (Note 15)
    
65
      
70
  
Taxes
    
151
      
72
  
Interest
    
82
      
79
  
Deferred revenue on PLR energy supply to affiliate (Note 16)
    
12
      
12
  
Price risk management liabilities (Note 18)
    
541
      
519
  
Other
    
325
      
328
  
Total Current Liabilities
    
2,053
      
2,177
  
                 
Long-term Debt
    
5,106
      
3,506
  
                 
Long-term Debt with Affiliate Trust (Notes 8, 16 and 22)
            
89
  
                 
Deferred Credits and Other Noncurrent Liabilities
                
Deferred income taxes and investment tax credits (Note 5)
    
1,363
      
1,157
  
Price risk management liabilities (Note 18)
    
437
      
523
  
Accrued pension obligations (Note 13)
    
279
      
232
  
Asset retirement obligations (Note 21)
    
336
      
298
  
Above market NUG contracts (Note 15)
    
71
      
136
  
Deferred revenue on PLR energy supply to affiliate (Note 16)
    
23
      
35
  
Other
    
393
      
306
  
Total Deferred Credits and Other Noncurrent Liabilities
    
2,902
      
2,687
  
                 
Commitments and Contingent Liabilities (Note 15)
                
                 
Minority Interest
    
60
      
56
  
                 
Member's Equity
    
4,534
      
4,149
  
                 
Total Liabilities and Equity
  
$
14,655
    
$
12,664
  
                 
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)
 
   
2006
  
2005
  
2004
                         
Member's Equity at beginning of year
  
$
4,149
    
$
4,050
    
$
3,478
  
Comprehensive income (Note 1):
                        
Net income
    
698
      
542
      
651
  
Other comprehensive income (loss) (a)
                        
Foreign currency translation adjustments
    
155
      
(53
)
    
110
  
Net unrealized gains (losses) on qualifying derivatives, net of tax expense (benefit) of $117, $(121), $(61)
    
185
      
(192
)
    
(105
)
Additional minimum pension liability adjustments, net of tax expense (benefit) of $22, $9, $(23)
    
49
      
21
      
(51
)
Net unrealized gains on available-for-sale securities, net of tax expense of $33, $6, $16
    
11
      
8
      
17
  
                         
Total comprehensive income
    
1,098
      
326
      
622
  
 
                        
Adjustment to initially apply SFAS 158, net of tax benefit of $89 (a) (Note 13)
    
(181
)
                
                         
Contributions from Member
    
180
      
50
      
358
  
                         
Distributions to Member
    
(712
)
    
(278
)
    
(410
)
                         
Other
            
1
      
2
  
                         
Member's Equity at end of year
  
$
4,534
    
$
4,149
    
$
4,050
  

(a)
  
See Note 1 for disclosure of balances for each component of Accumulated other comprehensive loss.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
   
Outstanding
    
   
2006
    
2005
  
Maturity (a)
                       
U.S.
                      
5.40% - 7.0% Senior Unsecured Notes
  
$
2,100
  
(g)(h)
  
$
1,100
    
2011-2046
2.625% Convertible Senior Notes (b)
    
102
        
400
    
2023
8.05% - 8.30% Senior Secured Notes (c)
    
437
        
437
    
2013
     
2,639
        
1,937
      
U.K.
                      
4.80436% - 9.25% Senior Unsecured Notes (d)
    
1,987
  
(i)(j)
    
1,784
    
2006-2037
1.541% Index-linked Senior Unsecured Notes (d)(e)
    
443
  
(k)
          
2053-2056
     
2,430
        
1,784
      
Latin America
                      
3.75% - 9.0% Inflation-linked Debt
    
205
  
(i)(l)
    
204
    
2006-2027
4.00% - 8.57% Other
    
18
        
22
    
2006-2011
     
223
        
226
      
     
5,292
        
3,947
      
Fair value adjustments from hedging activities
    
(2
)
      
(3
)
    
Unamortized premium
    
12
        
13
      
Unamortized discount
    
(15
)
      
(6
)
    
     
5,287
        
3,951
      
Less amount due within one year
    
(181
)
      
(445
)
    
                       
Total Long-term Debt
  
$
5,106
      
$
3,506
      
                       
Long-term Debt with Affiliate Trust:
                      
8.23% Subordinated Debentures (f)
  
$
89
      
$
89
    
2027
Less amount due within one year
    
(89
)
              
                       
Total Long-term Debt with Affiliate Trust
  
$
        
$
89
      
 
See Note 8 for information on debt issuances, debt retirements and other changes in long-term debt.

(a)
  
Aggregate maturities of long-term debt, including long-term debt with affiliate trust, are (millions of dollars): 2007, $270; 2008, $229; 2009, $4; 2010, $12; 2011, $539; and $4,327 thereafter. There are no debt securities outstanding that have sinking fund requirements.
(b)
  
The Convertible Senior Notes may be redeemed beginning on May 20, 2008. Additionally, the holders have the right to require PPL Energy Supply to purchase the notes at par value on every fifth anniversary of the issuance, with such first date being May 15, 2008. See Notes 4 and 8 for a discussion of conversion terms.
(c)
  
Represents lease financing consolidated through a variable interest entity. See Note 22 for additional information.
(d)
  
Although financial information of foreign subsidiaries is recorded on a one-month lag, WPD's December 2006 bond issuances and bond retirement are reflected in the 2006 Financial Statements due to the materiality of these transactions. See Note 8 for further discussion.
(e)
  
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.
(f)
  
Represents debt with a wholly-owned trust that was deconsolidated effective December 31, 2003. See Note 22 for further discussion. See Note 8 for a discussion of the redemption of these debentures in February 2007.
(g)
  
Includes $300 million of 5.70% REset Put Securities due 2035 (REPSSM). 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.
(h)
  
Includes $250 million of notes that may be redeemed at par beginning in July 2011.
(i)
  
Increase is due to or partially due to an increase in foreign currency exchange rates.
(j)
  
Includes $443 million 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 $443 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.
(k)
  
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.
(l)
  
Includes $87 million of debt that may be redeemed at par beginning in 2008, $35 million of debt that may be redeemed at par beginning in 2009 and $70 million of debt that may be redeemed at a specified calculated value beginning in 2014.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
   
2006
  
2005
  
2004
Operating Revenues
                       
Retail electric
  
$
3,099
    
$
3,011
    
$
2,687
  
Wholesale electric
    
3
      
4
      
6
  
Wholesale electric to affiliate (Note 16)
    
157
      
148
      
154
  
Total
    
3,259
      
3,163
      
2,847
  
                         
Operating Expenses
                        
Operation
                        
Energy purchases
    
175
      
256
      
207
  
Energy purchases from affiliate (Note 16)
    
1,708
      
1,590
      
1,500
  
Other operation and maintenance
    
369
      
375
      
365
  
Amortization of recoverable transition costs
    
282
      
268
      
257
  
Depreciation (Note 1)
    
118
      
112
      
107
  
Taxes, other than income (Note 5)
    
189
      
185
      
152
  
Total
    
2,841
      
2,786
      
2,588
  
                         
Operating Income
    
418
      
377
      
259
  
                         
Other Income - net (Note 17)
    
31
      
21
      
15
  
                         
Interest Expense
    
134
      
170
      
187
  
                         
Interest Expense with Affiliate (Note 16)
    
17
      
12
      
3
  
                         
Income Before Income Taxes
    
298
      
216
      
84
  
                         
Income Taxes (Note 5)
    
104
      
69
      
8
  
                         
Net Income
    
194
      
147
      
76
  
                         
Dividends on Preferred Securities
    
14
      
2
      
2
  
                         
Income Available to PPL
  
$
180
    
$
145
    
$
74
  
                         
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
   
2006
  
2005
  
2004
Cash Flows from Operating Activities
                        
Net income
  
$
194
    
$
147
    
$
76
  
Adjustments to reconcile net income to net cash provided by operating activities
                        
Depreciation
    
118
      
112
      
107
  
Stock compensation expense
    
4
      
7
      
3
  
Amortizations - recoverable transition costs and other
    
303
      
289
      
278
  
Deferred income taxes and investment tax credits
    
17
      
9
      
81
  
Realization of benefits related to Black Lung Trust assets
    
(36
)
                
Accrual for PJM billing dispute
    
(35
)
    
47
          
Write-off (deferral) of storm-related costs
    
11
      
(12
)
    
4
  
Change in current assets and current liabilities
                        
Accounts receivable
    
11
      
(38
)
    
40
  
Accounts payable
    
22
      
11
      
50
  
Collateral on PLR energy supply (Note 16)
                    
302
  
Other
    
(18
)
    
2
      
(7
)
Other operating activities
                        
Other assets
    
(1
)
    
(6
)
    
(3
)
Other liabilities
    
(12
)
    
12
      
(33
)
Net cash provided by operating activities
    
578
      
580
      
898
  
                         
Cash Flows from Investing Activities
                        
Expenditures for property, plant and equipment
    
(289
)
    
(174
)
    
(179
)
Purchases of marketable securities
    
(143
)
    
(32
)
    
(60
)
Proceeds from the sale of marketable securities
    
143
      
17
      
50
  
Net increase in notes receivable from affiliate
                    
(300
)
Net increase in restricted cash
    
(2
)
    
(10
)
    
(35
)
Other investing activities
    
4
      
6
      
1
  
Net cash used in investing activities
    
(287
)
    
(193
)
    
(523
)
                         
Cash Flows from Financing Activities
                        
Issuance of preference stock, net of issuance costs
    
245
                  
Issuance of long-term debt
            
424
          
Retirement of long-term debt
    
(433
)
    
(559
)
    
(394
)
Contribution from PPL
    
75
                  
Repurchase of common stock from PPL
    
(200
)
                
Payment of common stock dividends to PPL
    
(116
)
    
(93
)
    
(24
)
Net increase in short-term debt
                    
42
  
Other financing activities
    
(10
)
    
(12
)
    
(10
)
Net cash used in financing activities
    
(439
)
    
(240
)
    
(386
)
                         
Net (Decrease) Increase in Cash and Cash Equivalents
    
(148
)
    
147
      
(11
)
Cash and Cash Equivalents at Beginning of Period
    
298
      
151
      
162
  
Cash and Cash Equivalents at End of Period
  
$
150
    
$
298
    
$
151
  
                         
Supplemental Disclosures of Cash Flow Information
                        
Cash paid (received) during the period for:
                        
Interest
  
$
137
    
$
156
    
$
180
  
Income taxes - net
  
$
122
    
$
21
    
$
(69
)
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
   
2006
  
2005
Assets
                
                 
Current Assets
                
Cash and cash equivalents
  
$
150
    
$
298
  
Restricted cash (Note 19)
    
43
      
42
  
Accounts receivable (less reserve: 2006, $19; 2005, $20)
    
219
      
224
  
Unbilled revenues
    
163
      
174
  
Accounts receivable from affiliates
    
6
      
10
  
Note receivable from affiliate (Note 16)
    
300
      
300
  
Prepayments
    
3
      
4
  
Prepayment on PLR energy supply from affiliate (Note 16)
    
12
      
12
  
Other
    
101
      
87
  
Total Current Assets
    
997
      
1,151
  
                 
Property, Plant and Equipment (Note 1)
                
Electric plant in service
                
Transmission and distribution
    
4,163
      
4,034
  
General
    
412
      
356
  
     
4,575
      
4,390
  
Construction work in progress
    
95
      
43
  
Electric plant
    
4,670
      
4,433
  
Other property
    
3
      
3
  
     
4,673
      
4,436
  
Less: accumulated depreciation
    
1,793
      
1,720
  
Total Property, Plant and Equipment
    
2,880
      
2,716
  
                 
Regulatory and Other Noncurrent Assets (Note 1)
                
Recoverable transition costs
    
884
      
1,165
  
Acquired intangibles (Note 20)
    
118
      
114
  
Prepayment on PLR energy supply from affiliate (Note 16)
    
23
      
35
  
Other
    
413
      
356
  
Total Regulatory and Other Noncurrent Assets
    
1,438
      
1,670
  
                 
Total Assets
  
$
5,315
    
$
5,537
  
                 
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)
   
2006
  
2005
Liabilities and Equity
                
                 
Current Liabilities
                
Short-term debt (Note 8)
  
$
42
    
$
42
  
Long-term debt
    
555
      
434
  
Accounts payable
    
53
      
42
  
Accounts payable to affiliates
    
164
      
183
  
Taxes
    
58
      
76
  
Collateral on PLR energy supply from affiliate (Note 16)
    
300
      
300
  
Other
    
141
      
147
  
Total Current Liabilities
    
1,313
      
1,224
  
                 
Long-term Debt
    
1,423
      
1,977
  
                 
Deferred Credits and Other Noncurrent Liabilities
                
Deferred income taxes and investment tax credits (Note 5)
    
814
      
771
  
Other
    
206
      
190
  
Total Deferred Credits and Other Noncurrent Liabilities
    
1,020
      
961
  
                 
Commitments and Contingent Liabilities (Note 15)
                
                 
Shareowners' Equity
                
Preferred securities (Note 7)
    
301
      
51
  
Common stock - no par value (a) (b)
    
364
      
1,476
  
Additional paid-in capital
    
424
      
354
  
Treasury stock (a) (b)
            
(912
)
Earnings reinvested
    
470
      
406
  
Total Shareowners' Equity
    
1,559
      
1,375
  
                 
Total Liabilities and Equity
  
$
5,315
    
$
5,537
  

(a)
  
170 million shares authorized; 66 million shares issued and outstanding at December 31, 2006, and 78 million shares issued and outstanding, excluding 79 million shares held as treasury stock, at December 31, 2005.
(b)
  
See Note 1 for additional information on the retirement of all treasury stock in 2006.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
 
 
FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, except share amounts)
   
2006
  
2005
  
2004
                         
Preferred securities at beginning of year
  
$
51
    
$
51
    
$
51
  
Issuance of preference stock
    
250
                  
                         
Preferred securities at end of year
    
301
      
51
      
51
  
                         
Common stock at beginning of year
    
1,476
      
1,476
      
1,476
  
Retirement of treasury stock
    
(1,112
)
                
                         
Common stock at end of year
    
364
      
1,476
      
1,476
  
                         
Additional paid-in capital at beginning of year
    
354
      
354
      
354
  
Capital contribution from PPL
    
75
                  
Capital stock expense
    
(5
)
                
                         
Additional paid-in capital at end of year
    
424
      
354
      
354
  
                         
Treasury stock at beginning of year
    
(912
)
    
(912
)
    
(912
)
Treasury stock purchased
    
(200
)
                
Retirement of treasury stock
    
1,112
                  
                         
Treasury stock at end of year
            
(912
)
    
(912
)
                         
Earnings reinvested at beginning of year
    
406
      
354
      
304
  
Net income (a)
    
194
      
147
      
76
  
Cash dividends declared on preferred securities
    
(14
)
    
(2
)
    
(2
)
Cash dividends declared on common stock
    
(116
)
    
(93
)
    
(24
)
                         
Earnings reinvested at end of year
    
470
      
406
      
354
  
                         
                         
Total Shareowners' Equity
  
$
1,559
    
$
1,375
    
$
1,323
  
                         
Common stock shares outstanding at beginning of year (b)
    
78,030
      
78,030
      
78,030
  
Treasury stock shares purchased
    
(11,662
)
                
                         
Common stock shares outstanding at end of year
    
66,368
      
78,030
      
78,030
  

(a)
  
PPL Electric's net income approximates comprehensive income.
(b)
  
Shares in thousands. All common shares of PPL Electric stock are owned by PPL.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
 
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
   
Outstanding
    
   
2006
    
2005
  
Maturity (a)
                   
First Mortgage Bonds (b)
                      
6.55%
            
$
146
    
March 1, 2006
7-3/8%
  
$
10
        
10
    
March 1, 2014
     
10
        
156
      
Senior Secured Bonds (b)
                      
5-7/8%
    
255
        
255
    
August 15, 2007
6-1/4%
    
486
        
486
    
August 15, 2009
4.30%
    
100
        
100
    
June 1, 2013
4.95%
    
100
        
100
    
December 15, 2015
5.15%
    
100
        
100
    
December 15, 2020
     
1,041
        
1,041
      
Senior Secured Bonds (Pollution Control Series) (c)
                      
3.125% Series
    
90
        
90
    
November 1, 2008
4.75% Series (d)
    
108
        
108
    
February 15, 2027
4.70% Series (e)
    
116
        
116
    
September 1, 2029
     
314
        
314
      
Series 1999-1 Transition Bonds
                      
7.05% - 7.15%
    
605
        
892
    
2006-2008
                       
Floating Rate Pollution Control Revenue Bonds (f)
    
9
        
9
    
June 1, 2027
     
1,979
        
2,412
      
Unamortized discount
    
(1
)
      
(1
)
    
     
1,978
        
2,411
      
Less amount due within one year
    
(555
)
      
(434
)
    
Total Long-term Debt
  
$
1,423
      
$
1,977
      

See Note 8 for information on debt retirements during 2006.
     
(a)
  
Aggregate maturities of long-term debt are (millions of dollars): 2007, $555; 2008, $395; 2009, $486; 2010 and 2011, $0; and $543 thereafter. There are no bonds outstanding that have sinking fund requirements.
(b)
  
The First Mortgage Bonds were issued under, and are secured by, the lien of the 1945 First Mortgage Bond Indenture. The lien of the 1945 First Mortgage Bond Indenture covers substantially all electric distribution plant and certain transmission plant owned by PPL Electric. The Senior Secured Bonds were issued under the 2001 Senior Secured Bond Indenture. The Senior Secured Bonds are secured by (i) an equal principal amount of First Mortgage Bonds issued under the 1945 First Mortgage Bond Indenture and (ii) the lien of the 2001 Senior Secured Bond Indenture, which covers substantially all electric distribution plant and certain transmission plant owned by PPL Electric and which is junior to the lien of the 1945 First Mortgage Bond Indenture.
(c)
  
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 Lehigh County Industrial Development Authority (LCIDA) on behalf of PPL Electric. These Senior Secured Bonds were issued in the same principal amount 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 (b) above.
(d)
  
May be redeemed at par on or after February 15, 2015.
(e)
  
May be redeemed at par on or after March 1, 2015.
(f)
  
Rate was 3.97% at December 31, 2006, and 3.58% at December 31, 2005.
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
 
Terms and abbreviations appearing in Combined Notes to Consolidated Financial Statements are explained in the glossary. Dollars are in millions, except per share data, unless otherwise noted.

1.  Summary of Significant Accounting Policies

General

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, the U.K. and Latin America. Based in Allentown, PA, PPL's principal direct subsidiaries are PPL Energy Funding, PPL Electric, PPL Gas Utilities, 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 located in Pennsylvania, Montana, Illinois, Connecticut, New York and Maine and use well-diversified fuel sources including coal, uranium, natural gas, oil and water. PPL EnergyPlus markets or brokers electricity produced by PPL Generation, along with purchased power, natural gas and oil, in competitive wholesale and deregulated retail markets, primarily in the northeastern and western portions of the U.S. PPL Global owns and operates international energy businesses that are primarily focused on the distribution of electricity.

(PPL and PPL Electric)

PPL Electric is a rate-regulated subsidiary of PPL. PPL Electric's principal businesses are the transmission and distribution of electricity to serve retail customers in its franchised territory in eastern and central Pennsylvania, and the supply of electricity to retail customers in that territory as a PLR.

(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. (See Note 22 for additional information regarding the consolidation and deconsolidation of variable interest entities.) Investments in entities in which the company has the ability to exercise significant influence but does not have a controlling financial interest are accounted for under the equity method. See Note 3 for further discussion. All other investments are carried at cost or fair value. All significant intercompany transactions have been eliminated. Any minority interests are reflected in the consolidated financial statements.

(PPL and PPL Energy Supply)

It is the policy of PPL and PPL Energy Supply to consolidate foreign subsidiaries on a one-month lag and record earnings from foreign equity method investments on a three-month lag, based on the availability of financial data on a U.S. GAAP basis. 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, while significant but not material events are only disclosed.

In June 2004, PPL Energy Supply subsidiaries purchased the Sundance and University Park generation assets from the lessor. Prior to the purchase of the assets, PPL's and PPL Energy Supply's consolidated financial statements included the accounts of this lessor in accordance with FIN 46(R). See Note 22 for further discussion. In May 2005, a subsidiary of PPL Generation completed the sale of its Sundance generation assets to Arizona Public Service Company. See Note 9 for further discussion.

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 14 for additional information.

Regulation 

(PPL and PPL Electric)

PPL Electric and PPL Gas Utilities account for regulated operations in accordance with the provisions of SFAS 71, "Accounting for the Effects of Certain Types of Regulation," which requires rate-regulated entities to reflect the effects of regulatory decisions in their financial statements.

The following regulatory assets were included in the "Regulatory and Other Noncurrent Assets" section of the Balance Sheets at December 31.

   
PPL
  
PPL Electric
   
2006
  
2005
  
2006
  
2005
                                 
Recoverable transition costs (a)
  
$
884
    
$
1,165
    
$
884
    
$
1,165
  
                                 
Taxes recoverable through future rates
    
265
      
250
      
256
      
242
  
                                 
Recoverable costs of defined benefit plans
    
75
              
61
          
                                 
Costs associated with severe ice storms - January 2005
    
12
      
12
      
12
      
12
  
                                 
Storm restoration costs - Hurricane Isabel
            
10
              
10
  
                                 
Other
    
6
      
7
      
3
      
5
  
                                 
   
$
1,242
    
$
1,444
    
$
1,216
    
$
1,434
  

(a)
  
Earn a current return.

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, $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 are being 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, are not available to creditors of PPL or PPL Electric. The transition bonds are obligations of PPL Transition Bond Company and are non-recourse to PPL and PPL Electric. The remaining competitive transition costs are also being amortized based on an amortization schedule previously filed with the PUC, adjusted for those competitive transition costs that were converted to intangible transition costs. As a result of the conversion of a significant portion of the competitive transition costs into intangible transition costs, amortization of substantially all of the remaining competitive transition costs will occur 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. In accordance with SFAS 109, "Accounting for Income Taxes," this regulatory asset and the deferred tax liability are not offset for general-purpose financial reporting; 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.

On December 31, 2006, PPL and PPL Electric established regulatory assets for recoverable costs of defined benefit plans as a result of the adoption of SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)." These regulatory assets do not represent cash expenditures already incurred; consequently, these assets are not earning a current return. These regulatory assets represent the costs that would have otherwise been recorded in other comprehensive income in accordance with SFAS 158, as follows:

   
PPL
    
PPL Electric
  
                 
Transition obligation
  
$
16
    
$
16
  
                 
Prior service cost
    
89
      
87
  
                 
Net actuarial gain
    
(30
)
    
(42
)
                 
Recoverable costs of defined benefit plans
  
$
75
    
$
61
  

Of these costs, $16 million are expected to be amortized into net periodic benefit cost in 2007. All costs will be amortized over the lives of the defined benefit plans. See Note 13 for the disclosures related to the adoption of SFAS 158.

In January 2005, severe ice storms hit PPL Electric's service territory. The total cost of restoring service, excluding capitalized cost and regular payroll expenses, was $16 million. In August 2005, the PUC issued an order granting PPL Electric's petition for authority to defer and amortize for regulatory accounting and reporting purposes a portion of these storm costs subject to certain conditions. As a result of the PUC Order and in accordance with SFAS 71, PPL Electric deferred $12 million of its previously expensed storm costs. The ratemaking treatment of these costs will be addressed in PPL Electric's next distribution base rate case, which is expected to be filed in late March 2007. PPL and PPL Electric believe that recovery of the remaining portion of these costs is probable.

In August 2006, the Commonwealth Court of Pennsylvania overturned the PUC's decision of December 2004 that previously allowed PPL Electric to recover, over a 10-year period, restoration costs incurred in connection with Hurricane Isabel in September 2003. As a result of the PUC's 2004 decision and in accordance with SFAS 71, PPL Electric had established a regulatory asset for the restoration costs. Effective January 1, 2005, PPL Electric began billing these costs to customers and amortizing the regulatory asset. The Commonwealth Court denied recovery of these costs because they were incurred when PPL Electric was subject to capped rates for transmission and distribution services, through December 31, 2004. As a result of the Court's decision, PPL Electric recorded a charge of $11 million, or $7 million after tax ($0.02 per share for PPL), in "Other operation and maintenance" on the Statements of Income, reversed the remaining unamortized regulatory asset of $9 million and recorded a regulatory liability of $2 million for restoration costs previously billed to customers from January 2005 through December 2006.

The remainder of the regulatory assets included in "Other" will be recovered through 2013.

(PPL and PPL Energy Supply)

Elfec accounts for regulated operations in accordance with the provisions of SFAS 71. Regulatory assets as of December 31, 2006 and 2005 were insignificant.

Accounting Records (PPL and PPL Electric)

The system of accounts for PPL Electric and PPL Gas Utilities are 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 U.S. 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)

Loss accruals are recorded in accordance with SFAS 5, "Accounting for Contingencies," and other related accounting guidance. 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. FASB defines "probable" as cases in which "the future event or events are likely to occur." SFAS 5 does not generally permit the accrual of contingencies that might result in gains. PPL continuously assesses potential loss contingencies for environmental remediation, litigation claims, income taxes, regulatory penalties and other events. PPL discounts its loss accruals for environmental remediation when appropriate.

PPL also has accrued estimated losses on long-term purchase commitments when significant events have occurred. For example, estimated losses were accrued when long-term purchase commitments were assumed under asset acquisition agreements and when PPL Electric's generation business was deregulated.

Changes in Classification 

(PPL, PPL Energy Supply and PPL Electric)

The classification of certain amounts in the 2005 and 2004 financial statements have been changed to conform to the current presentation. The changes in classification did not affect net income or total equity. On the Statements of Income, components of operating income and losses of the Griffith plant were reclassified from certain line items to "Loss from Discontinued Operations." See Note 10 for further discussion.

Comprehensive Income (PPL and PPL Energy Supply)

Comprehensive income consists of net income and other comprehensive income, defined as changes in equity from transactions not related to shareowners. Comprehensive income is shown on PPL's Statements of Shareowners' Common Equity and Comprehensive Income and PPL Energy Supply's Statements of Member's Equity and Comprehensive Income.

Accumulated other comprehensive loss, which is presented on the Balance Sheets of PPL and included in Member's Equity on the PPL Energy Supply Balance Sheets, consisted of these after-tax amounts at December 31.

   
2006
    
2005
  
PPL
                
                 
Foreign currency translation adjustments
  
$
170
    
$
15
  
                 
Net unrealized gains on available-for-sale securities
    
58
      
48
  
                 
Additional minimum pension liability
            
(349
)
                 
Defined benefit plans
    
(495
)
        
                 
Net unrealized losses on qualifying derivatives
    
(51
)
    
(246
)
   
$
(318
)
  
$
(532
)
                 
PPL Energy Supply
                
                 
Foreign currency translation adjustments
  
$
170
    
$
15
  
                 
Net unrealized gains on available-for-sale securities
    
59
      
48
  
                 
Additional minimum pension liability
            
(339
)
                 
Defined benefit plans
    
(471
)
        
                 
Net unrealized losses on qualifying derivatives
    
(52
)
    
(237
)
   
$
(294
)
  
$
(513
)
 
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.

Contracts that meet the definition of a derivative are accounted for under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," as amended and interpreted. Certain energy contracts have been excluded from the requirements of SFAS 133 because they meet the definition of a "normal purchase or normal sale." These contracts are reflected in the financial statements using the accrual method of accounting.

All derivative contracts that are subject to the requirements of SFAS 133 and its amendments 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 contracts are included in "Current Assets" and "Current Liabilities." PPL records long-term derivative contracts in "Regulatory and Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities" and PPL Energy Supply records long-term derivative contracts 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 other comprehensive income or in current-period earnings in accordance with SFAS 133.

When recognized on the Statements of Income, realized gains and losses from energy contracts accounted for as fair value or cash flow hedges, are reflected in "Wholesale energy marketing," "Fuel," or "Energy purchases," consistent with the hedged item. Unrealized gains and losses from changes in market prices of energy contracts accounted for as fair value hedges are reflected in "Energy purchases" on the Statements of Income, as are changes in the underlying position. Additionally, PPL enters into certain energy or energy-related contracts to hedge future cash flows or fair values, but these contracts are not eligible for hedge accounting treatment under SFAS 133, or hedge accounting treatment is not elected. Unrealized and realized gains and losses on these transactions are reflected in "Wholesale energy marketing" or "Energy purchases," consistent with the hedged item. Unrealized and realized gains and losses on options to hedge synthetic fuel tax credits are reflected in "Energy-related businesses" revenues.

Gains and losses from interest rate and foreign currency derivative contracts that hedge interest payments, when recognized on the Statements of Income, are accounted for in "Interest Expense." Gains and losses from foreign currency derivative contracts that economically hedge foreign earnings translation are recognized in "Other Income - net." Gains and losses from foreign currency derivative contracts that hedge foreign currency payments for equipment, when recognized on the Statements of Income, are accounted for in "Depreciation."

PPL Energy Supply accounts for non-trading bilateral sales and purchases in accordance with EITF 03-11, "Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not 'Held for Trading Purposes' as Defined in Issue No. 02-3," to net non-trading bilateral sales of electricity at major market delivery points with purchases that offset the sales at those same delivery points. A major market delivery point is any delivery point with liquid pricing available.

See Note 18 for additional information on SFAS 133, its amendments and related accounting guidance.

Revenue

Utility Revenue

(PPL)

The Statements of Income "Utility" line item contains revenues from domestic and international rate-regulated delivery operations.

(PPL Energy Supply)

The Statements of Income "Utility" line item contains revenues from the international 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 records energy marketing activity in the period when the energy is delivered. The wholesale sales and purchases that meet the criteria in EITF 03-11 are reported net on the Statements of Income within "Wholesale energy marketing." Additionally, the bilateral sales and purchases that are designated as trading activities are also reported net, in accordance with EITF 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities," and are reported on the Statements of Income within "Net energy trading margins." Spot market activity that balances PPL'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 sales to and purchases from the respective ISOs.

"Energy-related businesses" revenue includes revenues from the mechanical contracting and engineering subsidiaries, WPD's telecommunications and property subsidiaries and PPL Global's proportionate share of affiliate earnings under the equity or cost method of accounting, as described in the "Business and Consolidation" section of Note 1. The mechanical contracting and engineering subsidiaries record profits from construction contracts on the percentage-of-completion method of accounting. Income from time and material contracts is recognized currently as the work is performed.

Allowance for Doubtful Accounts 

(PPL, PPL Energy Supply and PPL Electric)

Trade receivables are reported in the Balance Sheets at the gross outstanding amount adjusted for an allowance for doubtful accounts.

Accounts receivable collectibility 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. Unusual items, 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.

Trade receivables are charged-off in the period in which the receivable is deemed uncollectible. Recoveries of trade receivables previously charged-off are recorded when it is known they will be received.

(PPL and PPL Energy Supply)

At December 31, 2005, PPL's and PPL Energy Supply's significant specific reserves related to receivables from Enron Corporation (Enron), which filed for bankruptcy in 2001, and from the California ISO, which has withheld payment pending the outcome of regulatory proceedings arising from the California electricity supply situation that began in 2000. At December 31, 2005, the Enron and California ISO reserves accounted for 60% of PPL's total allowance for doubtful accounts and 80% of PPL Energy Supply's total allowance for doubtful accounts.

The reserves related to Enron were for claims against Enron North America and Enron Power Marketing (Enron Subsidiaries), and against Enron, which had guaranteed the Enron Subsidiaries' performance (Enron Corporation Guarantees).

In March 2006, the U.S. Bankruptcy Court approved agreements between Enron and PPL Energy Supply that settled the litigation between PPL Energy Supply and Enron regarding the validity and enforceability of the Enron Corporation Guarantees. As a result of the Bankruptcy Court's approval of the settlement of the Enron Corporation Guarantees litigation and an assessment of current market price quotes for the purchase of Enron claims, PPL Energy Supply reduced the associated allowance for doubtful accounts by $15 million or $9 million after tax ($0.03 per share for PPL).

In July 2006, PPL Energy Supply executed an agreement to assign its Enron claims to an independent third party for $17 million and further reduced the associated allowance for doubtful accounts in the second quarter of 2006 by $4 million, or $2 million after tax ($0.01 per share for PPL). PPL Energy Supply received the payment in July 2006. See "Guarantees and Other Assurances" in Note 15 for information regarding the indemnifications PPL Energy Supply provided as a result of the assignment.

At December 31, 2006, the California ISO reserves accounted for 34% of PPL's total allowance for doubtful accounts and 59% of PPL Energy Supply's total allowance for doubtful accounts.

Cash and Investments (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.

Short-term Investments

Highly liquid investments with original maturities greater than three months are considered to be short-term investments. Short-term investments consist of auction rate and similar securities that provide for periodic reset of interest rates, and certificates of deposit. Even though PPL considers these investments as part of its liquid portfolio, it does not include these investments in cash and cash equivalents due to their stated maturities. These investments are included in "Short-term investments" on the Balance Sheets of PPL and PPL Energy Supply and in "Current Assets - Other" for PPL Electric.

Restricted Cash

Bank deposits that are restricted by agreement or that have been designated for a specific purpose are classified as restricted cash. The change in restricted cash is reported as an investing activity in the Statements of Cash Flows. On the Balance Sheets, the current portion of restricted cash is shown as "Restricted cash" within current assets, while the noncurrent portion is included in "Other" within other noncurrent assets. See Note 19 for the components of restricted cash.

Investments in Debt and Marketable 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 securities and marketable equity securities that are acquired and held principally for the purpose of selling them in the near-term are classified as trading. All other investments in debt and marketable equity securities are classified as available-for-sale. Both trading and available-for-sale securities are carried at fair value. Any unrealized gains and losses for trading securities are included in earnings. Unrealized gains and losses for available-for-sale securities are reported, net of tax, in other comprehensive income or are recognized currently in earnings when a decline in fair value is determined to be other than temporary. The specific identification method is used to calculate realized gains and losses on debt and marketable equity securities. See Note 21 for additional information on available-for-sale securities held in the nuclear decommissioning trust.

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 asset's new cost basis. Original cost includes material, labor, contractor costs, construction 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.

AFUDC is capitalized as part of the construction costs for regulated projects. Interest is capitalized as part of construction costs for non-regulated projects.

(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 5 years. Capitalized software costs and accumulated amortization were:

   
December 31, 2006
    
December 31, 2005
  
   
Carrying
Amount
    
Accumulated
Amortization
    
Carrying
Amount
    
Accumulated
Amortization
  
PPL
 
$
106
    
$
76
    
$
92
    
$
57
  
PPL Energy Supply
    
64
      
48
      
54
      
38
  
PPL Electric
    
21
      
16
      
21
      
12
  

The following capitalized software costs were amortized during:

   
PPL
  
PPL
Energy Supply
  
PPL
Electric
  
               
2006
  
$
14
  
$
6
  
$
4
  
2005
    
13
    
6
    
4
  
2004
    
11
    
5
    
4
  

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.

PPL and its subsidiaries periodically review the useful lives of their fixed assets. In light of significant planned environmental capital expenditures, PPL Generation conducted studies of the useful lives of Montour Units 1 and 2 and Brunner Island Unit 3 during the first quarter of 2005. Based on these studies, the useful lives of these units were extended from 2025 to 2035, effective January 1, 2005. In the second quarter of 2005, PPL Generation conducted additional studies of the useful lives of certain Eastern fossil-fuel and hydroelectric generation plants. The most significant change related to the useful lives of Brunner Island Units 1 and 2 and Martins Creek Units 3 and 4, which were extended from 2025 to 2035, effective July 1, 2005. The effect of these changes in useful lives for 2005 was to increase net income, as a result of lower depreciation, by $7 million (or $0.02 per share for PPL).

In 2005, as a result of the final regulatory outcome published by Ofgem of the most recent price control review and an assessment of the economic life of meters, WPD reduced the remaining depreciable lives of its existing meter stock to approximately nine years. The lives of new meters were reduced from 40 years to 19 years. The effect for 2005 was to decrease net income, as a result of higher depreciation, by $5 million (or $0.01 per share for PPL).

Following are the weighted-average rates of depreciation at December 31.

   
2006
  
   
PPL
    
PPL Energy Supply
    
PPL Electric
 
                         
 
Generation
    
2.05%
      
2.05%
          
 
Transmission and distribution
    
2.84%
      
3.39%
      
2.25%
  
 
General
    
4.13%
      
3.71%
      
3.35%
  

   
2005
  
   
PPL
    
PPL Energy Supply
    
PPL Electric
 
                         
 
Generation
    
2.01%
      
2.02%
          
 
Transmission and distribution
    
3.03%
      
3.89%
      
2.23%
  
 
General
    
3.78%
      
4.12%
      
2.87%
  

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
    
15-60
      
15-50
      
15-60
  
 
General
    
5-60
      
5-60
      
5-60
  

Goodwill and Other Acquired 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. In accordance with SFAS 142, "Goodwill and Other Intangible Assets," PPL and its subsidiaries do not amortize goodwill.

Other acquired intangible assets that have finite useful lives are valued at cost and amortized over their useful lives based upon the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up.

PPL and its subsidiaries account for emission allowances as intangible assets. As such, emission allowances are amortized and expensed when consumed. In addition, vintage year swaps are accounted for at fair value in accordance with SFAS 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29."

Asset Impairment (PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiaries review long-lived assets, including intangibles, that are subject to depreciation or amortization for impairment when events or circumstances indicate carrying amounts may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable from undiscounted future cash flows. The impairment charge is measured by the difference between the carrying amount of the asset and its fair value. See Note 9 for a discussion of asset impairment charges recorded.

Intangible assets with indefinite lives are reviewed for impairment annually or more frequently when events or circumstances indicate that the assets may be impaired. An impairment charge is recognized if the carrying amount of the assets exceeds its fair value. The difference represents the amount of impairment.

Goodwill is reviewed for impairment, at the reporting unit level, annually or more frequently when events or circumstances indicate that the carrying value may be greater than the implied fair value. PPL's reporting units are one level below its operating segments. If the carrying value of the reporting unit exceeds its fair value, the implied fair value of goodwill must be calculated. If the implied fair value of goodwill is less than its carrying value, the difference represents the amount of impairment.

PPL also reviews the residual value of leased assets. Residual value is the estimated fair value of the leased property at the end of the lease term. If the residual value is determined to be less than the residual value that was originally recorded for the property, PPL must determine whether the decrease is other than temporary. If so, the residual value would be revised using the new estimate and a loss would be recorded currently. If the residual value is found to be greater than the original, no adjustment is needed.

Asset Retirement Obligations (PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiaries account for the retirement of its long-lived assets according to SFAS 143, "Accounting for Asset Retirement Obligations," which addresses the accounting for obligations associated with the retirement of tangible long-lived assets and FIN 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143," which clarifies certain aspects of SFAS 143. SFAS 143 requires legal obligations associated with the retirement of long-lived assets to be recognized as liabilities in the financial statements. The initial obligation is measured at the estimated 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.

See Note 21 for a discussion of accounting for AROs.

Compensation and Benefits

Pension and Other Postretirement Benefits (PPL, PPL Energy Supply and PPL Electric)

PPL and certain of its subsidiaries sponsor various pension and other postretirement and postemployment benefit plans. PPL follows the guidance of SFAS 87, "Employers' Accounting for Pensions," and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," when accounting for these benefits. In addition, PPL adopted the recognition and measurement date provisions of SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," effective December 31, 2006.

PPL uses a market-related value of plan assets in accounting for its pension plans. The market-related value of plan assets is calculated by rolling forward the prior year market-related value with contributions, disbursements and 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 13 for the impact of the adoption of SFAS 158 and a discussion of pension and other postretirement benefits.

Stock-Based Compensation

(PPL, PPL Energy Supply and PPL Electric)

PPL grants stock options, restricted stock and restricted stock units to employees and restricted stock units and stock units to directors under several stock-based compensation plans. In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment," which is known as SFAS 123(R) and replaces SFAS 123, "Accounting for Stock-Based Compensation," as amended by SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." PPL and its subsidiaries adopted SFAS 123(R) effective January 1, 2006. See Note 23 for a discussion of SFAS 123(R). Effective January 1, 2003, PPL and its subsidiaries adopted the fair value method of accounting for stock-based compensation, as prescribed by SFAS 123, "Accounting for Stock-Based Compensation," using the prospective method of transition permitted by SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123." The prospective method of transition requires PPL and its subsidiaries to use the fair value method under SFAS 123 to account for all stock-based compensation awards granted, modified or settled on or after January 1, 2003. Thus, all awards granted prior to January 1, 2003, were accounted for under the intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to Employees," to the extent such awards are not modified or settled.

Use of the fair value method prescribed by both SFAS 123 and SFAS 123(R) require PPL and its subsidiaries to recognize compensation expense for stock options issued. Fair value for the stock options is determined using the Black-Scholes options pricing model. Stock options with graded vesting (i.e., that vest in installments) are valued as a single award.

PPL and its subsidiaries were not required to recognize compensation expense for stock options issued and accounted for under the intrinsic value method of APB Opinion No. 25, since PPL grants stock options with an exercise price that is not less than the fair market value of PPL's common stock on the date of grant. As currently structured, awards of restricted stock, restricted stock units and directors' stock units result in the same amount of compensation expense under the fair value method of SFAS 123 or SFAS 123(R) as they would under the intrinsic value method of APB Opinion No. 25 since the value of the awards are based on the fair value of PPL's common stock on the date of grant. See Note 12 for a discussion of stock-based compensation. Stock-based compensation is included in "Other operation and maintenance" expense on the Statements of Income.

The table below illustrates the pro forma effect on net income and EPS as if the fair value method had been used to account for all outstanding stock-based compensation awards in 2004. For 2005, the difference between the pro forma and reported amounts would have been insignificant. In 2006, PPL accounted for all stock-based compensation awards under the fair value method.

(PPL)
   
2004
Net Income
        
Net Income - as reported
 
$
698
  
Add: Stock-based employee compensation expense included in reported net income, net of tax
    
8
  
Deduct: Total stock-based compensation expense determined under the fair value method for all awards, net of tax
    
10
  
Pro forma Net Income
  
$
696
  
         
EPS
        
Basic - as reported
  
$
1.89
  
Basic - pro forma
 
$
1.89
  
Diluted - as reported
  
$
1.89
  
Diluted - pro forma
 
$
1.88
  

(PPL Energy Supply)
   
2004
Net Income
        
Net Income - as reported
 
$
651
  
Add: Stock-based employee compensation expense included in reported net income, net of tax
    
5
  
Deduct: Total stock-based compensation expense determined under the fair value method for all awards, net of tax
    
7
  
Pro forma Net Income
  
$
649
  

PPL Energy Supply's stock-based compensation expense includes an allocation of PPL Services' expense.

(PPL Electric)

PPL Electric's stock-based compensation expense, including awards granted to employees and an allocation of costs of awards granted to employees of PPL Services, was insignificant under both the intrinsic value and fair value methods for each of 2006, 2005 and 2004.

(PPL, PPL Energy Supply and PPL Electric)

SFAS 123(R) provided additional guidance on the requirement to accelerate expense recognition for employees who are at or near retirement age and who are under a plan that allows for accelerated vesting upon an employee's retirement. Such guidance is relevant to prior accounting for stock-based compensation under other accounting guidance. PPL's stock-based compensation plans allow for accelerated vesting upon an employee's retirement. Thus, for employees who are retirement eligible when stock-based awards are granted, PPL recognizes the expense immediately. For employees who are not retirement eligible when stock-based awards are granted, PPL amortizes the awards on a straight-line basis over the shorter of the vesting period or the period up to the employee's attainment of retirement age. Retirement eligible has been defined by PPL as the early retirement age of 55. The adjustments below related to retirement-eligible employees were recorded based on the aforementioned clarification of existing guidance and are not related to the adoption of SFAS 123(R).

(PPL)

In 2005, PPL recorded a charge of $10 million after tax, or $0.03 per share, to accelerate stock-based compensation expense for retirement-eligible employees, of which $5 million of the after-tax total, or $0.01 per share, was related to periods prior to 2005. The prior period amounts were not material to previously issued financial statements.

(PPL Energy Supply)

In 2005, PPL Energy Supply recorded a charge of $7 million after tax to accelerate stock-based compensation expense for retirement-eligible employees, of which $3 million of the after-tax total was related to periods prior to 2005. The prior period amounts were not material to previously issued financial statements.

(PPL Electric)

In 2005, PPL Electric recorded a charge of $3 million after tax to accelerate stock-based compensation expense for retirement-eligible employees, of which $2 million of the after-tax total was related to periods prior to 2005. The prior period amounts were not material to previously issued financial statements.

Other

Income Taxes

(PPL, PPL Energy Supply and PPL Electric)

The income tax provision for PPL and its subsidiaries is calculated in accordance with SFAS 109, "Accounting for Income Taxes." 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, including the determination of deferred tax assets and liabilities, valuation allowances required against deferred tax assets and estimating the phase-out range for synthetic fuel tax credits that is not published by the IRS until April of the following year. 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 future taxable income and ongoing prudent and feasible tax planning strategies in assessing 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.

Annual tax provisions include amounts to pay assessments that may result from examination by taxing authorities of prior year tax returns. The amounts ultimately paid upon resolution of issues raised by such authorities may differ materially from the amounts accrued and may materially impact PPL and its subsidiaries' financial statements in the future. In evaluating the exposure associated with various tax filing positions, PPL and its subsidiaries accrue charges for probable exposures based on management's best estimate of the amount of benefit that should be recognized in the financial statements in accordance with SFAS 5, "Accounting for Contingencies."

The 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 and PPL Electric and any domestic subsidiaries each filed a separate consolidated return. PPL Energy Supply's intercompany tax liability was $17 million and $40 million at December 31, 2006 and 2005. PPL Electric's intercompany tax receivable was $2 million at December 31, 2006, and its intercompany tax liability was $6 million at December 31, 2005.

PPL Energy Supply and PPL Electric deferred investment tax credits when the credits were 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 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 U.S. GAAP is deferred and included in taxes recoverable through future rates in "Regulatory and Other Noncurrent Assets - Other" on the Balance Sheet.

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 apply the provisions of SFAS 13, "Accounting for Leases," as amended and interpreted, to all transactions that qualify for lease accounting. See Note 11 for a discussion of accounting for leases under which PPL, PPL Energy Supply and PPL Electric are lessees.

(PPL and PPL Energy Supply)

PPL EnergyPlus is the lessor, for accounting purposes, of a 79.9 MW oil-powered station in Shoreham, New York. The Long Island Power Authority has contracted to purchase all of the plant's capacity and ancillary services as part of a 15-year power purchase agreement with PPL EnergyPlus, which ends in 2017. The capacity payments in the power purchase agreement result in the plant being classified as a direct-financing lease. Additionally, a subsidiary of PPL Energy Supply is the lessor, for accounting purposes, of a sales-type lease related to an 8 MW on-site electrical generation plant.

As of December 31, 2006 and 2005, PPL and PPL Energy Supply had receivable balances of $240 million and $256 million (included in "Current Assets - Other" and "Regulatory and Other Noncurrent Assets - Other" for PPL and "Current Assets - Other" and "Other Noncurrent Assets - Other" for PPL Energy Supply) and unearned revenue balances of $128 million and $143 million (included in "Current Liabilities - Other" and "Deferred Credits and Other Noncurrent Liabilities - Other"). The receivable balances include $65 million of an unguaranteed residual value. Rental income received during 2006, 2005 and 2004 was $14 million, $15 million and $14 million. Total future minimum lease payments expected to be received on both leases are estimated at $16 million for each of the years from 2007 through 2011.

Fuel, Materials and Supplies

(PPL)

PPL and its subsidiaries value inventory at the lower of cost or market. Inventory is removed and charged to the Statements of Income using the average-cost method, except for natural gas, which is removed and charged to the Statements of Income using the last-in, first-out method (LIFO). The carrying value of the LIFO inventory was $13 million and $16 million at December 31, 2006 and 2005, and the excess of replacement cost over carrying value was $16 million and $15 million at December 31, 2006 and 2005.

(PPL Energy Supply and PPL Electric)

Fuel, materials and supplies are valued at the lower of cost or market using the average-cost method.

Guarantees (PPL, PPL Energy Supply and PPL Electric)

In accordance with the provisions of FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34," the fair values of guarantees related to arrangements entered into prior to January 1, 2003, as well as guarantees excluded from the initial recognition and measurement provisions of FIN 45, are not recorded in the financial statements. See Note 15 for further discussion of recorded and unrecorded guarantees.

Treasury Stock (PPL and PPL Electric)

Treasury shares are reflected on the balance sheet as an offset to shareowners' equity under the cost method of accounting. Treasury shares are not considered outstanding in calculating EPS.

(PPL)

At December 31, 2005, PPL held 62,113,489 shares of treasury stock. PPL held no treasury stock at December 31, 2006. In the second quarter of 2006, PPL retired all treasury shares, which totaled 62,174,729 shares, and restored them to authorized but unissued shares of common stock. "Capital in excess of par value" was reduced by $839 million as a result of the retirement. Total "Shareowners' Common Equity" was not impacted. PPL plans to restore all shares of common stock acquired in the future to authorized but unissued shares of common stock upon acquisition.

(PPL Electric)

At December 31, 2005, PPL Electric held 79,270,519 shares of treasury stock. PPL Electric held no treasury stock at December 31, 2006. In the second quarter of 2006, PPL Electric retired all treasury shares, which totaled 90,932,326 shares, and restored them to authorized but unissued shares of common stock. "Common stock" was reduced by $1.1 billion as a result of the retirement. Total "Shareowners' Equity" was not impacted. PPL Electric plans to restore all shares of common stock acquired in the future 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 operations, 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. Adjustments resulting from translation are recorded in accumulated other comprehensive loss. The local currency is the functional currency for all of PPL's international operating companies except for those located in Bolivia, where the U.S. dollar is the functional currency.

Gains or losses relating to foreign currency transactions are recognized currently in income. The net transaction losses were insignificant in 2006, 2005 and 2004.

New Accounting Standards (PPL, PPL Energy Supply and PPL Electric)

See Note 23 for a discussion of new accounting standards recently adopted or pending adoption.

2.  Segment and Related Information

(PPL and PPL Energy Supply)

PPL's reportable segments are Supply, International Delivery and Pennsylvania Delivery. The Supply segment primarily consists of the domestic energy marketing, domestic generation and domestic development operations of PPL Energy Supply. The International Delivery segment includes operations of the international energy businesses of PPL Global that are primarily focused on the distribution of electricity. The majority of PPL Global's international businesses are located in the U.K., Chile, El Salvador and Bolivia. The Pennsylvania Delivery segment includes the regulated electric and gas delivery operations of PPL Electric and PPL Gas Utilities.

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 costs, for services provided by PPL Services. These service costs include functions such as financial, legal, human resources and information services.

Financial data for the segments are:

   
PPL
  
PPL Energy Supply
   
2006
  
2005
  
2004
  
2006
  
2005
  
2004
Income Statement Data
                                                
Revenues from external customers
                                                
Supply
  
$
2,239
    
$
1,774
    
$
1,783
    
$
3,925
    
$
3,335
    
$
3,264
  
International Delivery
    
1,347
      
1,206
      
1,102
      
1,347
      
1,206
      
1,102
  
Pennsylvania Delivery
    
3,313
      
3,199
      
2,869
                          
     
6,899
      
6,179
      
5,754
      
5,272
      
4,541
      
4,366
  
Intersegment revenues (a)
                                                
Supply
    
1,708
      
1,590
      
1,500
                          
Pennsylvania Delivery
    
160
      
152
      
156
                          
                                                 
Depreciation
                                                
Supply
    
159
      
144
      
144
      
148
      
135
      
138
  
International Delivery
    
161
      
157
      
146
      
161
      
157
      
146
  
Pennsylvania Delivery
    
126
      
119
      
114
                          
     
446
      
420
      
404
      
309
      
292
      
284
  
Amortization - recoverable transition costs and other
                                                
Supply
    
31
      
33
      
14
      
17
      
18
      
(1
)
International Delivery
    
(14
)
    
(13
)
    
(2
)
    
(14
)
    
(13
)
    
(2
)
Pennsylvania Delivery
    
292
      
278
      
267
                          
     
309
      
298
      
279
      
3
      
5
      
(3
)
Interest income
                                                
Supply
    
(4
)
    
(6
)
    
15
      
35
      
21
      
23
  
International Delivery
    
13
      
8
      
8
      
13
      
8
      
8
  
Pennsylvania Delivery
    
32
      
21
      
16
                          
     
41
      
23
      
39
      
48
      
29
      
31
  
Interest expense
                                                
Supply
    
122
      
116
      
114
      
87
      
81
      
64
  
International Delivery
   
203
      
203
      
203
      
203
      
203
      
203
  
Pennsylvania Delivery
    
157
      
189
      
196
                          
     
482
      
508
      
513
      
290
      
284
      
267
  
                                                 
Income tax expense
                                                
Supply
    
147
      
21
      
125
      
168
      
42
      
146
  
International Delivery
   
21
      
34
      
59
      
21
      
34
      
59
  
Pennsylvania Delivery
    
107
      
67
      
17
                          
     
275
      
122
      
201
      
189
      
76
      
205
  
                                                 
Deferred income taxes and investment tax credits
                                                
Supply
   
(6
)
    
(93
)
    
17
      
102
      
13
      
104
  
International Delivery
    
(23
)
    
18
      
49
      
(23
)
    
18
      
49
  
Pennsylvania Delivery
    
12
      
10
      
87
                          
     
(17
)
    
(65
)
    
153
      
79
      
31
      
153
  
Net Income
                                                
 
Supply (b) (c)
    
416
      
311
      
421
      
430
      
327
      
454
  
 
International Delivery (d)
    
268
      
215
      
197
      
268
      
215
      
197
  
 
Pennsylvania Delivery
    
181
      
152
      
80
                          
   
$
865
    
$
678
    
$
698
    
$
698
    
$
542
    
$
651
  
                                                 
Cash Flow Data
                                                
Expenditures for property, plant and equipment
                                                
 
Supply
  
$
738
    
$
332
    
$
259
    
$
693
    
$
304
    
$
242
  
 
International Delivery
    
340
      
289
      
279
      
340
      
289
      
279
  
 
Pennsylvania Delivery
    
316
      
190
      
196
                          
   
$
1,394
    
$
811
    
$
734
    
$
1,033
    
$
593
    
$
521
  

   
PPL
  
PPL Energy Supply
   
As of December 31,
  
As of December 31,
   
2006
  
2005
  
2006
  
2005
Balance Sheet Data
                                
Net investment in unconsolidated affiliates - at equity
                                
Supply
  
$
44
    
$
41
    
$
44
    
$
41
  
International Delivery
    
3
      
15
      
3
      
15
  
     
47
      
56
      
47
      
56
  
Total assets
                                
Supply
    
8,039
      
7,118
      
8,447
      
7,575
  
International Delivery
    
6,208
      
5,089
      
6,208
      
5,089
  
Pennsylvania Delivery
    
5,500
      
5,719
                  
   
$
19,747
    
$
17,926
    
$
14,655
    
$
12,664
  

   
PPL
  
PPL Energy Supply
   
2006
  
2005
  
2004
  
2006
  
2005
  
2004
Geographic Data
                                                
Revenues from external customers
                                                
U.S.
  
$
5,552
    
$
4,973
    
$
4,652
    
$
3,925
    
$
3,335
    
$
3,264
  
Foreign:
                                                
U.K.
    
792
      
750
      
715
      
792
      
750
      
715
  
Latin America
    
555
      
456
      
387
      
555
      
456
      
387
  
     
1,347
      
1,206
      
1,102
      
1,347
      
1,206
      
1,102
  
   
$
6,899
    
$
6,179
    
$
5,754
    
$
5,272
    
$
4,541
    
$
4,366
  


   
PPL
  
PPL Energy Supply
   
As of December 31,
  
As of December 31,
   
2006
  
2005
  
2006
  
2005
Property, Plant and Equipment
                                
U.S.
  
$
7,845
    
$
7,292
    
$
4,701
    
$
4,287
  
Foreign:
                                
U.K.
    
3,755
      
3,162
      
3,755
      
3,162
  
Latin America
    
469
      
462
      
469
      
462
  
     
4,224
      
3,624
      
4,224
      
3,624
  
   
$
12,069
    
$
10,916
    
$
8,925
    
$
7,911
  

(a)
  
See "PLR Contracts" and "NUG Purchases" in Note 16 for the basis of accounting between reportable segments.
(b)
  
All years include the results of discontinued operations. See Notes 9 and 10 for additional information.
(c)
  
2005 includes the cumulative effect of a change in accounting principle. See Note 21 for additional information.
(d)
  
2004 includes the results of discontinued operations. See Note 9 for additional information.

The net income of the International Delivery segment for the year ended December 31, 2006, reflects accounting adjustments related to prior periods. During the third quarter of 2006, management determined that it had incorrectly applied the impacts of Chilean inflation in calculating depreciation and deferred income taxes on certain Chilean assets from 1997 through 2006. As a result, net income was increased by $5 million for the depreciation adjustment in the third quarter of 2006, of which $4 million related to periods prior to 2006 and less than $1 million related to the first and second quarters of 2006. Net income was also increased by $9 million for the deferred income tax adjustment in the third quarter of 2006, of which $8 million related to periods prior to 2006 and less than $1 million related to the first and second quarters of 2006. These adjustments are not considered by management to be material to the financial statements of prior periods and are not material to the financial statements for 2006.

3.  Investment in Unconsolidated Affiliates - at Equity

(PPL and PPL Energy Supply)

Investment in unconsolidated affiliates accounted for under the equity method at December 31 (equity ownership percentages as of December 31, 2006) was:

   
2006
  
2005
                 
Aguaytia Energy, LLC
         
$
10
  
Bangor-Pacific Hydro Associates - 50.0%
  
$
19
      
17
  
Safe Harbor Water Power Corporation - 33.3%
    
15
      
15
  
Other
   
13
      
14
  
   
$
47
    
$
56
  

In 2006, PPL Global completed the sale of its minority interest in Aguaytia Energy, LLC. See Note 9 for additional information.

In 2006, a PPL Energy Supply subsidiary sold its 50% interest in a partnership that owned the Griffith plant. See Note 10 for additional information. The partnership arrangement was essentially a cost-sharing arrangement, in that each of the partners had rights to one-half of the plant capacity and energy, and an obligation to cover one-half of the operating costs of the plant. Accordingly, the equity investment is not reflected in the table above and is classified as "Electric plant in service - Generation" on the Balance Sheet at December 31, 2005.

4.  Earnings Per Share

(PPL)

In August 2005, PPL completed a 2-for-1 split of its common stock. The distribution date was August 24, 2005. The share and per-share amounts included in these financial statements have been adjusted for all periods presented to reflect the stock split.

Basic EPS is calculated using the weighted-average shares of common stock outstanding during the period. Diluted EPS is calculated using the weighted-average shares of common stock outstanding that are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock. Potentially dilutive securities consist of:

·
stock options, restricted stock and restricted stock units granted under the incentive compensation plans;
·
stock units representing common stock granted under the directors compensation programs;
·
common stock purchase contracts that were a component of the PEPS Units and PEPS Units, Series B; and
·
convertible senior notes.

The basic and diluted EPS calculations, and the reconciliation of the shares (in thousands) used in the calculations, are:

   
2006
  
2005
  
2004
Income (Numerator)
                        
Income from continuing operations
  
$
885
    
$
739
    
$
710
  
Loss from discontinued operations (net of income taxes)
    
20
      
53
      
12
  
Cumulative effect of a change in accounting principle (net of income taxes)
            
(8
)
        
                         
Net Income
  
$
865
    
$
678
    
$
698
  
                         
Shares (Denominator)
                        
Shares for Basic EPS
    
380,754
      
379,132
      
368,456
  
Add incremental shares
                        
Convertible Senior Notes
    
3,221
      
2,263
      
134
  
Restricted stock, stock options and other share-based awards
    
2,794
      
2,342
      
1,396
  
Shares for Diluted EPS
    
386,769
      
383,737
      
369,986
  
                         
Basic EPS
                        
Income from continuing operations
  
$
2.32
    
$
1.95
    
$
1.93
  
Loss from discontinued operations (net of income taxes)
    
0.05
      
0.14
      
0.04
  
Cumulative effect of a change in accounting principle (net of income taxes)
            
(0.02
)
        
Net Income
 
$
2.27
    
$
1.79
    
$
1.89
  
                         
Diluted EPS
                        
Income from continuing operations
 
$
2.29
    
$
1.93
    
$
1.92
  
Loss from discontinued operations (net of income taxes)
    
0.05
      
0.14
      
0.03
  
Cumulative effect of a change in accounting principle (net of income taxes)
           
(0.02
)
        
Net Income
 
$
2.24
    
$
1.77
    
$
1.89
  

In May 2001, PPL and PPL Capital Funding Trust I issued 23 million PEPS Units that contained a purchase contract component for PPL's common stock. In January 2004, PPL completed an exchange offer resulting in the exchange of approximately four million PEPS Units for PEPS Units, Series B. The primary difference in the units related to the debt component. The purchase contract components of both units were identical. The purchase contracts were only dilutive if the average price of PPL's common stock exceeded a threshold appreciation price, which was adjusted for cash distributions on PPL common stock. The threshold appreciation price for the PEPS Units was initially set at $32.52 and was adjusted to $31.69 as of April 1, 2004, based on dividends paid on PPL's common stock since issuance. The threshold appreciation price for the purchase contract component of the PEPS Units, Series B was adjusted in the same manner as that of the PEPS Units and was $31.69 as a result of the adjustment as of April 1, 2004. The purchase contracts of both the PEPS Units and PEPS Units, Series B were settled in May 2004. Since the average price did not exceed the threshold appreciation price, the purchase contracts were excluded from the diluted EPS calculations for 2004.

In May 2003, PPL Energy Supply issued $400 million of 2.625% Convertible Senior Notes due 2023. The notes are guaranteed by PPL and, as originally issued, could be converted into shares of PPL common stock if:

·
during any fiscal quarter starting after June 30, 2003, the market price of PPL's common stock exceeds $29.83 per share over a certain period during the preceding fiscal quarter;
·
PPL calls the debt for redemption;
·
the holder exercises its right to put the debt on any five-year anniversary of the offering;
·
the long-term credit rating assigned to the notes by Moody's Investors Service, Inc. and Standard & Poor's Ratings Services falls below Ba2 and BB or the notes are not rated; or
·
certain specified corporate transactions occur, e.g., change in control and certain distributions to the holders of PPL common stock.

The conversion rate is 40.2212 shares per $1,000 principal amount of notes (or $24.8625 per share). It will be adjusted if certain specified distributions, whether in the form of cash, stock, other equity interests, evidence of indebtedness or assets, are made to holders of PPL common stock. Additionally, the conversion rate can be increased by PPL if its Board of Directors has made a determination that to do so would be in the best interests of either PPL or holders of PPL common stock.

Depending upon which of the conversion events identified above occurs, the Convertible Senior Notes, as originally issued, could have been settled in cash or shares. However, the notes were modified in November 2004 to require cash settlement of the principal amount, permit settlement of any conversion premium in cash or stock, and eliminate a provision that required settlement in stock in the event of default. These modifications were made in response to the FASB's ratification of EITF Issue 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share," as well as other anticipated rules relating to EPS. EITF Issue 04-8 requires contingently convertible instruments to be included in diluted EPS.

The Convertible Senior Notes have a dilutive impact when the average market price of PPL common stock equals or exceeds $24.87.

See Note 8 for discussion of attainment of the market price trigger related to the Convertible Senior Notes and the related conversions during 2006.

As of December 31, 2006, only $102 million of Convertible Senior Notes remains outstanding. The maximum number of shares of PPL common stock that could potentially be issued to settle the conversion premium, based upon the current conversion rate, is 4,117,042 shares. Based on PPL's common stock price at December 31, 2006, the conversion premium equated to 1,261,015 shares of PPL common stock, or $45 million.

During 2006, PPL issued 1,546,447 shares of common stock related to the exercise of stock options and vesting of restricted stock and restricted stock units under its stock-based compensation plans. See Note 12 for a discussion of PPL's stock-based compensation plans.

The following number of stock options to purchase PPL common shares were excluded in the periods' computations of diluted EPS because the effect would have been antidilutive.

(Thousands of Shares)
  
2006
    
2005
    
2004
                 
Antidilutive stock options
    
334
      
402
      
2,266

5.  Income and Other Taxes

For 2006, 2005 and 2004, the statutory U.S. corporate federal income tax rate was 35%. The statutory corporate net income tax rate for Pennsylvania was 9.99%.

(PPL)

"Income from Continuing Operations Before Income Taxes, Minority Interest and Dividends on Preferred Securities of a Subsidiary" included the following components for the years ended December 31:

   
2006
    
2005
    
2004
                       
Domestic income
 
$
888
    
$
616
    
$
657
Foreign income
   
297
      
254
      
264
   
$
1,185
    
$
870
    
$
921

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:

   
2006
  
2005
Deferred Tax Assets
                
Deferred investment tax credits
  
$
30
    
$
36
  
NUG contracts and buybacks
    
73
      
102
  
Unrealized loss on qualifying derivatives
    
29
      
139
  
Accrued pension costs
    
140
      
80
  
Federal tax credit carryforwards
    
47
      
112
  
Foreign loss carryforwards
    
175
      
140
  
Foreign - pensions
    
74
      
53
  
Foreign - other
    
20
      
36
  
Contributions in aid of construction
    
85
      
78
  
Other
    
245
      
195
  
Valuation allowances
    
(189
)
    
(148
)
     
729
      
823
  

Deferred Tax Liabilities
                
Plant - net
    
1,428
      
1,316
  
Recoverable transition costs
    
333
      
434
  
Taxes recoverable through future rates
    
113
      
106
  
Reacquired debt costs
    
15
      
16
  
Foreign - plant
    
765
      
692
  
Foreign - other
    
86
      
98
  
Other domestic
    
71
      
78
  
     
2,811
      
2,740
  
Net deferred tax liability
  
$
2,082
    
$
1,917
  

PPL had federal alternative minimum tax credit carryforwards with an indefinite carryforward period of $27 million and $111 million at December 31, 2006 and 2005. PPL had federal foreign tax credit carryforwards that expire in 2015 of $20 million and $1 million at December 31, 2006 and 2005. PPL also had state net operating loss carryforwards that expire between 2006 and 2027 of $216 million and $97 million at December 31, 2006 and 2005. Valuation allowances have been established for the amount that, more likely than not, will not be realized.

PPL Global had foreign net operating loss carryforwards of $37 million and $50 million at December 31, 2006 and 2005. PPL Global also had foreign capital loss carryforwards of $563 million and $439 million at December 31, 2006 and 2005. All of these losses have an unlimited 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, $83 million is allocable to goodwill.

PPL Global does not pay or record U.S. income taxes on the undistributed earnings of its foreign subsidiaries where management has determined that the earnings are permanently reinvested. The cumulative undistributed earnings are included in "Earnings reinvested" on the Balance Sheets. The amounts considered permanently reinvested at December 31, 2006 and 2005, are $910 million and $650 million. 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, Minority Interest and Dividends on Preferred Securities of a Subsidiary," for accounting purposes, and details of taxes, other than income were:

   
2006
  
2005
  
2004
Income Tax Expense
                        
Current-Federal
  
$
230
    
$
124
    
$
52
  
Current-State
    
18
      
(1
)
    
(31
)
Current-Foreign
    
44
      
64
      
27
  
     
292
      
187
      
48
  
Deferred-Federal
    
(6
)
    
(84
)
    
100
  
Deferred-State
    
6
      
17
      
17
  
Deferred-Foreign
    
(3
)
    
17
      
51
  
     
(3
)
    
(50
)
    
168
  
Investment tax credit, net-Federal
    
(14
)
    
(15
)
    
(15
)
Total income tax expense from continuing operations (a)
  
$
275
    
$
122
    
$
201
  
                         
Total income tax expense-Federal
  
$
210
    
$
25
    
$
137
  
Total income tax expense-State
    
24
      
16
      
(14
)
Total income tax expense-Foreign
    
41
      
81
      
78
  
Total income tax expense from continuing operations (a)
  
$
275
    
$
122
    
$
201
  

(a)
Excludes $6 million of deferred federal, state and foreign tax benefit in 2005 related to the cumulative effect of a change in accounting principle, recorded net of tax. Excludes current and deferred federal and state tax benefits of $12 million in 2006, $29 million in 2005 and $6 million in 2004 related to loss from discontinued operations, recorded net of tax. Excludes realized tax benefits related to stock-based compensation, recorded as an increase to capital in excess of par value of $13 million in 2006, $7 million in 2005 and $3 million in 2004. Also excludes federal, state and foreign tax (benefits) recorded to other comprehensive income (loss) of $80 million in 2006, $(102) million in 2005 and $(66) million in 2004.


     
2006
  
2005
  
2004
Reconciliation of Income Tax Expense
                        
Indicated federal income tax on Income from Continuing Operations Before Income Taxes, Minority Interest and Dividends on Preferred Securities of a Subsidiary at statutory tax rate - 35%
  
$
415
    
$
305
    
$
322
  
Increase (decrease) due to:
                        
State income taxes (b) (c) (d)
    
31
      
21
      
12
  
Amortization of investment tax credit
    
(10
)
    
(10
)
    
(10
)
Difference related to income recognition of foreign affiliates (net of foreign income taxes)
    
(48
)
    
(55
)
    
(36
)
Chilean tax benefit related to monetary indexation
(Note 2)
    
(9
)
                
Transfer of WPD tax items (a)
    
(20
)
                
Stranded cost securitization (b) (c) (d)
    
(7
)
    
(7
)
    
(22
)
Federal income tax credits
    
(58
)
    
(107
)
    
(74
)
Federal income tax return adjustments (b) (c) (d)
    
2
      
(16
)
    
(3
)
Change in tax reserves (b) (c) (d)
    
(12
)
    
(3
)
    
9
  
Other
    
(9
)
    
(6
)
    
3
  
     
(140
)
    
(183
)
    
(121
)
Total income tax expense from continuing operations
  
$
275
    
$
122
    
$
201
  
Effective income tax rate
    
23.2%
      
14.0%
      
21.8%
  

(a)
  
In January 2006, WPD, Hyder's liquidator and a former Hyder affiliate signed an agreement to transfer to the affiliate a future tax liability from WPD and certain surplus tax losses from Hyder. The U.K. taxing authority subsequently confirmed this agreement. This transfer resulted in a net reduction of income tax expense of $20 million in 2006, and a decrease to goodwill of $12 million from the resolution of a pre-acquisition tax contingency pursuant to EITF Issue 93-7, "Uncertainties Related to Income Taxes in a Purchase Business Combination."
     
(b)
  
During 2006, PPL recorded $7 million in state and federal tax expense from filing the 2005 income tax returns. The $7 million tax expense included in the Reconciliation of Income Tax Expense consisted of a $2 million federal expense reflected in "Federal income tax return adjustments" and a $5 million state expense reflected in "State income taxes."
 
During 2006, PPL recorded a $10 million benefit related to federal and state income tax reserve changes. The $10 million benefit included in the Reconciliation of Income Tax Expense consisted of a $7 million benefit reflected in "Stranded costs securitization" and a $12 million federal benefit reflected in "Change in tax reserves," offset by a $9 million state expense reflected in "State income taxes."
     
(c)
  
During 2005, PPL recorded a $13 million benefit from the reduction of state and federal income taxes from filing the 2004 income tax returns. The $13 million benefit included in the Reconciliation of Income Tax Expense consisted of a $16 million federal benefit reflected in "Federal income tax return adjustments" offset by a $3 million state expense reflected in "State income taxes."
 
During 2005, PPL recorded a $12 million benefit related to federal and state income tax reserve changes. The $12 million benefit included in the Reconciliation of Income Tax Expense consisted of a $7 million benefit reflected in "Stranded costs securitization," a $2 million state benefit reflected in "State income taxes" and a $3 million federal benefit reflected in "Change in tax reserves."
     
(d)
  
During 2004, PPL recorded a $1 million benefit from the reduction of state and federal income taxes from filing the 2003 income tax returns. The $1 million benefit included in the Reconciliation of Income Tax Expense consisted of a $3 million federal benefit reflected in "Federal income tax return adjustments," offset by a $2 million state expense reflected in "State income taxes."
 
During 2004, PPL recorded a $15 million benefit related to federal and state income tax reserve changes. The $15 million benefit included in the Reconciliation of Income Tax Expense consisted of a $22 million benefit reflected in "Stranded costs securitization" and a $2 million state benefit reflected in "State income taxes," offset by a $9 million federal expense reflected in "Change in tax reserves."

   
2006
  
2005
  
2004
Taxes, other than income
                        
State gross receipts
  
$
181
    
$
175
    
$
156
  
State utility realty
    
5
      
6
      
(10
)
State capital stock
    
12
      
14
      
22
  
Property - foreign
    
57
      
57
      
55
  
Other - foreign
    
1
      
1
      
1
  
Domestic property and other
    
26
      
26
      
25
  
   
$
282
    
$
279
    
$
249
  

(PPL Energy Supply)

"Income from Continuing Operations Before Income Taxes and Minority Interest" included the following components for the years ended December 31:

   
2006
  
2005
  
2004
                 
Domestic income
 
$
621
    
$
432
    
$
612
Foreign income
   
297
      
254
      
264
   
$
918
    
$
686
    
$
876

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:

   
2006
  
2005
Deferred Tax Assets
                
Deferred investment tax credits
  
$
23
    
$
28
  
NUG contracts and buybacks
    
73
      
102
  
Unrealized loss on qualifying derivatives
    
31
      
133
  
Accrued pension costs
    
52
      
23
  
Federal tax credit carryforwards
    
47
      
112
  
Foreign loss carryforwards
    
175
      
140
  
Foreign - pensions
    
74
      
53
  
Foreign - other
    
20
      
36
  
Other domestic
    
136
      
92
  
Valuation allowances
    
(178
)
    
(144
)
     
453
      
575
  
                 
Deferred Tax Liabilities
                
Plant - net
    
739
      
654
  
Foreign investments
    
3
      
5
  
Foreign - plant
    
765
      
692
  
Foreign - other
    
86
      
98
  
Other domestic
    
36
      
48
  
     
1,629
      
1,497
  
Net deferred tax liability
  
$
1,176
    
$
922
  

PPL Energy Supply had federal alternative minimum tax credit carryforwards with an indefinite carryforward period of $27 million and $111 million at December 31, 2006 and 2005. PPL Energy Supply had federal foreign tax credit carryforwards that expire in 2015 of $20 million and $1 million at December 31, 2006 and 2005. PPL Energy Supply also had state net operating loss carryforwards that expire between 2006 and 2027 of $9 million and $6 million at December 31, 2006 and 2005. Valuation allowances have been established for the amount that, more likely than not, will not be realized.

PPL Global had foreign net operating loss carryforwards of $37 million and $50 million at December 31, 2006 and 2005. PPL Global also had foreign capital loss carryforwards of $563 million and $439 million at December 31, 2006 and 2005. All of these losses have an unlimited 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, $83 million is allocable to goodwill.

PPL Global does not pay or record U.S. income taxes on the undistributed earnings of its foreign subsidiaries where management has determined that the earnings are permanently reinvested. The cumulative undistributed earnings are included in "Member's Equity" on the Balance Sheets. The amounts considered permanently reinvested at December 31, 2006 and 2005, are $910 million and $650 million. 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 and Minority Interest" for accounting purposes, and details of taxes, other than income were:

   
2006
  
2005
  
2004
Income Tax Expense
                        
Current-Federal
  
$
40
    
$
(46
)
  
$
15
  
Current-State
    
26
      
27
      
10
  
Current-Foreign
    
44
      
64
      
27
  
     
110
      
45
      
52
  
Deferred-Federal
    
86
      
5
      
99
  
Deferred-State
    
8
      
21
      
15
  
Deferred-Foreign
    
(3
)
    
17
      
51
  
     
91
      
43
      
165
  
Investment tax credit, net-Federal
    
(12
)
    
(12
)
    
(12
)
Total income tax expense from continuing operations (a)
  
$
189
    
$
76
    
$
205
  
                         
Total income tax expense-Federal
  
$
114
    
$
(53
)
  
$
102
  
Total income tax expense-State
    
34
      
48
      
25
  
Total income tax expense-Foreign
    
41
      
81
      
78
  
Total income tax expense from continuing operations (a)
  
$
189
    
$
76
    
$
205
  

(a)
  
Excludes $6 million of deferred federal, state and foreign tax benefit in 2005 related to the cumulative effect of a change in accounting principle, recorded net of tax. Excludes current and deferred federal and state tax benefits of $12 million in 2006, $29 million in 2005 and $6 million in 2004 related to loss from discontinued operations, recorded net of tax. Also excludes federal, state and foreign tax (benefits) recorded to other comprehensive income of $83 million in 2006, $(106) million in 2005 and $(68) million in 2004.

   
2006
  
2005
  
2004
Reconciliation of Income Tax Expense
                        
Indicated federal income tax on Income from Continuing Operations Before Income Taxes and Minority Interest at statutory tax rate - 35%
  
$
321
    
$
240
    
$
307
  
Increase (decrease) due to:
                        
State income taxes (b) (c) (d)
    
27
      
40
      
20
  
Amortization of investment tax credit
    
(8
)
    
(8
)
    
(8
)
Difference related to income recognition of foreign affiliates (net of foreign income taxes)
    
(48
)
    
(55
)
    
(36
)
Chilean tax benefit related to monetary indexation
(Note 2)
    
(9
)
                
Transfer of WPD tax items (a)
    
(20
)
                
Federal income tax credits
    
(58
)
    
(107
)
    
(74
)
Federal income tax return adjustments (b) (c) (d)
    
1
      
(22
)
    
(9
)
Change in tax reserves (b) (c) (d)
    
(9
)
    
(8
)
    
6
  
Other
    
(8
)
    
(4
)
    
(1
)
     
(132
)
    
(164
)
    
(102
)
Total income tax expense from continuing operations
  
$
189
    
$
76
    
$
205
  
Effective income tax rate
    
20.6%
      
11.1%
      
23.4%
  

(a)
  
In January 2006, WPD, Hyder's liquidator and a former Hyder affiliate signed an agreement to transfer to the affiliate a future tax liability from WPD and certain surplus tax losses from Hyder. The U.K. taxing authority subsequently confirmed this agreement. This transfer resulted in a net reduction of income tax expense of $20 million in 2006, and a decrease to goodwill of $12 million from the resolution of a pre-acquisition tax contingency pursuant to EITF Issue 93-7, "Uncertainties Related to Income Taxes in a Purchase Business Combination."
     
(b)
  
During 2006, PPL Energy Supply recorded $6 million in state and federal income tax expense from filing the 2005 income tax returns. The $6 million tax expense included in the Reconciliation of Income Tax Expense consisted of a $1 million federal expense reflected in "Federal income tax return adjustments" and a $5 million state expense reflected in "State income taxes."
 
During 2006, PPL Energy Supply recorded a $1 million benefit related to federal and state income tax reserve changes. The $1 million benefit included in the Reconciliation of Income Tax Expense consisted of a $9 million benefit reflected in "Change in tax reserves," offset by an $8 million state expense reflected in "State income taxes."
     
(c)
  
During 2005, PPL Energy Supply recorded $3 million in state and federal income tax expense from filing the 2004 income tax returns. The $3 million tax expense included in the Reconciliation of Income Tax Expense consisted of a $25 million state expense reflected in "State income taxes," offset by a $22 million federal benefit reflected in "Federal income tax return adjustments."
 
During 2005, PPL Energy Supply recorded an $8 million benefit related to federal income tax reserve changes. The $8 million benefit is included in "Change in tax reserves" in the Reconciliation of Income Tax Expense.
     
(d)
  
During 2004, PPL Energy Supply recorded $9 million in state and federal income tax expense from filing the 2003 income tax returns. The $9 million tax expense included in the Reconciliation of Income Tax Expense consisted of an $18 million state expense reflected in "State income taxes," offset by a $9 million federal benefit reflected in "Federal income tax return adjustments."
 
During 2004, PPL Energy Supply recorded a $6 million expense related to federal income tax reserve changes. The $6 million expense is included in "Change in Tax Reserves" in the Reconciliation of Income Tax Expense.

   
2006
  
2005
  
2004
Taxes, other than income
                        
State gross receipts
  
$
1
    
$
1
    
$
2
  
State capital stock
    
8
      
9
      
13
  
Property - foreign
    
57
      
57
      
55
  
Other - foreign
   
1
      
1
      
1
  
Domestic property and other
    
25
      
26
      
24
  
   
$
92
    
$
94
    
$
95
  

(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 U.S. GAAP is deferred and included in taxes recoverable through future rates in "Regulatory and Other Noncurrent Assets - Other" on the Balance Sheets.

The tax effects of significant temporary differences comprising PPL Electric's net deferred income tax liability were as follows:

   
2006
  
2005
Deferred Tax Assets
                
Deferred investment tax credits
  
$
6
    
$
7
  
Accrued pension costs
    
56
      
32
  
Contributions in aid of construction
    
80
      
73
  
Other
    
41
      
48
  
     
183
      
160
  
                 
Deferred Tax Liabilities
                
Electric utility plant - net
    
648
      
615
  
Recoverable transition costs
    
145
      
144
  
Taxes recoverable through future rates
    
106
      
100
  
Reacquired debt costs
    
14
      
15
  
Other
    
36
      
19
  
     
949
      
893
  
Net deferred tax liability
  
$
766
    
$
733
  

PPL Electric has state net operating loss carryforwards that expire in 2024 of $11 million and $13 million at December 31, 2006 and 2005. Valuation allowances have been established for the amount that, more likely than not, will not be realized.

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" for accounting purposes, and details of taxes other than income were:

   
2006
  
2005
  
2004
Income Tax Expense
                        
Current-Federal
  
$
85
    
$
66
    
$
(33
)
Current-State
    
1
      
(5
)
    
(40
)
     
86
      
61
      
(73
)
Deferred-Federal
    
19
      
12
      
79
  
Deferred-State
    
1
      
(1
)
    
5
  
     
20
      
11
      
84
  
Investment tax credit, net-Federal
    
(2
)
    
(3
)
    
(3
)
Total
  
$
104
    
$
69
    
$
8
  
                         
Total income tax expense-Federal
  
$
102
    
$
75
    
$
43
  
Total income tax expense-State
    
2
      
(6
)
    
(35
)
Total
  
$
104
    
$
69
    
$
8
  

   
2006
  
2005
  
2004
Reconciliation of Income Tax Expense
                        
Indicated federal income tax on Income Before Income Taxes at statutory tax rate - 35%
  
$
104
    
$
76
    
$
30
  
Increase (decrease) due to:
                        
State income taxes (a) (b) (c)
    
12
      
4
      
(1
)
Stranded costs securitization (a) (b) (c)
    
(7
)
    
(7
)
    
(22
)
Amortization of investment tax credit
    
(2
)
    
(2
)
    
(2
)
Other (a) (b) (c)
    
(3
)
    
(2
)
    
3
  
             
(7
)
    
(22
)
Total income tax expense
  
$
104
    
$
69
    
$
8
  
Effective income tax rate
    
34.9%
      
31.9%
      
9.5%
  

(a)
  
During 2006, PPL Electric recorded $4 million in state and federal income tax expense from filing the 2005 income tax returns. The $4 million tax expense included in the Reconciliation of Income Tax Expense consisted of a $1 million federal expense reflected in "Other" and a $3 million state expense reflected in "State income taxes."
 
During 2006, PPL Electric recorded a $9 million benefit related to federal and state income tax reserve changes. The $9 million benefit included in the Reconciliation of Income Tax Expense consisted of a $7 million benefit reflected in "Stranded costs securitization" and a $2 million federal benefit reflected in "Other."
     
(b)
  
During 2005, PPL Electric recorded a $10 million benefit related to federal and state income tax reserve changes. The $10 million benefit included in the Reconciliation of Income Tax Expense consisted of a $7 million benefit reflected in "Stranded costs securitization," a $2 million state benefit reflected in "State income taxes" and a $1 million federal benefit reflected in "Other."
     
(c)
  
During 2004, PPL Electric recorded a $20 million benefit related to federal and state income tax reserve changes. The $20 million benefit included in the Reconciliation of Income Tax Expense consisted of a $22 million benefit reflected in "Stranded costs securitization," a $2 million state benefit reflected in "State income taxes," offset by a $4 million federal provision reflected in "Other."

   
2006
  
2005
  
2004
Taxes, other than income
                        
State gross receipts
  
$
181
    
$
174
    
$
155
  
State utility realty
    
4
      
6
      
(10
)
State capital stock
    
4
      
5
      
7
  
   
$
189
    
$
185
    
$
152
  

6.  Financial Instruments

(PPL, PPL Energy Supply and PPL Electric)

At December 31, 2006 and 2005, the carrying value of cash and cash equivalents, short-term investments, investments in the nuclear decommissioning trust funds, other investments and short-term debt approximated fair value due to the liquid nature of the instruments, variable interest rates associated with the financial instruments or the carrying value of the instruments being based on established market prices. Price risk management assets and liabilities are recorded at fair value using exchange-traded market quotes, prices obtained through third-party brokers or internally developed price curves. Financial instruments where 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:

   
December 31, 2006
    
December 31, 2005
  
   
Carrying
Amount
    
Fair
Value
    
Carrying
Amount
    
Fair
Value
  
PPL
                                
Long-term debt
  
$
7,746
    
$
7,869
    
$
7,081
    
$
7,585
  
Long-term debt with affiliate trust
    
89
      
86
      
89
      
84
  
PPL Energy Supply
                                
Long-term debt
 
$
5,287
    
$
5,355
    
$
3,951
    
$
4,340
  
Long-term debt with affiliate trust
    
89
      
86
      
89
      
84
  
PPL Electric
                                
Long-term debt
 
$
1,978
    
$
2,023
    
$
2,411
    
$
2,496
  

7.  Preferred Securities

(PPL)

PPL is authorized to issue up to 10 million shares of preferred stock. No PPL preferred stock had been issued or was outstanding at December 31, 2006 and 2005.

(PPL and PPL Electric)

Details of PPL Electric's preferred securities, without sinking fund requirements, as of December 31 were:

   
2006
  
2005
                 
4-1/2% Preferred Stock
  
$
25
    
$
25
  
                 
Series Preferred Stock
                
3.35%
    
2
      
2
  
4.40%
    
12
      
12
  
4.60%
    
3
      
3
  
6.75%
   
9
      
9
  
Total Series Preferred Stock
    
26
      
26
  
                 
6.25% Series Preference Stock
    
250
          
                 
Total Preferred Securities
  
$
301
    
$
51
  

   
2006
   
Issued and
Outstanding
Shares
  
Shares
Authorized
  
Optional Redemption Price Per Share
               
4-1/2% Preferred Stock (a)
  
247,524
  
629,936
  
$
110.00
               
Series Preferred Stock (a)
              
3.35%
  
20,605
        
103.50
4.40%
  
117,676
        
102.00
4.60%
  
28,614
        
103.00
6.75%
 
90,770
        
102.36
               
Total Series Preferred Stock
  
257,665
  
10,000,000
      
               
6.25% Series Preference Stock (c)
  
2,500,000
  
10,000,000
    
(b)
               
Total Preferred Securities
  
3,005,189
          

(a)
  
During 2006 and 2005, there were no increases or decreases to the preferred stock outstanding at December 31, 2005 and 2004.
(b)
  
Redeemable on or after April 6, 2011.
(c)
  
2.5 million shares of preference stock were issued in 2006.

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).

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. Preferred Stock ranks senior to PPL Electric's common stock and 6.25% Series Preference Stock.

Preference Stock

In April 2006, PPL Electric sold 10 million depositary shares, each representing a quarter interest in a share of PPL Electric's 6.25% Series Preference Stock (Preference Shares), totaling $250 million. In connection with the sale of the depositary shares, PPL Electric issued 2.5 million Preference Shares, with a liquidation preference of $100 per share, to the bank acting as a depositary. PPL Electric used the net proceeds of $245 million from the offering to repurchase $200 million of its common stock held by PPL, and for other general corporate purposes. PPL used the $200 million received from PPL Electric to fund capital expenditures and for general corporate purposes.

Holders of the depositary shares are entitled to all proportional rights and preferences of the Preference Shares, including dividend, voting, redemption and liquidation rights, exercised through the depositary. The Preference Shares rank senior to PPL Electric's common stock and junior to its preferred stock, and they have no voting rights, except as provided by law.

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.

The Preference Shares do not have a stated maturity, and are not subject to sinking fund requirements. However, PPL Electric may, at its option, redeem the Preference Shares in whole or in part from time to time for $100 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends, on or after April 6, 2011.

In May 2006, PPL Electric filed Amended and Restated Articles of Incorporation that, among other things, increased the authorized amount of preference stock from 5 million to 10 million shares, without nominal or par value.

8.  Credit Arrangements and Financing Activities

Credit Arrangements

(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.

In March 2006, PPL Energy Supply extended the expiration date of its 364-day reimbursement agreement to March 2007. Under the agreement, PPL Energy Supply can cause the bank to issue up to $200 million of letters of credit but cannot make cash borrowings under this agreement. At December 31, 2006 and 2005, there was $47 million and $199 million of letters of credit outstanding under this agreement.

In June 2006, PPL Energy Supply entered into a $1.9 billion Amended and Restated Five-Year Credit Agreement, which expires in June 2011. This credit agreement amended, restated and combined into one credit facility the following three five-year credit facilities of PPL Energy Supply: the $800 million facility expiring in June 2010, the $600 million facility expiring in June 2010 and the $500 million facility expiring in December 2010. PPL Energy Supply has the ability to cause the lenders under this facility to issue letters of credit. At December 31, 2006, PPL Energy Supply had an aggregate of $51 million of letters of credit and no cash borrowings outstanding under this facility. There was an aggregate of $172 million of letters of credit and no cash borrowings outstanding under the facilities that were in existence as of December 31, 2005.

PPL Energy Supply also maintains a $300 million five-year letter of credit and revolving credit facility expiring in March 2011. There were no cash borrowings and $222 million of letters of credit outstanding under this facility, at December 31, 2006, and no cash borrowings and $286 million of letters of credit outstanding at December 31, 2005. 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 $300 million five-year letter of credit and reimbursement agreement also expiring in March 2011.

PPL Energy Supply maintains a commercial paper program for up to $500 million to provide it with an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Energy Supply's $1.9 billion five-year credit facility. PPL Energy Supply had no commercial paper outstanding at December 31, 2006, and $100 million of commercial paper, with a weighted-average interest rate of 4.51%, outstanding at December 31, 2005.

WPD (South West) maintained three committed credit facilities: a £100 million 364-day facility, a £150 million three-year facility and a £150 million five-year facility (approximately $787 million in total at December 31, 2006). In November 2006, WPD (South West) replaced its £100 million 364-day credit facility that expired in October 2006, with a credit facility of the same size that expires in November 2007. The five-year facility expires in October 2009. In January 2007, the £150 million three-year facility, which was to expire in October 2008, was terminated and replaced by a new £150 million five-year facility at WPDH Limited that expires in January 2012, with the option to extend the expiration date by a maximum of two years. At December 31, 2006 and 2005, WPD (South West) also had uncommitted credit facilities of £65 million (approximately $128 million at December 31, 2006). At December 31, 2006 and 2005, there were no cash borrowings and £41 million (approximately $71 million at then current exchange rates), with a weighted-average interest rate of 4.98%, outstanding under the WPD (South West) credit facilities.

(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.

In June 2006, PPL Electric amended and restated the credit agreement for its $200 million five-year credit facility and extended the expiration date to June 2011. PPL Electric has the ability to cause the lenders under this facility to issue letters of credit. At December 31, 2006 and 2005, PPL Electric had no cash borrowings or letters of credit outstanding under this credit facility. PPL Electric's $100 million three-year credit facility expired in June 2006 and was not renewed.

PPL Electric maintains a commercial paper program for up to $200 million to provide it with an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Electric's $200 million five-year credit facility. PPL Electric had no commercial paper outstanding at December 31, 2006 and 2005.

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. PPL Electric uses the proceeds from the credit agreement for general corporate purposes and to cash collateralize letters of credit. The subsidiary's borrowing limit under this credit agreement is $150 million, and interest under the credit agreement varies based on the commercial paper conduit's actual cost to issue commercial paper that supports the debt. At December 31, 2006 and 2005, $136 million and $131 million of accounts receivable and $145 million and $142 million of unbilled revenue were pledged by the subsidiary under the credit agreement. At December 31, 2006 and 2005, there was $42 million of short-term debt outstanding under the credit agreement at an interest rate of 5.35% for 2006 and 4.3% for 2005, all of which was being used to cash collateralize letters of credit issued on PPL Electric's behalf. At December 31, 2006, based on the accounts receivable and unbilled revenue pledged, an additional $108 million was available for borrowing. The funds used to cash collateralize the letters of credit are reported in "Restricted Cash" on the Balance Sheets. 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. In July 2006, PPL Electric and the subsidiary extended the expiration date of the credit agreement to July 2007. PPL Electric currently expects that it and the subsidiary will continue to renew the credit agreement on an annual basis.

(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 16 under "PLR Contracts";
·
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; and
·
appointed 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.

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.

Financing Activities

(PPL)

In May 2006, PPL Capital Funding retired all $99 million of its Senior Floating Rate Notes and all $148 million of its 7.29% Subordinated Notes upon maturity.

(PPL and PPL Energy Supply)

In December 2005, Elfec made a scheduled $3 million principal payment on its $23 million of Bolivian bonds, which was funded primarily with short-term debt. This transaction was recorded in January 2006 due to the one-month lag in foreign subsidiary reporting.

PPL Energy Supply issued $300 million of 6.20% Senior Notes due 2016 (6.20% Notes) in May 2006 and issued an additional $150 million of the 6.20% Notes in July 2006. The 6.20% Notes may be redeemed any time prior to maturity at PPL Energy Supply's option at make-whole redemption prices. In July 2006, PPL Energy Supply also issued $250 million of 7% Senior Notes due 2046 (7% Notes). The 7% Notes are not subject to redemption prior to July 15, 2011. On or after July 15, 2011, PPL Energy Supply may, at its option, redeem the 7% Notes, in whole or in part, at par. Proceeds from the sale of both the 6.20% Notes and 7% Notes were used for capital expenditures, including expenditures relating to PPL Energy Supply's installation of pollution control equipment at two of its coal-fired power plants in Pennsylvania, and for general corporate purposes.

In December 2006, PPL Energy Supply issued $300 million of 6% Senior Notes due 2036 (6% Notes). The 6% Notes may be redeemed any time prior to maturity at PPL Energy Supply's option at make-whole redemption prices. The proceeds of $297 million, net of discount, from the sale of the 6% Notes were used to replenish cash and repay short-term indebtedness that PPL Energy Supply used or incurred to fund conversions in 2006 of its 2.625% Convertible Senior Notes due 2023, as discussed below.

The terms of PPL Energy Supply's 2.625% Convertible Senior Notes due 2023 include a market price trigger that permits holders to convert the notes during any fiscal quarter if the closing sale price of PPL's common stock exceeds $29.83 for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. This market price trigger was met in each quarter of 2006. Therefore, holders of the Convertible Senior Notes were entitled to convert their notes at any time during the second, third and fourth quarters of 2006 and are also entitled to convert their notes any time during the first quarter of 2007. As discussed in Note 4, when holders elect to convert the Convertible Senior Notes, PPL Energy Supply is required to settle the principal amount in cash and any conversion premium in cash or PPL common stock.

During 2006, Convertible Senior Notes in an aggregate principal amount of $298 million were presented for conversion. The total conversion premium related to these conversions was $121 million, which was settled with 3,448,109 shares of PPL common stock, along with an insignificant amount of cash in lieu of fractional shares. After such conversions, $102 million of Convertible Senior Notes remain outstanding and are eligible for conversion in the first quarter of 2007.

In July 2006, Emel issued 3 million UF denominated bonds (approximately $104 million at December 31, 2006) in two series. The first series consists of 1 million UF denominated bonds that mature in 2011, are callable at par on or after June 1, 2009, and bear interest at 3.75%. The second series consists of 2 million UF denominated bonds with serial maturities from 2021 through 2027, which are callable on or after June 1, 2014, at a specified calculated value on the call date and bear interest at 4.50%. The proceeds were used to pay Emel's 3 million UF denominated bond maturity in August 2006.
 
In December 2006, WPD (South West) issued £225 million of index-linked notes (approximately $443 million at December 31, 2006) in two tranches: £120 million of 1.541% Index-linked Notes due 2056 and £105 million of 1.541% Index-linked Notes due 2053. Both series of notes may be redeemed by WPD (South West), in total by series but not in part, in December 2026. The proceeds were used to fund the maturity of WPD LLP's $332 million of 6.80% Notes in December 2006 and payment of $118 million to settle related cross-currency swaps. The $118 million payment is included on the Statement of Cash Flows as a component of "Retirement of long-term debt."

In December 2006, WPD (South Wales) issued £225 million of 4.80436% Notes due 2037 (approximately $443 million at December 31, 2006). The notes may be redeemed by WPD (South Wales), in total but not in part, in December 2026. The proceeds will be used for general corporate purposes, including refinancing debt obligations of companies within the WPDH Limited group.

Although financial information of foreign subsidiaries is recorded on a one-month lag, the December 2006 bond issuances, bond retirement and related settlement of cross-currency swaps by the WPD entities noted above are reflected in the 2006 Financial Statements due to the materiality of these transactions.

In December 2006, Elfec issued $11 million of 6.05% UFV (inflation-adjusted bolivianos) denominated bonds with serial maturities from 2012 through 2014. Of these bonds, $5 million were issued in exchange for existing bonds with maturities in 2007 and 2008. Proceeds of $6 million were used in January 2007 to refinance bonds with maturities in 2007. These transactions will be reflected in PPL's January 2007 financials due to the one-month lag in foreign subsidiary reporting.

In February 2007, WPD LLP redeemed all of the 8.23% Subordinated Debentures due 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. In connection with this redemption, SIUK Capital Trust I was required to use all of the proceeds received from the repayment of the subordinated debentures to redeem all of its common and preferred securities. See Note 22 for a discussion of the trust. The redemption of the subordinated debentures and the trust's common and preferred securities resulted in a loss of $2 million, after tax, that will be recorded by WPD LLP in 2007.

(PPL Energy Supply)

During 2006, PPL Energy Supply distributed $712 million to its parent company, PPL Energy Funding, and received cash capital contributions of $115 million.

On July 1, 2006, in connection with an internal reorganization, PPL Energy Supply received non-cash contributions from its parent, consisting of a note receivable and ownership interests in certain subsidiaries (including PPL Telcom). The contributions were recorded at the parent's historical carrying amounts, collectively totaling $65 million. The businesses of these subsidiaries became a component of PPL Energy Supply's Supply segment. The impact on PPL Energy Supply's financial statements and to its Supply segment was not significant.

(PPL and PPL Electric)

In March 2006, PPL Electric retired all $146 million of its 6.55% Series First Mortgage Bonds upon maturity.

During 2006, PPL Transition Bond Company made principal payments on transition bonds of $288 million.

See Note 7 for a discussion of PPL Electric's issuance of preference stock in 2006.

(PPL Electric)

During 2006, PPL Electric received a capital contribution of $75 million from PPL.

Dividends and Dividend Restrictions

(PPL)

In February 2006, PPL announced an increase to its quarterly common stock dividend, effective April 1, 2006, to 27.5 cents per share (equivalent to $1.10 per annum). In February 2007, PPL announced an increase to its quarterly common stock dividend, payable April 1, 2007, to 30.5 cents per share (equivalent to $1.22 per annum). Future dividends, declared at the discretion of PPL's Board of Directors, will be dependent upon future earnings, cash flows, financial requirements and other factors.

(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. Certain of PPL Global's international 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 Electric)

During 2006, PPL Electric paid common stock dividends of $116 million to PPL.

(PPL and PPL Electric)

PPL Electric's 2001 Senior Secured Bond Indenture restricts dividend payments in the event that PPL Electric fails to meet interest coverage ratios or fails to comply with certain requirements included in its Articles of Incorporation and Bylaws to maintain its separateness from PPL and PPL's other subsidiaries. PPL Electric does not, at this time, expect that any of such limitations would significantly impact its ability to declare dividends.

As discussed in Note 7, 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 stock 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.

9.  Acquisitions, Development and Divestitures

From time to time, PPL and its subsidiaries are involved in negotiations with third parties regarding acquisitions and dispositions of businesses and assets, joint ventures and development projects. Any such transactions may impact future financial results.

Domestic (PPL and PPL Energy Supply)

Sales

In 2004, a subsidiary of PPL Generation sold two spare gas combustion turbine generators and related equipment for $18 million. These turbine generators and related equipment were originally intended for a project in New York that PPL later canceled. The net loss from this sale was insignificant.

Also in 2004, PPL Maine entered into an agreement with a coalition of government agencies and private groups to sell three of its nine hydroelectric dams in Maine. Under the agreement, a non-profit organization designated by the coalition would have a five-year option to purchase the dams for $25 million, and PPL Maine would receive rights to increase energy output at its other hydroelectric dams in Maine. The coalition has announced plans to remove or bypass the dams subject to the agreement in order to restore runs of Atlantic salmon and other migratory fish to the Penobscot River. The agreement requires several approvals by the FERC. Certain of these regulatory approvals have been obtained, but PPL cannot predict whether or when all of them will be obtained.

License Renewals

In September 2006, PPL Susquehanna applied to the NRC for 20-year license renewals for Units 1 and 2 of the nuclear power plant. The license renewals for each of the Susquehanna units would extend their expiration dates from 2022 to 2042 for Unit 1 and from 2024 to 2044 for Unit 2. PPL cannot predict whether or when NRC approval will be obtained.

In December 2006, PPL Montana applied to the FERC to renew its license to generate electricity at the Mystic Lake Project. The current license expires in 2009. Power companies that use dams to produce energy must renew their FERC licenses every 30 to 50 years. PPL cannot predict whether or when the FERC approval will be obtained.

Development

In October 2006, PPL Susquehanna filed a request with the NRC to increase the amount of electricity the plant can generate. The total expected capacity increase is 205 MW, of which PPL Susquehanna's share would be 185 MW. PPL Susquehanna's share of the expected capital cost of this project is $263 million. PPL cannot predict whether or when NRC approval will be obtained.

PPL also plans to expand the capacity of its Holtwood hydroelectric plant by 125 MW, at an expected capital cost of $243 million. This planned expansion is subject to various regulatory approvals and other conditions, and PPL cannot predict whether or when these approvals will be obtained or the other conditions will be met.

Other 

(PPL)

In June 2004, a PPL subsidiary evaluated its investment in a technology supplier for impairment. As a result of the evaluation, the subsidiary recorded a pre-tax impairment charge of $10 million ($6 million after tax), which is included in "Other Income - net" on the Statement of Income.

(PPL and PPL Energy Supply)

See Note 15 for a discussion of the impairment of PPL Energy Supply's synthetic fuel production facilities recorded in 2006.

International (PPL and PPL Energy Supply)

Sales

In 2002, PPL made a decision to exit its CEMAR investment after a series of impairment losses were recorded. At that time, PPL Global's remaining portion of its CEMAR investment was written-off. In 2004, PPL Global, which is included in the International Segment, sold its interest in CEMAR to two companies controlled by a private equity fund managed by GP Investimentos, a Brazilian private equity firm. The sale resulted in a credit of $23 million as a result of the reversal of the negative carrying value and the associated cumulative translation adjustment, which is included in "Other Income - net" on the Statement of Income.

In 2004, PPL Global completed the sale of its minority interest in shares of CGE for $123 million. The sale resulted in a pre-tax charge of $15 million ($7 million after tax), which is included in operating expenses as "Energy-related businesses" on the Statement of Income. This charge was due to the write-off of the associated cumulative translation adjustment, primarily as a result of the devaluation of the Chilean peso since the original acquisition in 2000.

In 2005, WPD effectively sold an equity investment by transferring all risks and rewards of ownership of the two subsidiaries that held the investment, receiving $9 million. The gain was deferred until WPD's continuing involvement in the subsidiaries ceased. In July 2006, WPD ceased involvement with one subsidiary. As a result, PPL Global recognized a pre-tax gain of $5 million, which is included in "Other Income - net" on the Statement of Income. In December 2006, WPD ceased involvement in the other subsidiary. PPL Global will recognize a pre-tax gain of $5 million in the first quarter of 2007 due to the one-month lag in foreign subsidiary reporting.

In 2006, PPL Global completed the sale of its minority interest in Aguaytia Energy, LLC, a combined generating and natural gas facility in Peru. PPL Global received $15 million from the sale, and recorded a pre-tax gain of $3 million, which is included in "Other Income - net" on the Statement of Income.

Other

In 2006, WPD received legal notification citing one of its real estate investments as an environmentally protected area, thus restricting planned development. An impairment assessment was performed based on a third-party appraisal. As a result, PPL Global recorded an impairment charge of $8 million ($6 million after tax), which is included in "Other Income - net" on the Statement of Income.

In 2000, WPD acquired Hyder. Subsequently, WPD sold the majority of Hyder's non-electricity delivery businesses and placed the remaining companies in liquidation. In March 2006, WPD received $24 million in proceeds as an initial distribution related to the planned ongoing liquidation of the remaining non-electricity delivery businesses. In August 2006, WPD received an additional distribution of $4 million, of which $3 million was credited to income. These distributions are included in "Other Income - net" on the Statement of Income. In December 2006, WPD received a further distribution of $4 million. This distribution will be included in the first quarter 2007 financial results due to the one-month lag in foreign subsidiary reporting. As of December 31, 2006, the Hyder non-electricity delivery businesses are substantially liquidated. WPD continues to operate the Hyder electricity delivery business.

Discontinued Operations (PPL and PPL Energy Supply)

Sale of Interest in Griffith Plant

See Note 10 for a discussion of the sale of PPL Energy Supply's ownership interest in the Griffith plant.

Sale of Sundance Plant

In May 2005, a subsidiary of PPL Energy Supply, which is included in the Supply segment, completed the sale of its 450 MW Sundance power plant located in Pinal County, Arizona, to Arizona Public Service Company for $190 million in cash. The book value of the plant was $260 million on the sale date.

Following are the components of "Loss from Discontinued Operations" on the Statements of Income related to the sale of the Sundance plant. There were no derivative contracts hedging the Sundance plant at the time of the sale.

   
2005
  
2004
                 
Operating revenues
  
$
4
    
$
19
  
Operating expenses
    
10
      
30
  
Loss from operations before income taxes
    
6
      
11
  
Interest expense
            
10
  
Income tax benefit
    
(2
)
    
(8
)
Loss from operations after income taxes
    
4
      
13
  
Loss on sale (net of tax benefit of $26 million)
    
47
          
Loss from discontinued operations (net of income taxes)
  
$
51
    
$
13
  

See "Guarantees and Other Assurances" in Note 15 for more information on PPL Energy Supply's indemnifications related to the sale.

Sale of Latin American Telecommunications Company

In 2004, PPL Global sold its investment in a Latin American telecommunications company to local management for a nominal amount. The 2004 operating loss of $2 million of the company, as well as the write-down of its net assets, which was an insignificant amount, are included in "Loss from Discontinued Operations" on the Statement of Income.

10.  Sale of Interest in Griffith Plant

(PPL and PPL Energy Supply)

In June 2006, a subsidiary of PPL Energy Supply, which is included in the Supply segment, sold its 50% ownership interest in the 600 MW Griffith power plant located in Kingman, Arizona, for $110 million in cash, adjusted for the $5 million settlement of the steam turbine indemnifications. Proceeds of the sale were used to fund a portion of PPL's capital expenditure requirements. The book value of PPL's interest in the plant was $150 million on the sale date.

Following are the components of "Loss from Discontinued Operations" on the Statements of Income related to the sale of PPL's interest in the Griffith plant.

   
2006
  
2005
  
2004
                         
Operating revenues
  
$
5
    
$
40
    
$
41
  
Operating expenses
    
10
      
43
      
36
  
Loss (income) from operations before income taxes
    
5
      
3
      
(5
)
Income tax benefit (expense)
    
1
      
1
      
(2
)
Loss (income) from operations after income taxes
    
4
      
2
      
(3
)
Loss on sale of interest (net of tax benefit of $16 million)
    
23
                  
Acceleration of net unrealized gains on derivatives associated with the plant (net of tax expense of $4 million)
    
(7
)
                
Loss (income) from Discontinued Operations (net of income taxes)
  
$
20
    
$
2
    
$
(3
)

See "Guarantees and Other Assurances" in Note 15 for more information on PPL Energy Supply's indemnifications related to the sale.

11.  Leases

Colstrip Generating Plant (PPL and PPL Energy Supply)

At December 31, 2006, PPL continued to participate in a significant sale/leaseback transaction. 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 an operating lease in accordance with current accounting pronouncements related to sale/leaseback arrangements. 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 $661 million at December 31, 2006.

Other Leases

(PPL, PPL Energy Supply and PPL Electric)

In September 2006, PPL's subsidiaries terminated the master lease agreements under which they leased equipment, such as vehicles, computers, and office equipment. In addition, PPL and its subsidiaries purchased the equipment from the lessors at a negotiated price. Prior to the buyout, PPL subsidiaries had been directly charged or allocated a portion of the rental expense related to the assets they utilized. In connection with the buyout, ownership of the purchased equipment was reviewed and attributed to the subsidiaries based on usage of the equipment. As a result, "Property, Plant and Equipment" increased on the Balance Sheet by $107 million for PPL, $29 million for PPL Energy Supply and $52 million for PPL Electric.

The following rent expense for all operating leases, including the Colstrip generating plant; equipment under the master lease agreements prior to September 2006; office space; land; buildings; and other equipment, was primarily included in "Other operation and maintenance" on the Statements of Income.

   
PPL
  
PPL
Energy Supply
  
PPL
Electric
  
               
2006
  
$
56
  
$
37
  
$
11
  
2005
    
68
    
44
    
23
  
2004
    
65
    
44
    
21
  

(PPL and PPL Energy Supply)

Total future minimum rental payments for all operating leases are estimated to be:

2007
  
$
49
  
2008
    
50
  
2009
    
51
  
2010
    
53
  
2011
    
51
  
Thereafter
    
354
  
   
$
608
  

In connection with the acquisition of certain fiber optic network assets in 2003, a subsidiary of PPL Telcom assumed a capital lease obligation through 2020 for the right to use portions of this fiber optic network. The balances outstanding at December 31, 2006 and 2005, were $10 million and $11 million. Total future minimum rental payments for this capital lease are estimated at $1 million for each of the years from 2007 through 2011, and $11 million thereafter.

(PPL Electric)

Due to the termination of the master lease agreements mentioned above, PPL Electric has no substantial future minimum rental payments.

12.  Stock-Based Compensation

(PPL, PPL Energy Supply and PPL Electric)

Effective January 1, 2006, PPL and its subsidiaries adopted SFAS 123 (revised 2004), "Share-Based Payment," which is known as SFAS 123(R), using the modified prospective application transition method. The adoption of SFAS 123(R) did not have a significant impact on PPL and its subsidiaries, since PPL and its subsidiaries adopted the fair value method of accounting for stock-based compensation, as described by SFAS 123, "Accounting for Stock-Based Compensation," effective January 1, 2003. See Note 23 for further discussion of SFAS 123(R).

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 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 and Corporate Governance Committee (CCGC) 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 for which PPL common stock was not yet issued as of April 25, 2003. 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 key executives and have vesting periods as determined by the CCGC in the case of the ICP, and the CLC in the case of the ICPKE, that range from seven to 25 years. In addition, 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, as determined by the CCGC in the case of the ICP, and the CLC in the case of the ICPKE. 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.

Compensation costs related to stock-based compensation awards for PPL in 2006, 2005 and 2004 were $24 million, $32 million and $12 million (with related income tax benefits of $10 million, $13 million and $5 million).

Compensation costs related to stock-based compensation awards for PPL Energy Supply in 2006, 2005 and 2004 were $17 million, $21 million and $9 million (with related income tax benefits of $7 million, $9 million and $4 million).

Compensation costs related to stock-based compensation awards for PPL Electric in 2006, 2005 and 2004 were $4 million, $7 million and $3 million (with related income tax benefits of $2 million, $3 million and $1 million).

Compensation costs for 2005 included an adjustment to record accelerated recognition of expense for employees at or near retirement age. See Note 1 for additional information.

The income tax benefit realized from stock-based arrangements for the year ended December 31, 2006, was $11 million, with $8 million attributed to stock option exercises.

Restricted stock and restricted stock unit activity for the year ended December 31, 2006 was:

   
Restricted
Shares
  
Weighted-
Average
Grant Date
Fair
Value
PPL
               
Nonvested at January 1, 2006
   
1,557,123
     $
21.23
  
Granted
    
811,100
      
30.95
  
Vested
    
(413,886
)
    
19.43
  
Forfeited
    
(98,572
)
    
20.28
  
Nonvested at December 31, 2006
    
1,855,765
      
25.97
  
                 
PPL Energy Supply
                
Nonvested at January 1, 2006
   
671,901
      $
19.67
  
Granted
    
322,650
      
31.16
  
Vested
    
(151,076
)
    
18.37
  
Forfeited
    
(45,990
)
    
25.38
  
Transferred
    
39,110
      
27.84
  
Nonvested at December 31, 2006
    
836,595
      
24.22
  
                 
PPL Electric
                
Nonvested at January 1, 2006
   
116,260
      $
23.09
  
Granted
    
64,610
      
31.73
  
Vested
    
(33,340
)
    
17.69
  
Nonvested at December 31, 2006
    
147,530
      
28.12
  

The weighted-average grant date fair value of restricted stock and restricted stock units granted during the year ended December 31, 2005, was $27.08 for PPL, $27.27 for PPL Energy Supply and $27.11 for PPL Electric.

The weighted-average grant date fair value of restricted stock and restricted stock units granted during the year ended December 31, 2004, was $23.03 for PPL, $23.14 for PPL Energy Supply and $23.13 for PPL Electric.

As of December 31, 2006, unrecognized compensation cost related to nonvested awards was:

   
Unrecognized Compensation Cost
  
Weighted-Average
Period for Recognition
                 
PPL
 
$
12
      
2.5 years
  
PPL Energy Supply
    
6
      
2.4 years
  
PPL Electric
    
1
      
1.3 years
  

The total fair value of shares vesting was:

   
Year Ended December 31,
  
   
2006
  
2005
  
2004
  
               
PPL
  
$
13
  
$
10
  
$
5
  
PPL Energy Supply
    
5
    
4
    
2
  
PPL Electric
    
1
    
1
    
1
  

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 beginning one year after the date of grant, assuming the individual is still employed by PPL or a subsidiary, in installments as determined by the CCGC in the case of the ICP, and the CLC in the case of the ICPKE. Options outstanding at December 31, 2006, become exercisable over a three-year period from the date of grant in equal installments. The CCGC 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 under the plans for the year ended December 31, 2006, was:

   
Number of Options
  
Weighted-Average Exercise Price
  
Weighted-Average Remaining Contractual Term
  
Aggregate Total Intrinsic Value
PPL
                               
Outstanding at January 1, 2006
    
5,586,072
    
$
21.81
                  
 
Granted
    
1,335,420
      
30.14
                  
 
Exercised
    
(1,473,122
)
    
18.48
                  
 
Forfeited
    
(64,540
)
    
30.14
                  
Outstanding at December 31, 2006
    
5,383,830
      
24.68
      
7.0 years
    
$
60
  
Options exercisable at December 31, 2006
    
3,166,515
      
22.42
      
6.2 years
      
43
  
Weighted-average fair value of options granted
  
$
4.86
                          
                                 
PPL Energy Supply
                                
Outstanding at January 1, 2006
    
1,225,502
    
$
21.72
                  
 
Granted
    
494,660
      
30.14
                  
 
Exercised
    
(249,860
)
    
18.74
                  
 
Transferred
    
194,360
      
23.93
                  
Outstanding at December 31, 2006
    
1,664,662
      
24.93
      
7.4 years
    
$
19
  
Options exercisable at December 31, 2006
    
748,460
      
20.92
      
6.0 years
      
11
  
Weighted-average fair value of options granted
  
$
4.86
                          
                                 
PPL Electric
                                
Outstanding at January 1, 2006
    
285,372
    
$
22.95
                  
 
Granted
    
88,540
      
30.14
                  
 
Exercised
    
(14,876
)
    
27.62
                  
Outstanding at December 31, 2006
    
359,036
      
24.53
      
6.8 years
    
$
4
  
Options exercisable at December 31, 2006
    
200,920
      
21.90
      
5.5 years
      
3
  
Weighted-average fair value of options granted
  
$
4.86
                          


The total intrinsic value of stock options exercised was:

   
Year Ended December 31,
  
   
2006
  
2005
  
2004
  
               
PPL
  
$
15
  
$
18
  
$
10
  
PPL Energy Supply
    
3
    
4
    
2
  
PPL Electric
          
3
    
1
  

As of December 31, 2006, unrecognized compensation cost related to stock options was:

   
Unrecognized Compensation Cost
  
Weighted-Average
Period for Recognition
                 
PPL
  
$
2
      
2.0 years
  
PPL Energy Supply
    
2
      
2.0 years
  

As of December 31, 2006, unrecognized compensation costs related to stock options were insignificant for PPL Electric.

PPL received cash from stock option exercises for the year ended December 31, 2006, of $21 million.

The estimated fair value of each option granted was calculated using a Black-Scholes option-pricing model. The weighted-average assumptions used in the model were:

   
2006
  
2005
  
2004
  
               
Risk-free interest rate
  
4.06%
  
4.09%
  
3.79%
  
Expected option life
  
6.25 yrs.
  
7.00 yrs.
  
7.47 yrs.
  
Expected stock volatility
  
19.86%
  
18.09%
  
32.79%
  
Dividend yield
  
3.76%
  
3.88%
  
3.51%
  

Based on the above assumptions, the weighted-average grant date fair values of options granted during the years ended December 31, 2006, 2005 and 2004 were $4.86, $3.99 and $6.16.

PPL uses historical volatility and exercise behavior to value its stock options using the Black-Scholes option pricing model. 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.

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 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 also 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 305,088 such stock units outstanding at December 31, 2006.

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, 2006, there were 338,502 stock appreciation rights outstanding.

13.  Retirement and Postemployment Benefits

(PPL, PPL Energy Supply and PPL Electric)

Pension and Other Postretirement Benefits

PPL and certain of its subsidiaries sponsor various pension and other postretirement benefit plans. PPL follows the guidance of SFAS 87, "Employers' Accounting for Pensions" and SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" when accounting for these benefits. In addition, PPL adopted the recognition and measurement date provisions of SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans," effective December 31, 2006.

SFAS 158 requires a registrant that sponsors a defined benefit plan(s) to: (i) record an asset or liability to recognize the funded status of the plan(s) in its consolidated balance sheet using a measurement date that corresponds with its fiscal year end, and for a registrant's consolidated subsidiary, the date that is used to consolidate the subsidiary, (ii) recognize in other comprehensive income, net of tax, gains and losses and prior service costs and credits, that arise during the period but are not currently recognized as a component of net periodic benefit cost, (iii) amortize gains and losses, prior service costs and credits, and transition assets or obligations recorded in accumulated other comprehensive income to net periodic benefit cost, and (iv) provide additional disclosures of, among other things, items deferred in accumulated other comprehensive income. In accordance with SFAS 158, accounting and related disclosures for 2004 and 2005 were not affected by the adoption of the new standard. The incremental impact of adopting of SFAS 158, resulted in the following increases (decreases) to the Balance Sheet at December 31, 2006.

     
Before Application of SFAS 158
  
Adjustments
  
After Application of SFAS 158
  
                 
PPL
                    
Current Assets
                    
 
Deferred income taxes
  
$
155
  
$
7
  
$
162
  
 
Other
   
59
    
(38
)
  
21
  
 
Total Current Assets
    
3,661
    
(31
)
  
3,630
  
                       
Regulatory and Other Noncurrent Assets
                    
 
Other (a)
    
870
    
65
    
935
  
 
Total Regulatory and Other Noncurrent Assets
    
3,419
    
65
    
3,484
  
 
Total Assets
    
19,713
    
34
    
19,747
  
                       
Current Liabilities
                    
 
Other
    
497
    
6
    
503
  
 
Total Current Liabilities
    
3,342
    
6
    
3,348
  
                       
Deferred Credits and Other Noncurrent Liabilities
                    
 
Deferred income taxes and investment tax credits
    
2,428
    
(97
)
  
2,331
  
 
Accrued pension obligations
    
270
    
94
    
364
  
 
Other
   
396
    
231
    
627
  
 
Total Deferred Credits and Other Noncurrent Liabilities
    
3,960
    
228
    
4,188
  
Shareowners' Common Equity
                    
 
Accumulated other comprehensive loss
    
(118
)
  
(200
)
  
(318
)
 
Total Shareowners' Common Equity
    
5,322
    
(200
)
  
5,122
  
 
Total Liabilities and Equity
    
19,713
    
34
    
19,747
  
                     
PPL Energy Supply
                    
Current Assets
                    
 
Deferred income taxes
    
113
    
4
    
117
  
 
Other
   
43
    
(33
)
  
10
  
 
Total Current Assets
    
3,221
    
(29
)
  
3,192
  
                       
Other Noncurrent Assets
                    
 
Other
    
508
    
(10
)
  
498
  
 
Total Other Noncurrent Assets
    
1,987
    
(10
)
  
1,977
  
 
Total Assets
    
14,694
    
(39
)
  
14,655
  
                 
Current Liabilities
                    
 
Other
    
323
    
2
    
325
  
 
Total Current Liabilities
    
2,051
    
2
    
2,053
  
Deferred Credits and Other Noncurrent Liabilities
                    
 
Deferred income taxes and investment tax credits
    
1,448
    
(85
)
  
1,363
  
 
Accrued pension obligations
    
149
    
130
    
279
  
 
Other
   
298
    
95
    
393
  
 
Total Deferred Credits and Other Noncurrent Liabilities
    
2,762
    
140
    
2,902
  
 
Member's Equity
    
4,715
    
(181
)
  
4,534
  
 
Total Liabilities and Equity
    
14,694
    
(39
)
  
14,655
  
                 
PPL Electric
                    
Regulatory and Other Noncurrent Assets
                    
 
Other (a)
    
352
    
61
    
413
  
 
Total Regulatory and Other Noncurrent Assets
    
1,377
    
61
    
1,438
  
 
Total Assets
    
5,254
    
61
    
5,315
  
                       
Deferred Credits and Other Noncurrent Liabilities
                    
 
Deferred income taxes and investment tax credits
    
844
    
(30
)
  
814
  
 
Other
    
115
    
91
    
206
  
 
Total Deferred Credits and Other Noncurrent Liabilities
    
959
    
61
    
1,020
  
 
Total Liabilities and Equity
    
5,254
    
61
    
5,315
  

(a)
  
See Note 1 for details of the regulatory assets recorded for recoverable costs of defined benefit plans in connection with the adoption of SFAS 158.

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. 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 PPL's U.K. subsidiary, WPD, are eligible for benefits from one pension scheme with benefits based on length of service and final average pay. Retirees of PPL's Latin American subsidiaries may be eligible for coverage under government-sponsored and administered programs.

PPL and certain of its subsidiaries also provide supplemental retirement benefits to directors, 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 and PPL Gas Retiree Health Plan are paid from funded VEBA trusts sponsored by the respective companies. Postretirement benefits under the PPL Montana Retiree Health Plan are paid from company assets.

The following disclosures distinguish between domestic and international pension plans.

Net periodic pension and other postretirement benefit costs (credits) were:

   
Pension Benefits
    
   
Domestic
  
International
  
Other Postretirement Benefits
   
2006
  
2005
  
2004
  
2006
  
2005
  
2004
  
2006
  
2005
  
2004
PPL
                                                                        
Service cost
  
$
62
    
$
56
    
$
49
    
$
22
    
$
17
    
$
15
    
$
7
    
$
7
    
$
6
  
Interest cost
    
124
      
114
      
112
      
140
      
150
      
139
      
28
      
26
      
29
  
Expected return on plan assets
    
(164
)
    
(158
)
    
(151
)
    
(197
)
    
(202
)
    
(205
)
    
(20
)
    
(19
)
    
(17
)
Amortization of:
                                                                        
Transition (asset) obligation
    
(4
)
    
(4
)
    
(5
)
                            
9
      
8
      
9
  
Prior service cost
    
15
      
15
      
15
      
5
      
5
      
5
      
5
      
4
      
4
  
Actuarial loss (gain)
    
3
      
2
      
(6
)
    
49
      
29
      
6
      
8
      
4
      
6
  
Net periodic pension and postretirement costs (credits) prior to special termination benefits
    
36
      
25
      
14
      
19
      
(1
)
    
(40
)
    
37
      
30
      
37
  
Settlement charge
    
4
                                                                  
Special termination benefits (a) (b)
    
3
                              
5
                                  
Net periodic pension and postretirement benefit costs (credits)
  
$
43
    
$
25
    
$
14
    
$
19
    
$
4
    
$
(40
)
  
$
37
    
$
30
    
$
37
  
PPL Energy Supply
                                                                        
Service cost
  
$
4
    
$
4
    
$
3
    
$
22
    
$
17
    
$
15
    
$
1
                  
Interest cost
    
5
      
4
      
4
      
140
      
150
      
139
      
1
    
$
1
    
$
1
  
Expected return on plan assets
    
(7
)
    
(6
)
    
(5
)
    
(197
)
    
(202
)
    
(205
)
                        
Amortization of:
                                                                        
Prior service cost
                    
1
      
5
      
5
      
5
                          
Actuarial loss (gain)
    
1
      
1
              
49
      
29
      
6
                          
Net periodic pension and postretirement costs (credits) prior to special termination benefits
    
3
      
3
      
3
      
19
      
(1
)
    
(40
)
    
2
      
1
      
1
  
Special termination benefits (a)
                                    
5
                                  
Net periodic pension and postretirement benefit costs (credits)
  
$
3
    
$
3
    
$
3
    
$
19
    
$
4
    
$
(40
)
  
$
2
    
$
1
    
$
1
  
 
(a)
  
The $5 million cost of special termination benefits for 2005 was related to the WPD approved staff reduction plan as a result of the merger of its two control rooms, metering reorganization and other staff efficiencies. Additional pension costs were recognized due to early retirement and pension enhancement provisions granted to the employees.
(b)
  
The $3 million cost of special termination benefits for 2006 was related to the PPL Susquehanna approved staff reduction plan. In addition, severance of $2 million was also recorded for a total pre-tax charge of $5 million ($3 million after tax), or $0.01 per share for PPL.

Net periodic pension and other postretirement benefits costs charged (credited) to operating expense, excluding amounts charged to construction and other non-expense accounts were:

   
Pension Benefits
    
   
Domestic
  
International
  
Other Postretirement Benefits
   
2006
  
2005
  
2004
  
2006
  
2005
  
2004
  
2006
  
2005
  
2004
  
                                                                         
PPL
  
$
37
    
$
21
    
$
12
    
$
17
    
$
4
    
$
(36
)
  
$
31
    
$
26
    
$
31
  
PPL Energy Supply (a)
    
16
      
10
      
6
      
17
      
4
      
(36
)
    
14
      
11
      
12
  
PPL Electric (b)
    
6
      
4
      
1
                              
9
      
7
      
9
  

(a)
  
In addition to the specific plans sponsored by PPL Energy Supply, PPL Generation subsidiaries and PPL EnergyPlus were also allocated $26 million of the costs of pension and other postretirement 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 pension or other postretirement benefit plans. PPL Electric is allocated a portion of the costs of pension and other postretirement plans sponsored by PPL Services, based on its participation in those plans.

The following assumptions were used in the valuation of the benefit obligations at December 31 and determination of net periodic benefit cost for the years ended December 31.

   
Pension Benefits
    
   
Domestic
  
International
  
Other Postretirement Benefits
  
   
2006
  
2005
  
2004
  
2006
  
2005
  
2004
  
2006
    
2005
    
2004
  
PPL and PPL Energy Supply
                                                                        
Discount rate
                                                                        
- obligations
                                                                        
PPL
    
5.94%
      
5.70%
      
5.75%
      
5.17%
      
4.75%
      
5.50%
      
5.88%
      
5.70%
      
5.75%
  
PPL Energy Supply
    
5.94%
      
5.70%
      
5.75%
      
5.17%
      
4.75%
      
5.50%
      
5.79%
      
5.55%
      
5.75%
  
- cost
                                                                        
PPL
    
5.70%
      
5.75%
      
6.25%
      
4.75%
      
5.50%
      
5.50%
      
5.70%
      
5.75%
      
6.25%
  
PPL Energy Supply
    
5.70%
      
5.75%
      
6.25%
      
4.75%
      
5.50%
      
5.50%
      
5.55%
      
5.75%
      
6.25%
  
Rate of compensation increase
                                                                        
- obligations
    
4.75%
      
4.75%
      
4.00%
      
4.00%
      
3.75%
      
3.75%
      
4.75%
      
4.75%
      
4.00%
  
- cost
    
4.75%
      
4.00%
      
4.00%
      
3.75%
      
3.75%
      
3.75%
      
4.75%
      
4.00%
      
4.00%
  
Expected return on plan assets
                                                                        
- obligations
                                                                        
PPL (a)
    
8.50%
      
8.50%
      
8.75%
      
8.09%
      
8.09%
      
8.30%
      
7.75%
      
8.00%
      
7.90%
  
PPL Energy Supply (a)
    
8.27%
      
8.22%
      
8.36%
      
8.09%
      
8.09%
      
8.30%
      
N/A
      
N/A
      
N/A
  
- cost
                                                                        
PPL (a)
    
8.50%
      
8.75%
      
8.75%
      
8.09%
      
8.30%
      
8.30%
      
8.00%
      
7.90%
      
7.80%
  
PPL Energy Supply (a)
    
8.22%
      
8.36%
      
8.75%
      
8.09%
      
8.30%
      
8.30%
      
N/A
      
N/A
      
N/A
  

(a)
  
The expected return on plan assets for PPL's and PPL Energy Supply's Domestic Pension Plans includes a 25 basis point reduction for management fees.

   
Assumed Health Care Cost Trend Rates at
December 31,
   
2006
  
2005
  
2004
PPL and PPL Energy Supply
            
Health care cost trend rate assumed for next year
            
  - obligations
  
9.0%
  
10.0%
  
10.0%
  - cost
  
10.0%
  
10.0%
  
11.0%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
            
  - obligations
  
5.5%
  
5.5%
  
5.0%
  - cost
  
5.5%
  
5.0%
  
5.0%
Year that the rate reaches the ultimate trend rate
            
  - obligations
  
2012
  
2011
  
2010
  - cost
  
2011
  
2010
  
2010

A one percentage point change in the assumed health care costs trend rate assumption would have had the following effects in 2006.

   
One Percentage Point
   
Increase
  
Decrease
PPL
            
Effect on service cost and interest cost components
  
$
1
    
$
(1
)
Effect on accumulated postretirement benefit obligation
    
21
      
(18
)
PPL Energy Supply
                
Effect on service cost and interest cost components
                
Effect on accumulated postretirement benefit obligation
    
1
      
(1
)

(PPL)

The funded status of the PPL plans was as follows.

   
Pension Benefits
    
   
Domestic
  
International
  
Other Postretirement Benefits
   
2006
  
2005
  
2006
  
2005
  
2006
  
2005
Change in Benefit Obligation
                                                
Benefit Obligation, January 1
  
$
2,147
    
$
1,969
    
$
2,891
    
$
2,931
    
$
518
    
$
485
  
Service cost
    
62
      
56
      
22
      
17
      
8
      
7
  
Interest cost
    
124
      
114
      
140
      
150
      
28
      
26
  
Participant contributions
                    
7
      
6
      
7
      
7
  
Plan amendments
    
46
      
1
              
5
      
38
      
16
  
Actuarial (gain) loss
    
(87
)
    
87
      
50
      
233
      
(32
)
    
11
  
Special termination benefits
    
3
                      
5
                  
Actual expenses paid
    
(1
)
                                        
Net benefits paid
    
(83
)
    
(80
)
    
(169
)
    
(165
)
    
(39
)
    
(34
)
Settlements
    
(12
)
                                        
Federal subsidy
                                    
2
          
Currency conversion
                    
398
      
(291
)
                
Benefit Obligation, December 31
    
2,199
      
2,147
      
3,339
      
2,891
      
530
      
518
  
                                                 
Change in Plan Assets
                                                
Plan assets at fair value, January 1
    
1,905
      
1,767
      
2,540
      
2,483
      
258
      
249
  
Actual return on plan assets
    
211
      
191
      
251
      
427
      
25
      
11
  
Employer contributions
    
61
      
27
      
102
      
41
      
37
      
25
  
Participant contributions
                    
7
      
6
      
8
      
7
  
Actual expenses paid
    
(1
)
                                        
Net benefits paid
    
(83
)
    
(80
)
    
(169
)
    
(165
)
    
(39
)
    
(34
)
Settlements
    
(12
)
                                        
Currency conversion
                    
363
      
(252
)
                
Plan assets at fair value, December 31
    
2,081
      
1,905
      
3,094
      
2,540
      
289
      
258
  
                                                 
Funded Status
                                                
Funded Status at end of year
    
(118
)
    
(242
)
    
(245
)
    
(351
)
    
(241
)
    
(260
)
Unrecognized actuarial (gain) loss
            
(49
)
            
721
              
156
  
Unrecognized prior service cost
            
139
              
36
              
35
  
Unrecognized transition assets
            
(18
)
                            
61
  
Currency conversion
                            
(72
)
                
Net amount recognized at end of year
  
$
(118
)
  
$
(170
)
  
$
(245
)
  
$
334
    
$
(241
)
  
$
(8
)
                                                 
Amounts recognized in the Balance Sheets consist of:
                                                
Noncurrent asset
  
$
7
                                          
Current liability
    
(6
)
                          
$
(1
)
        
Noncurrent liability
    
(119
)
          
$
(245
)
            
(240
)
        
Prepaid benefit cost
          
$
12
            
$
334
            
$
4
  
Accrued benefit liability
            
(182
)
                            
(12
)
Additional minimum liability
           
(40
)
            
(545
)
                
Intangible asset
            
9
              
33
                  
Accumulated other comprehensive loss (pre-tax)
            
31
              
472
                  
Cumulative translation adjustment
                            
40
                  
Net amount recognized at end of year
  
$
(118
)
  
$
(170
)
  
$
(245
)
  
$
334
    
$
(241
)
  
$
(8
)
                                                 
Amounts recognized in accumulated other comprehensive (income) loss (pre-tax) consist of:
                                                
Transition (asset) obligation
 
$
(8
)
                          
$
31
          
Prior service cost
   
106
            
$
28
              
34
          
Net actuarial (gain) loss
    
(112
)
            
602
              
72
          
Foreign currency translation adjustments
                    
(27
)
                        
Accumulated other comprehensive (income) loss (pre-tax)
  
$
(14
)
          
$
603
            
$
137
          
                                                 
Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2007 are as follows:
                                                
Transition (asset) obligation
 
$
(3
)
                          
$
5
          
Prior service cost
   
12
            
$
5
              
5
          
Net actuarial loss
    
2
              
54
              
4
          
Total
  
$
11
            
$
59
            
$
14
          
                                                 
Total accumulated benefit obligation for defined benefit pension plans
  
$
1,947
   
$
1,883
    
$
3,177
    
$
2,751
                  

Information for pension plans with projected and accumulated benefit obligations in excess of plan assets follows.

   
Plans With Projected Benefit Obligations
in Excess of Plan Assets
  
Plans With Accumulated Benefit Obligations
in Excess of Plan Assets
   
Domestic
  
International
  
Domestic
  
International
   
2006
  
2005
  
2006
  
2005
  
2006
  
2005
  
2006
  
2005
                                                                 
Projected benefit obligation
 
$
2,118
    
$
2,147
    
$
3,339
    
$
2,891
    
$
112
    
$
199
    
$
3,339
    
$
2,891
  
Accumulated benefit obligation
    
1,866
      
1,883
      
3,177
      
2,751
      
95
      
178
      
3,177
      
2,751
  
Fair value of assets
    
1,993
      
1,905
      
3,094
      
2,540
      
46
      
111
      
3,094
      
2,540
  

Other postretirement benefit plans with accumulated postretirement benefit obligations in excess of plan assets had accumulated postretirement benefit obligations and fair value of assets of $531 million and $289 million at December 31, 2006, and $518 million and $258 million at December 31, 2005.

(PPL Energy Supply)

The funded status of the PPL Energy Supply plans was as follows.
   
Pension Benefits
    
   
Domestic
  
International
  
Other Postretirement Benefits
   
2006
  
2005
  
2006
  
2005
  
2006
  
2005
Change in Benefit Obligation
                                                
Benefit Obligation, January 1
  
$
83
    
$
74
    
$
2,891
    
$
2,931
    
$
14
    
$
12
  
Service cost
    
4
      
4
      
22
      
17
      
1
          
Interest cost
    
5
      
4
      
140
      
150
      
1
      
1
  
Participant contributions
                    
7
      
6
                  
Plan amendments
                            
5
                  
Actuarial (gain) loss
   
(3
)
    
2
      
50
      
233
      
1
      
1
  
Special termination benefits
                            
5
                  
Net benefits paid
    
(2
)
    
(1
)
    
(169
)
    
(165
)
    
(1
)
        
Currency conversion
                    
398
      
(291
)
                
Benefit Obligation, December 31
    
87
      
83
      
3,339
      
2,891
      
16
      
14
  
                                                 
Change in Plan Assets
                                                
Plan assets at fair value, January 1
    
75
      
61
      
2,540
      
2,483
                  
Actual return on plan assets
    
9
      
7
      
251
      
427
                  
Employer contributions
    
11
      
8
      
102
      
41
                  
Participant contributions
                    
7
      
6
                  
Net benefits paid
    
(2
)
    
(1
)
    
(169
)
    
(165
)
                
Currency conversion
                    
363
      
(252
)
                
Plan assets at fair value, December 31
    
93
      
75
      
3,094
      
2,540
                  
                                                 
Funded Status
                                                
Funded Status at end of year
    
6
      
(8
)
    
(245
)
    
(351
)
    
(16
)
    
(14
)
Unrecognized actuarial loss
            
14
              
721
              
4
  
Unrecognized prior service cost
            
3
              
36
              
1
  
Currency conversion
                            
(72
)
                
Net amount recognized at end of year
  
$
6
    
$
9
    
$
(245
)
  
$
334
    
$
(16
)
  
$
(9
)
                                                 
Amounts recognized in the Balance Sheets consist of:
                                                
Noncurrent asset
  
$
7
                                          
Current liability
                                  
$
(1
)
        
Noncurrent liability
    
(1
)
          
$
(245
)
            
(15
)
        
Prepaid benefit cost
          
$
9
            
$
334
                  
Accrued benefit liability
                                          
$
(9
)
Additional minimum liability
            
(17
)
            
(545
)
                
Intangible asset
            
3
              
33
                  
Accumulated other comprehensive income (pre-tax)
            
14
              
472
                  
Cumulative translation adjustment
                            
40
                  
Net amount recognized at end of year
  
$
6
    
$
9
    
$
(245
)
  
$
334
    
$
(16
)
  
$
(9
)
                                                 
Amounts recognized in accumulated other comprehensive loss (pre-tax) consist of:
                                                
Prior service cost
 
$
3
            
$
28
                          
Net actuarial loss
    
9
              
602
            
$
5
          
Foreign currency translation adjustments
                    
(27
)
                        
Accumulated other comprehensive loss (pre-tax)
  
$
12
            
$
603
            
$
5
          


   
Pension Benefits
    
   
Domestic
  
International
  
Other Postretirement Benefits
   
2006
  
2005
  
2006
  
2005
  
2006
  
2005
Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 2007 are as follows:
                                                
Prior service cost
                  
$
5
                          
Net actuarial loss
                    
54
                          
Total
                  
$
59
                          
                                                 
Total accumulated benefit obligation for defined benefit pension plans
  
$
87
    
$
83
    
$
3,177
    
$
2,751
                  

Information for pension plans with projected and accumulated benefit obligations in excess of plan assets follows.

   
Domestic
  
International
   
2006
  
2005
  
2006
  
2005
                                 
Projected benefit obligation
  
$
87
    
$
83
    
$
3,339
    
$
2,891
  
Accumulated benefit obligation
    
87
      
83
      
3,177
      
2,751
  
Fair value of assets
    
93
      
75
      
3,094
      
2,540
  

Other postretirement benefit plans with accumulated postretirement benefit obligations in excess of plan assets had accumulated postretirement benefit obligations and fair value of assets of $16 million and none at December 31, 2006, and $14 million and none at December 31, 2005.

In addition to the plans sponsored by PPL Energy Supply, PPL Generation subsidiaries and PPL EnergyPlus are allocated a portion of the liabilities and costs of the pension and other postretirement benefit plans sponsored by PPL Services based on their participation in those plans. PPL Energy Supply's allocated share of these pension liabilities was $35 million and $60 million at December 31, 2006 and 2005. PPL Energy Supply's allocated share of other postretirement benefits was a liability of $90 million at December 31, 2006 and a prepaid asset of $1 million at December 31, 2005.

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 of $48 million, $37 million and $28 million were made in 2006, 2005 and 2004. The change in contributions from year to year was primarily the result of the changes in the workforce at the mechanical contracting companies. The contribution rates have also increased from year to year.

(PPL Electric)

Although PPL Electric does not directly sponsor any pension or other postretirement benefit plans, it is allocated a portion of the liabilities and costs of plans sponsored by PPL Services based on participation in those plans. At December 31, 2006 and 2005, the recorded balance of PPL Electric's allocated share of these pension liabilities was $45 million and $77 million. The balance for PPL Electric's allocated share of other postretirement benefits was a liability of $88 million at December 31, 2006, and a prepaid asset of $2 million at December 31, 2005.

(PPL and PPL Electric)

At December 31, 2006, PPL Electric had a regulatory asset of $3 million relating to the initial adoption of SFAS 106, which is being amortized and recovered in rates, with a remaining life of six years.

PPL Electric also 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. PPL Electric accounts for this liability under EITF 92-13, "Accounting for Estimated Payments in Connection with the Coal Industry Retiree Health Benefit Act of 1992." PPL Electric's net liability was $35 million at December 31, 2005. In the third quarter of 2006, PPL Electric was able to fully offset the net liability, calculated at that time, of $36 million, with excess Black Lung Trust assets as a result of the passage of the Pension Protection Act of 2006. At December 31, 2006, the net liability continues to be fully offset with excess Black Lung Trust assets. See "Pension Protection Act of 2006" within this note for further discussion.

Plan Assets - Domestic Pension Plans (PPL and PPL Energy Supply)

The asset allocation for the PPL Retirement Plan Master Trust and the target allocation, by asset category, are detailed below.

Asset Category
  
Percentage of plan assets at
December 31,
    
Target asset allocation
  
   
2006
    
2005
        
                         
Equity securities
    
74%
      
74%
      
70%
  
Debt securities
    
21%
      
21%
      
25%
  
Real estate and other
    
5%
      
5%
      
5%
  
Total
    
100%
      
100%
      
100%
  

The domestic pension plan assets are managed by outside investment managers and are rebalanced as necessary to maintain the target asset allocation ranges. PPL's investment strategy with respect to the domestic pension assets is to achieve a satisfactory risk-adjusted return on assets that, in combination with PPL's funding policy and tolerance for return volatility, will ensure that sufficient dollars are available to provide benefit payments.

The expected long-term rate of return for PPL's domestic pension plans considers the plans' historical experience, but is primarily based on the plans' mix of assets and expectations for long-term returns of those asset classes.

Plan Assets - Domestic Other Postretirement Benefit Plans (PPL)

The asset allocation for the PPL other postretirement benefit plans by asset category is detailed below.

Asset Category
  
Percentage of plan assets at December 31,
  
   
2006
    
2005
  
Equity securities
    
56%
      
62%
  
Debt securities
    
44%
      
38%
  
Total
    
100%
      
100%
  

PPL's investment strategy with respect to its other postretirement benefit obligations is to fund the VEBA trusts with voluntary contributions and to invest in a tax efficient manner utilizing a prudent mix of assets. Based on the current VEBA and postretirement plan structure, a targeted asset allocation range of 50% to 60% equity and 40% to 50% debt is maintained.

The expected long-term rate of return for PPL's other postretirement benefit plans is based on the VEBA trusts' mix of assets and expectations for long-term returns of those asset classes considering that a portion of those assets are taxable.

Plan Assets - International Pension Plans (PPL and PPL Energy Supply)

WPD operates three defined benefit plans, the WPD Group segment of the Electricity Supply Pension Scheme (ESPS), the Western Power Utilities Pension Scheme and the Infralec 1992 Scheme. The assets of all three schemes are held separately from those of WPD in trustee-administered funds.

PPL's international pension plan asset allocation and target allocation is detailed below.

Asset Category
  
Percentage of plan assets at December 31,
    
Target asset allocation
  
   
2006
    
2005
        
                         
Equity securities
    
74%
      
76%
      
75%
  
Debt securities
    
22%
      
21%
      
23%
  
Real estate and other
    
4%
      
3%
      
2%
  
 
Total
    
100%
      
100%
      
100%
  

In consultation with its investment advisor and with WPD, the group trustees of the WPD Group of the ESPS have drawn up a Statement of Investment Principles to comply with the requirements of U.K. legislation.

The group trustees' primary investment objective is to maximize investment returns within the constraint of avoiding excessive volatility in the funding position.

The expected rate of return for PPL and its subsidiaries' international pension plans considers that a portfolio largely invested in equities would be expected to achieve an average rate of return in excess of a portfolio largely invested in long-term bonds. The historical experience has been an excess return of 2% to 4% per annum on average over the return on long-term bonds.

Expected Cash Flows - Domestic Pension and Other Postretirement Benefit Plans

(PPL)

There are no contributions required for PPL's primary domestic pension plan or any of PPL's other domestic subsidiary pension plans. However, PPL's domestic subsidiaries expect to contribute approximately $27 million to their pension plans in 2007 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 $6 million of benefit payments under these plans in 2007.

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 $38 million to its other postretirement benefit plans in 2007.

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
  
                         
2007
  
$
91
    
$
41
    
$
1
  
2008
    
95
      
42
      
1
  
2009
    
101
      
47
      
1
  
2010
    
109
      
52
      
1
  
2011
    
118
      
57
      
1
  
2012 - 2016
    
742
      
355
      
4
  

(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
  
             
2007
  
$
2
    
$
1
  
2008
    
2
      
1
  
2009
    
3
      
1
  
2010
    
4
      
2
  
2011
    
4
      
2
  
2012 - 2016
    
31
      
12
  

Expected Cash Flows - International 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, 2004, in respect of WPD's principal pension scheme, the ESPS, to determine contribution requirements for 2005 and forward. WPD expects to make contributions of approximately $1 million in 2007.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the separate plan trusts.

   
Pension
  
       
2007
  
$
184
  
2008
    
189
  
2009
    
194
  
2010
    
199
  
2011
    
204
  
2012 - 2015
    
1,110
  

Savings Plans (PPL, PPL Energy Supply and PPL Electric)

Substantially all employees of PPL's domestic subsidiaries are eligible to participate in deferred savings plans (401(k)s). Contributions to the plans charged to operating expense approximated the following.

     
2006
  
2005
  
2004
  
                 
 
PPL
  
$
14
  
$
13
  
$
13
  
 
PPL Energy Supply
    
8
    
7
    
7
  
 
PPL Electric
    
3
   
3
    
3
  

Employee Stock Ownership Plan (PPL, PPL Energy Supply and PPL Electric)

PPL sponsors a non-leveraged ESOP in which substantially all domestic employees, excluding those of PPL Montana, PPL Gas Utilities 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.

Amounts charged as compensation expense for ESOP contributions were $7 million, $6 million and $5 million for 2006, 2005 and 2004. 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, 2006, were 8,342,459 or 2% of total common shares outstanding, and are included in all EPS calculations.

Postemployment Benefits

(PPL, PPL Energy Supply and PPL Electric)

Certain PPL subsidiaries provide health and life insurance benefits to disabled employees and income benefits to eligible spouses of deceased employees. PPL follows the guidance of SFAS 112, "Employers' Accounting for Postemployment Benefits," when accounting for these benefits. Postemployment benefits charged to operating expenses were not significant for 2006. Postemployment benefits charged to operating expense for 2005 were $8 million for PPL, $4 million for PPL Energy Supply and $2 million for PPL Electric, primarily due to an updated valuation for Long-Term Disability benefits completed in 2005. Postemployment benefits were not significant in 2004.

(PPL and PPL Energy Supply)

Certain of PPL Global subsidiaries, including Emel, DelSur, Elfec and Integra, provide limited non-pension benefits to all current employees. All active employees are entitled to benefits in the event of termination or retirement in accordance with government-sponsored programs. These plans generally obligate a company to pay one month's salary per year of service to employees in the event of involuntary termination. Under certain plans, employees with five or more years of service are entitled to this payment in the event of voluntary or involuntary termination.

The liabilities for these plans are accounted for under the guidance of EITF 88-1, "Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan," using what is commonly referred to as the "shut down" method, where a company records the undiscounted obligation as if it were payable at each balance sheet date. The combined liabilities for these plans at December 31, 2006 and 2005, were $11 million and $10 million, and are recorded in "Deferred Credits and Noncurrent Liabilities - Other" on the Balance Sheets.

Pension Protection Act of 2006

(PPL, PPL Energy Supply and PPL Electric)

On August 17, 2006, the Pension Protection Act of 2006 (the Act) was signed by President Bush. The Act's changes, which will become effective in 2008, cover current pension plan legislation and funding rules for defined benefit pension plans. Based on the current funded status of PPL's defined benefit pension plans, the Act is not expected to have a significant impact on the future funding of these plans or have a significant financial impact on PPL, PPL Energy Supply or PPL Electric in regard to these plans.

(PPL and PPL Electric)

The Act does contain a provision that provides for excess assets held exclusively in Black Lung Trust funds to be used to pay for health benefits other than black lung disease for retired coal miners. Prior to recognition of this provision of the Act, PPL Electric had a net liability of $36 million for the medical costs of retirees of a PPL subsidiary represented by the United Mine Workers of America (UMWA). This subsidiary had a Black Lung Trust that was significantly overfunded. As a result of the Act and the ability to use the excess Black Lung Trust assets to make future benefit payments for the UMWA retiree medical costs, PPL Electric was able to fully offset the UMWA retiree medical liability on its Balance Sheet and record a one-time credit to PPL's and PPL Electric's "Other operation and maintenance" expense of $21 million (net of tax expense of $15 million).

14.  Jointly-Owned Facilities

(PPL and PPL Energy Supply)

At December 31, 2006 and 2005, 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 in Service
  
Other Property
  
Accumulated Depreciation
  
Construction Work
in Progress
December 31, 2006
                            
PPL Generation
                            
Generating Stations
                            
Susquehanna
  
90.00%
  
$
4,332
        
$
3,449
  
$
99
Conemaugh
  
16.25%
    
198
          
87
    
1
Keystone
  
12.34%
    
100
          
54
    
7
Wyman Unit 4
  
8.33%
    
15
          
6
      
Merrill Creek Reservoir
  
8.37%
        
$
22
    
14
      
December 31, 2005
                            
PPL Generation
                            
Generating Stations
                            
Susquehanna
  
90.00%
    
4,308
          
3,447
    
57
Griffith (a)
  
50.00%
    
151
                  
Conemaugh
  
16.25%
    
199
          
83
    
3
Keystone
  
12.34%
    
100
          
54
    
3
Wyman Unit 4
  
8.33%
    
15
          
5
      
Merrill Creek Reservoir
  
8.37%
          
22
    
14
      

(a)
  
A PPL subsidiary had a 50% interest in a partnership that owned the Griffith gas-fired generating station. The partnership arrangement was essentially a cost-sharing arrangement, in that each of the partners had rights to one-half of the plant capacity and energy, and an obligation to cover one-half of the operating costs of the station. Accordingly, the equity investment was classified as "Electric Plant in Service - Generation" on the Balance Sheet. During 2006, PPL sold its 50% ownership interest in the Griffith plant. See Note 10 for further discussion.

Each PPL Generation subsidiary provided 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.

In addition to the interests mentioned above, PPL Montana is the operator of the jointly-owned, coal-fired generating units comprising the Colstrip steam generation facility. At December 31, 2006 and 2005, 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 11 for additional information.

PPL Montana's share of direct expenses associated with the operation and maintenance of these facilities is included in the corresponding operating expenses on the Statements of Income. Each joint-owner in these facilities provides its own financing. As operator of all Colstrip Units, PPL Montana invoices each joint-owner for its respective portion of the direct expenses. The amount due from joint-owners was $7 million at both December 31, 2006 and 2005.

At December 31, 2006, 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. However, each party is responsible for its own fuel-related costs.

15.  Commitments and Contingent Liabilities

Energy Purchases, Energy Sales and Other Commitments

Energy Purchase Commitments (PPL, PPL Energy Supply and PPL Electric)

PPL and PPL Energy Supply enter into long-term purchase contracts to supply the fuel requirements for generation facilities. These include contracts to purchase coal, emission allowances, natural gas, oil and nuclear fuel. These contracts extend for terms through 2019. PPL and PPL Energy Supply also enter into long-term contracts for the storage and transportation of natural gas. These contracts extend through 2014 and 2032. Additionally, PPL and PPL Energy Supply have entered into long-term contracts to purchase power that extend for terms through 2010, excluding the windfarm and Longview Power, LLC agreements discussed below.

PPL and PPL Energy Supply entered into long-term power purchase agreements with two wind project developers to purchase the full output of their facilities when they begin commercial operation. These contracts extend for terms through 2026.

As part of the purchase of generation assets from Montana Power, PPL Montana assumed a power purchase agreement, which was still in effect at December 31, 2006. In accordance with purchase accounting guidelines, PPL Montana recorded a liability of $58 million as the estimated fair value of the agreement at the acquisition date. The liability is being reduced over the term of the agreement, through 2010, as an adjustment to "Energy purchases" on the Statements of Income. The unamortized balance of the liability related to the agreement at December 31, 2006, was $42 million, of which $34 million is included in "Deferred Credits and Other Noncurrent Liabilities - Other" and $8 million is included in "Current Liabilities - Other" on the Balance Sheets.

In 1998, PPL Electric recorded a loss accrual for above-market contracts with NUGs of $879 million, due to the 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 the corporate realignment in 2000, the remaining balance of this liability was transferred to PPL EnergyPlus. At December 31, 2006, the remaining liability associated with the above-market NUG contracts was $136 million.

In 2006, PPL entered into a long-term coal purchase agreement with CONSOL Energy Inc. The contract will provide more than one-third of PPL's and PPL Energy Supply's projected coal needs for the Pennsylvania power plants from 2008 through 2018.

In January 2007, PPL EnergyPlus entered into a fixed price contract with Longview Power, LLC, to financially purchase 300 MW of energy and capacity from a new coal-fired generating facility to be built in West Virginia. The power purchase agreement begins in January 2012 and expires in December 2016, with an option to extend at a fixed price through December 2017.

Energy Sales Commitments (PPL and PPL Energy Supply)

PPL Energy Supply enters into long-term power sales contracts in connection with its load-serving activities or associated with certain of its power plants. These power sales contracts extend for terms through 2017. All long-term contracts were executed at pricing that approximated market rates, including profit margin, at the time of execution.

In July 2002, PPL Montana began to sell to NorthWestern an aggregate of 450 MW of energy. Under two five-year agreements with terms through June 30, 2007, PPL Montana is supplying 300 MW of around-the-clock electricity and 150 MW of unit-contingent on-peak electricity. PPL Montana also makes short-term energy sales to NorthWestern. In July 2006, PPL Montana entered into a new seven-year power purchase and sale agreement with NorthWestern pursuant to which PPL Montana will provide the following wholesale electricity supply to NorthWestern:

Period
  
On-Peak Supply
    
Off-Peak Supply
  
                 
7/1/2007 - 6/30/2010
    
325 MW
      
175 MW
  
7/1/2010 - 6/30/2012
    
275 MW
      
150 MW
  
7/1/2012 - 6/30/2014
    
200 MW
      
125 MW
  

In 2002, PPL began commercial operations of its Edgewood natural gas-fired generating station and its Shoreham oil-fired generating station. Each of these New York plants has a capacity of 79.9 MW. Initially, the Long Island Power Authority contracted to purchase all of Edgewood's capacity and ancillary services as part of a three-year power purchase agreement with PPL EnergyPlus beginning at commercial operation, and all of Shoreham's capacity and ancillary services as part of a 15-year power purchase agreement with PPL EnergyPlus beginning at commercial operation. In 2005, PPL EnergyPlus extended the Edgewood power purchase agreement for an additional term that runs through October 2008. The Shoreham power purchase agreement remains in effect until 2017.

In January 2004, PPL EnergyPlus began supplying 12.5% of Connecticut Light & Power Company's (CL&P) Transitional Standard Offer load under a three-year fixed-price contract. During peak hours, PPL EnergyPlus' obligation to supply the Transitional Standard Offer load may reach 625 MW. In January 2006, PPL EnergyPlus began to supply an additional 6.25% of CL&P's Transitional Standard Offer load under a one-year fixed-price contract. During peak hours, PPL EnergyPlus' obligation to supply the Transitional Standard Offer load may reach 313 MW. In September 2006, PPL EnergyPlus entered into an agreement to supply an additional 10% of CL&P's Transitional Standard Offer load under a two-year fixed-price contract, commencing January 1, 2007. During peak hours, PPL EnergyPlus' obligation to supply the Transitional Standard Offer load may reach 450 MW.

As a result of New Jersey's Electric Discount and Energy Competition Act, the New Jersey Board of Public Utilities authorized and made available to power suppliers, on a competitive basis, the opportunity to provide Basic Generation Service (BGS) to all non-shopping New Jersey customers. In February 2003, PPL EnergyPlus was awarded 34-month fixed-price BGS contracts for a fixed percentage of customer load (an aggregate of 1,000 MW) for Atlantic City Electric Company (ACE), Jersey Central Power & Light Company (JCPL) and Public Service Electric & Gas Company (PSEG). These contracts commenced in August 2003. In the first quarter of 2005, PPL EnergyPlus was awarded a portion of the Commercial Industrial Energy Pricing tranche, which amounts to 85 MW after expected shopping. These 12-month contracts ended in June 2006. In February 2006, PPL EnergyPlus was awarded 36-month fixed-price BGS contracts for fixed percentages of customer load (an aggregate of 600 MW) for ACE, JCPL and PSEG. These contracts commenced in June 2006. Additionally, in February 2007, PPL EnergyPlus was a successful bidder for fixed-priced BGS contracts for a percentage of customer load in New Jersey for those retail customers who have not shopped for competitive electricity.

In December 2005 and January 2006, PPL EnergyPlus entered into agreements with Delmarva Power and Light Company to provide a portion of its full requirements service from May 2006 through May 2008. Additionally, in November 2006, PPL EnergyPlus entered into an agreement with Delmarva Power and Light Company to provide a portion of its full requirements service from June 2007 through May 2010.

As a result of the Electric Service Customer Choice and Rate Relief Law of 1997, the Illinois General Assembly provided the opportunity for power suppliers to compete for the full requirements electric supply of all non-shopping Illinois customers. In September 2006, PPL EnergyPlus entered into three agreements with Commonwealth Edison Company to provide a portion of its full requirements service. These agreements commence in January 2007 and expire after 17, 29 and 41 months. During peak hours, PPL EnergyPlus' obligation to supply the load may reach 700 MW.

In September 2006, PPL EnergyPlus entered into agreements with Metropolitan Edison Company and Pennsylvania Electric Company to provide a portion of their full requirements service from December 2006 through December 2008. During peak hours, PPL EnergyPlus' obligation to supply the load may have reached 250 MW; however, these agreements were subsequently cancelled by mutual agreement in February 2007.

In December 2006, PPL EnergyPlus entered into an agreement with Western Massachusetts Electric Company to provide a portion of their full requirements service. This agreement commences in January 2007 and expires in December 2007. During peak hours, PPL EnergyPlus' obligation to supply the load may reach 160 MW.

Additionally, in December 2006, PPL EnergyPlus entered into an agreement with The United Illuminating Company to provide a portion of their full requirements service. This agreement commences in January 2008 and expires in December 2008. During peak hours, PPL EnergyPlus' obligation to supply the load may reach 300 MW.

PPL Montana Hydroelectric License Commitments (PPL and PPL Energy Supply)

PPL Montana has 11 hydroelectric facilities and one storage reservoir licensed by the FERC pursuant to the Federal Power Act under long-term licenses. 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 was jointly issued by the FERC to Montana Power and the Confederated Salish and Kootenai Tribes of the Flathead Reservation in 1985, and required Montana Power to hold and operate the project for 30 years. The license required Montana Power, and subsequently PPL Montana as a result of the purchase of the Kerr Dam from Montana Power, to continue to implement a plan to mitigate the impact of the Kerr Dam on fish, wildlife and the habitat. Under this arrangement, PPL Montana has a remaining commitment to spend $18 million between 2007 and 2015, at which point the tribes have the option through 2025 to purchase, hold and operate the project.

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 require PPL Montana to implement plans to mitigate the impact of its projects on fish, wildlife and the habitat, and to increase recreational opportunities. The MOUs were created to maximize collaboration between the parties and enhance the possibility for matching funds from relevant federal agencies. Under this arrangement, PPL Montana has a remaining commitment to spend $34 million between 2007 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.

Montana Power Shareholders' Litigation (PPL and PPL Energy Supply)

In August 2001, a purported class-action lawsuit was filed by a group of shareholders of Montana Power 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 was required to, and did not, obtain shareholder approval of the sale of Montana Power's generation assets to PPL Montana in 1999, and thus that sale "was null and void ab initio." Among the remedies that the plaintiffs are seeking 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 has been pending in the U.S. District Court of Montana, Butte Division, and the judge has placed this proceeding on hold pending the outcome of certain motions currently before the U.S. Bankruptcy Court for the District of Delaware, the resolution of which may impact this proceeding. PPL and PPL Energy Supply cannot predict the outcome of this matter.

Montana Hydroelectric Litigation (PPL and PPL Energy Supply)

In November 2004, PPL Montana, Avista Corporation 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 hydropower facilities' use and occupancy of streambeds in Montana can be collected by the State of Montana. This request for declaratory judgment from the Montana state court was brought following the dismissal of the State of Montana's federal lawsuit seeking such payments or compensation in the U.S. District Court of Montana, Missoula Division, due to lack of diversity jurisdiction. The State's federal lawsuit was founded on allegations that the bed of Montana's navigable rivers became state-owned property upon Montana's admission to statehood, and that the use of them for placement of dam structures, affiliated structures and reservoirs should, under an existing regulatory scheme, trigger lease payments for use of land underneath. In July 2006, the Montana state court approved a stipulation by the State of Montana that it is not seeking any lease payments or other compensation from PPL Montana for the period prior to PPL Montana's acquisition of the hydropower facilities in December 1999. The trial for this state court proceeding has been scheduled to commence in October 2007. PPL and PPL Energy Supply cannot predict the outcome of this matter.

Regulatory Issues

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 from October 2000 through June 2001, of which $17 million has not been paid to PPL subsidiaries. Given the myriad of electricity supply problems presently faced by the California electric utilities and the California ISO, PPL cannot predict whether or when it will receive payment. At December 31, 2006, PPL has fully reserved for underrecoveries of payments for these sales.

Regulatory proceedings arising out of the California electricity supply situation 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. As part of its August 2006 decision, the Court stayed the time to petition for rehearing of the decision and its mandate to the FERC in order to allow the parties time to conduct settlement discussions.

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. The FERC also commenced additional investigations relating to "gaming" and bidding practices during 2000 and 2001, but, to their knowledge, neither PPL EnergyPlus nor PPL Montana is a subject of these investigations.

Litigation arising out of the California electricity supply situation has been filed in California courts against sellers of energy to the California ISO. The plaintiffs and intervenors in these legal proceedings allege, among other things, abuse of market power, manipulation of market prices, unfair trade practices and violations of state antitrust laws, and seek other relief, including treble damages and attorneys' fees. While PPL's subsidiaries have not been named by the plaintiffs in these legal proceedings, one defendant in a consolidated court proceeding named PPL Montana in its cross-complaint; this defendant denied any unlawful conduct but asserted that, if it is found liable, the other generators and power marketers, including PPL Montana, caused, contributed to and/or participated in the plaintiffs' alleged losses. In July 2006, the Court dismissed this case as the result of a settlement under which PPL Montana was not required to make any payments or provide any compensation.

In February 2004, the Montana Public Service Commission (PSC) 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 Capacity Litigation (PPL, PPL Energy Supply and PPL Electric)

In December 2002, PPL was served with a complaint against PPL, PPL EnergyPlus and PPL Electric filed in the U.S. District Court for the Eastern District of Pennsylvania by a group of 14 Pennsylvania boroughs that apparently alleged, among other things, violations of the federal antitrust laws in connection with the pricing of installed capacity in the PJM daily market during the first quarter of 2001 and certain breach of contract claims. These boroughs were wholesale customers of PPL Electric. In April 2006, the Court dismissed all of the federal antitrust claims and all of the breach of contract claims except for one breach of contract claim by one of the boroughs.

Each of the U.S. Department of Justice - Antitrust Division, the FERC and the Pennsylvania Attorney General conducted investigations regarding PPL's PJM capacity market transactions in early 2001 and did not find any reason to take action against PPL.

New England Investigation (PPL and PPL Energy Supply)

In January 2004, PPL became aware of an investigation by the Connecticut Attorney General and the FERC's Office of Market Oversight and Investigation (OMOI) regarding allegations that natural gas-fired generators located in New England illegally sold natural gas instead of generating electricity during the week of January 12, 2004. PPL has responded to a data request of OMOI that indicated that PPL was not under suspicion of a regulatory violation, but that OMOI was conducting an initial investigation. PPL also has responded to data requests of ISO New England and data requests served by subpoena from the Connecticut Attorney General. Both OMOI and ISO New England have issued preliminary reports finding no regulatory or other violations concerning these matters. While PPL does not believe that it committed any regulatory or other violations concerning the subject matter of these investigations, PPL cannot predict the outcome of these investigations.

PJM Billing (PPL, PPL Energy Supply and PPL Electric)

In December 2004, Exelon Corporation, on behalf of its subsidiary, PECO Energy, Inc. (PECO), filed a complaint against PJM and PPL Electric with the FERC alleging that PJM had overcharged PECO from April 1998 through May 2003 as a result of an error by PJM in the State Estimator Model used in connection with billing all PJM customers for certain transmission, spot market energy and ancillary services charges. Specifically, the complaint alleged that PJM mistakenly identified PPL Electric's Elroy substation transformer as belonging to PECO and that, as a consequence, during times of congestion, PECO's bills for transmission congestion from PJM erroneously reflected energy that PPL Electric took from the Elroy substation and used to serve PPL Electric's load. The complaint requested the FERC, among other things, to direct PPL Electric to refund to PJM $39 million, plus interest of $8 million, and for PJM to refund these same amounts to PECO.

In April 2005, the FERC determined that PECO was entitled to reimbursement for the transmission congestion charges that PECO asserts PJM erroneously billed to it at the Elroy substation. The FERC set for additional proceedings before a judge the determination of the amount of the overcharge to PECO and which PJM market participants were undercharged and therefore are responsible for reimbursement to PECO.

PPL Electric recognized an after-tax charge of $27 million (or $0.07 per share for PPL) in the first quarter of 2005 for a loss contingency related to this matter. The pre-tax accrual was $47 million, with $39 million included in "Energy purchases" on the Statement of Income, and $8 million in "Interest Expense."

In September 2005, PPL Electric and Exelon Corporation filed a proposed settlement agreement regarding this matter with the FERC. In March 2006, the FERC rejected the settlement agreement indicating that the agreement involves material issues of fact that it cannot decide without further information, and ordered the matter to be set for hearing.

Subsequently, in March 2006, PPL Electric and Exelon filed with the FERC a new proposed settlement agreement under which PPL Electric would have paid approximately $41 million over a five-year period to PJM through a new transmission charge. Pursuant to this proposed agreement, PJM would have forwarded the amounts collected under this new charge to PECO.

In November 2006, the FERC entered an order accepting the parties' March 2006 proposed settlement agreement, upon the condition that PPL Electric agree to certain modifications. The FERC's acceptance was conditioned upon reimbursement to PECO through a single credit to PECO's monthly PJM bill and a corresponding charge on PPL Electric's monthly PJM bill, rather than through a PJM Tariff transmission charge applicable only to PPL Electric. The FERC ordered PPL Electric to advise the FERC within 30 days as to whether it would accept or reject the proposed modifications.

In December 2006, PPL Electric and Exelon filed with the FERC, pursuant to the November 2006 order, a modified offer of settlement ("Compliance Filing"). Under the Compliance Filing, which must be approved by the FERC, PPL Electric would make a single payment through its monthly PJM bill of $38 million, plus interest through the date of payment, and PJM would include a single credit for this amount in PECO's monthly PJM bill. Through December 31, 2006, the estimated interest on this payment would be $4 million, for a total PPL Electric payment of $42 million.

Based on the terms of the Compliance Filing and the effective date and provisions of power supply agreements between PPL Electric and PPL EnergyPlus, PPL has determined that PPL Electric is responsible for the claims prior to July 1, 2000 (totaling $12 million), and that PPL EnergyPlus is responsible for the claims subsequent to that date (totaling $30 million).

Based on the Compliance Filing, PPL and PPL Electric reduced the recorded loss accrual by $5 million (or $0.01 per share for PPL) at December 31, 2006. PPL Electric also recorded a receivable from PPL EnergyPlus of $30 million at December 31, 2006, for the portion of the claims allocated to PPL EnergyPlus. As a result of the reduction of the loss accrual and the allocation to PPL EnergyPlus, PPL Electric recorded credits to expense of $35 million on the Statement of Income, including $28 million of "Energy purchases" and $7 million of "Interest Expense."

PPL Energy Supply recorded a loss accrual of $30 million at December 31, 2006, for its share of the claims, and recorded a corresponding payable to PPL Electric. PPL EnergyPlus recorded $27 million of "Energy purchases" and $3 million of "Interest Expense" on the Statement of Income.

PPL, PPL Electric and PPL Energy Supply cannot be certain if or when the FERC will approve the Compliance Filing. Management will continue to assess the loss accrual for this contingency in future periods.

FERC Market-Based Rate Authority (PPL and PPL Energy Supply)

In December 1998, the FERC issued an order authorizing 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 of the date of the order, and every three years thereafter. The most recent market-based rate filings with the FERC were made in November 2004 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.

In September 2005, the FERC issued an order conditionally approving the Eastern market-based rate filing, subject to PPL subsidiaries making a compliance filing providing further support that they cannot erect other non-transmission barriers to entry into the generation market. The PPL subsidiaries made this compliance filing in October 2005, which the FERC accepted.

In May 2006, the FERC issued an order rejecting the claims of the various parties in the proceeding regarding PPL's Western market-based rate filing and granting PPL Montana market-based rate authority in NorthWestern's control area. There are two outstanding requests for rehearing of the FERC's order, and the FERC has issued a routine order allowing more time to consider these rehearing requests. While PPL Montana continues to believe that it does not have market power in NorthWestern's control area and that it has no obligations to make additional sales of power to NorthWestern regardless of the outcome of this proceeding, it cannot predict the outcome of these proceedings.

Currently, if a seller is granted market-based rate authority by the FERC, it may enter into power contracts during the time period for which such authority has been granted. If the FERC determines that the market is not workably competitive or the seller possesses market power or is not charging just and reasonable rates, the FERC institutes prospective action. 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 any 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 to review in advance most, if not all, power contracts. The FERC has not yet taken action in response to these recent court decisions, and the decisions have been or are expected to be appealed to the U.S. Supreme Court. 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.

Wallingford Cost-Based Rates (PPL and PPL Energy Supply)

In January 2003, PPL negotiated an agreement with ISO New England that would declare that four of the five units at PPL's Wallingford, Connecticut facility are "reliability must run" (RMR) units and put those units under cost-based rates. This RMR agreement and the cost-based rates are subject to approval by the FERC. In May 2003, the FERC denied PPL's request for approval of the RMR agreement and cost-based rates, but in August 2005, the U.S. Court of Appeals for the District of Columbia Circuit reversed the FERC's denial and remanded the case to the FERC for further consideration. In April 2006, the FERC conditionally approved the RMR agreement and the cost-based rates for the four Wallingford units, effective February 1, 2003, subject to refund, hearing and settlement procedures. The FERC ordered a hearing to determine whether the Wallingford units needed the RMR agreement, the proposed cost-based rates under the RMR agreement and the amounts to be recovered for past periods under the RMR agreement. Any rates collected under the RMR agreement prior to the completion of the hearing and/or settlement proceedings are subject to refund pending the outcome of the proceedings. The hearing has been held in abeyance pending the outcome of the settlement proceedings among the interested parties.

In September 2006, PPL and certain of the parties filed a written settlement with the FERC. The settlement is unopposed. If approved by the FERC, the settlement would resolve all issues in the pending proceeding, including payments to PPL for the past period and going forward. Under the terms of the settlement, PPL would receive a total of $44 million in settlement of amounts due under the RMR agreement for the period February 1, 2003 through May 31, 2006. This amount (plus interest) would be paid to PPL in approximately equal monthly installments over a two-year period. In addition, PPL would enter into a revised RMR Agreement effective as of June 1, 2006, under which it would be entitled to receive $2 million per month for its recovery of fixed costs while the agreement remains in effect. PPL has deferred $11 million of payments related to the pending RMR settlement as of December 31, 2006. In October 2006, the administrative law judge assigned to this matter certified the settlement to the FERC for its consideration as an uncontested settlement.

PPL and PPL Energy Supply currently expect that the four Wallingford RMR units will begin to participate in ISO New England's locational forward reserve market in June 2007, at which time the revised RMR Agreement would terminate in accordance with the settlement provided certain conditions are met. The ISO New England locational forward reserve market provides revenues to peaking generation that can quickly come on line from reserve status to meet reliability requirements.

PPL and PPL Energy Supply cannot predict whether or when the FERC will approve this settlement agreement or the ultimate outcome of this matter.

Montana Public Service Commissioner's Litigation (PPL and PPL Energy Supply)

In May 2006, one of the commissioners of the Montana PSC commenced an action in Montana First Judicial District Court against PPL Montana and the Montana PSC seeking to cause the Montana PSC to reverse its 1999 order consenting to EWG status for PPL Montana's power plants. In 1999, the FERC had granted the plants EWG status and the authority to sell electricity produced at market-based rates, and the Montana PSC consented to this status for PPL Montana's plants under a provision of federal law. In September 2006, the Court granted PPL Montana's and the Montana PSC's motions to dismiss this action. The plaintiff has appealed the dismissal of the lawsuit to the Montana Supreme Court. PPL and PPL Energy Supply continue to believe that this lawsuit is groundless and beyond the statute of limitations period, but cannot predict the outcome of this matter.

IRS Synthetic Fuels Tax Credits (PPL and PPL Energy Supply)

PPL, through its subsidiaries, has interests in two synthetic fuel production facilities: the Somerset facility located in Pennsylvania and the Tyrone facility located in Kentucky. PPL receives tax credits pursuant to Section 29/45K of the Internal Revenue Code based on the sale of synthetic fuel from these facilities. Section 29/45K tax credits are currently scheduled to expire at the end of 2007.

To qualify for the Section 29/45K tax credits, the synthetic fuel must meet three primary conditions: (i) there must be a significant chemical change in the coal feedstock, (ii) the product must be sold to an unaffiliated entity, and (iii) the production facility must have been placed in service before July 1, 1998.

In addition, Section 29/45K provides for the synthetic fuel tax credit to begin to phase out when the relevant annual reference price for crude oil, which is the domestic first purchase price (DFPP), falls within a designated range and to be eliminated when the DFPP exceeds the range. The phase-out range is adjusted annually for inflation. Currently, the DFPP is published by the IRS annually in April for the prior year and is calculated based on the annual average wellhead price per barrel for all unregulated domestic crude oil.

PPL cannot predict with any certainty the final DFPP reference price for crude oil for 2006 or 2007 or the phase-out range for either year. Accounting for inflation, PPL currently estimates the phase-out range for 2006 to begin at about $54 per barrel (DFPP) and the tax credits to be totally eliminated at about $68 per barrel (DFPP). Accounting for inflation, PPL currently estimates the phase-out range for 2007 to begin at about $56 per barrel (DFPP) and the tax credits to be totally eliminated at about $70 per barrel (DFPP). PPL expects a phase-out of approximately 35% of the gross tax credits produced in 2006, based on its estimate of the DFPP reference price and the phase-out range applicable for 2006. If the price of crude oil increases above current price levels in 2007, PPL's synthetic fuel tax credits for 2007 could be significantly reduced or eliminated.

Since PPL began the synthetic fuel operations, the synthetic fuel produced at the Somerset and Tyrone facilities has resulted in an aggregate recognition of an estimated $291 million and $94 million of tax credits as of December 31, 2006, including estimated amounts for 2006. As of December 31, 2006, PPL is estimating the 2006 phase-out to be 35%, resulting in the recognition of $23 million of tax credits for Somerset and $32 million of tax credits for Tyrone for the year ending December 31, 2006. An estimated $12 million of the gross tax credits for Somerset and $18 million for Tyrone are not expected to be recognized for the year ending December 31, 2006, due to the phase-out range and estimated DFPP reference price.

In 2005, PPL entered into economic hedge transactions that serve to mitigate some of the earnings and cash flow impact of increases in DFPP crude oil prices for 2006 and 2007. In 2006, PPL entered into additional economic hedge transactions for this purpose. The mark-to-market value of these hedges is reflected in "Energy-related businesses" revenues on the Statements of Income. PPL has entered into additional economic hedge transactions for 2007 that are expected to mitigate PPL's tax credit phase-out risk due to an increase of the DFPP reference price in 2007. Such hedge transactions are not intended to mitigate any ongoing operational or production risks associated with the Tyrone and Somerset facilities.

Based on forecasted oil prices and other considerations, in early April 2006, PPL temporarily suspended operations at its Somerset facility. In August 2006, operations resumed at the Somerset facility. The Tyrone facility operated throughout 2006.

PPL performed impairment reviews of both its synthetic fuel production facilities during the second quarter of 2006. The reviews were prompted by the Somerset suspension, the uncertainty surrounding the future operations of each of the facilities and continued observed and forecasted high crude oil prices. PPL determined that the net book value of the facilities exceeded the projected undiscounted cash flows. Therefore, in the second quarter of 2006, PPL recorded charges totaling $10 million ($6 million after tax, or $0.01 per share for PPL) to fully impair its synfuel-related assets based on an internal model and other analysis. The impairment charges are reflected in "Energy-related businesses" expense on PPL's and PPL Energy Supply's Statements of Income. The assets of the facilities are a component of the Supply segment.

PPL also purchases synthetic fuel from unaffiliated third parties, at prices below the market price of coal, for use at its coal-fired power plants. In 2005 and 2006, PPL's purchases from these third parties resulted in fuel cost savings of $24 million and $18 million. PPL estimates that, unless these third parties discontinue their synthetic fuel operations and sales to PPL due to the impact of projected DFPP oil prices, its purchases from these parties will result in fuel cost savings in 2007 of $24 million assuming full production throughout the year.

In October 2003, it was reported that the U.S. Senate Permanent Subcommittee on Investigations, of the Committee on Governmental Affairs, had begun an investigation of the synthetic fuel industry and its producers. That investigation is ongoing. PPL cannot predict when the investigation will be completed or the potential results of the investigation.

Energy Policy Act of 2005 (PPL, PPL Energy Supply and PPL Electric)

In August 2005, President Bush signed into law the Energy Policy Act of 2005 (the 2005 Energy Act). The 2005 Energy Act is comprehensive legislation that will substantially affect the regulation of energy companies. The Act amends federal energy laws and provides the FERC with new oversight responsibilities. Among the important changes that have been or will be implemented as a result of this legislation are:

·
The Public Utility Holding Company Act of 1935 has been repealed. PUHCA significantly restricted mergers and acquisitions in the electric utility sector.
·
The FERC has appointed the North American Electric Reliability Council as the electric reliability organization to establish and enforce mandatory reliability standards ("Reliability Standards") regarding the bulk power system, and the FERC will oversee this process and independently enforce the Reliability Standards, as further described below.
·
The FERC will establish incentives for transmission companies, such as performance-based rates, recovery of the costs to comply with reliability rules and accelerated depreciation for investments in transmission infrastructure.
·
The Price-Anderson Amendments Act of 1988, which provides the framework for nuclear liability protection, was extended to 2025.
·
Federal support will be available for certain clean coal power initiatives, nuclear power projects and renewable energy technologies.

The implementation of the 2005 Energy Act requires proceedings at the state level and the development of regulations, some of which have not been finalized, by the FERC, the DOE and other federal agencies. PPL cannot predict when all of these proceedings and regulations will be finalized.

Upon implementation, the Reliability Standards will have the force and effect of law, and will apply to all users of the bulk power electricity system, including electric utility companies, generators and marketers. The FERC has indicated that it intends to vigorously enforce the Reliability Standards using, among other means, civil penalty authority. At this time, PPL cannot predict the impact that compliance with the Reliability Standards will have on PPL, including its capital and operating expenditures, but such compliance costs could be significant.

PPL also cannot predict with certainty the impact of the other provisions of the 2005 Energy Act and any related regulations on PPL and its subsidiaries.

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, replace or cease operating certain facilities to comply with statutes, regulations and actions by regulatory bodies or courts. In this regard, PPL subsidiaries also may incur capital expenditures or operating expenses in amounts which are not now determinable, but could be significant.

Air (PPL and PPL Energy Supply)

The Clean Air Act deals, in part, with acid rain, attainment of federal ambient ozone standards, particulate matter standards and toxic air emissions and visibility in the U.S. Amendments to the Clean Air Act requiring additional emission reductions are likely to continue to be brought up for consideration in the U.S. Congress. The Clean Air Act allows states to develop more stringent regulations and in some instances, as further discussed below, Pennsylvania and Montana have chosen to do so.

Citing its authority under the Clean Air Act, the EPA has developed new standards for ambient levels of ozone and fine particulates in the U.S. These standards have been upheld following court challenges. To facilitate attainment of these standards, the EPA has promulgated the Clean Air Interstate Rule (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 emissions of nitrogen oxides to a year-round program starting in 2009. The CAIR requires further reductions, starting in 2015, in sulfur dioxide and nitrogen oxides of 30% and 20%, respectively, from 2010 levels. The CAIR allows these reductions to be achieved through cap-and-trade programs. Pennsylvania has not challenged the CAIR, but the rule has been challenged by several states and environmental groups as not being sufficiently strict, and by industry petitioners as being too strict. In addition, several Canadian environmental groups have petitioned the EPA under the Clean Air Act to revise the CAIR to require deeper reductions in sulfur dioxide and mercury emissions, and the Ozone Transport Commission (consisting of Pennsylvania and 11 other states and the District of Columbia) has passed a resolution calling for reductions in sulfur dioxide and nitrogen oxides that are more stringent than those under CAIR. The Pennsylvania DEP, which represents Pennsylvania on the Ozone Transport Commission, has indicated its support for developing regulations for reductions in sulfur dioxide and nitrogen oxides that are more stringent than those under CAIR.

In order to continue meeting existing sulfur dioxide reduction requirements of the Clean Air Act, including CAIR, PPL is installing sulfur dioxide scrubbers at its Montour Units 1 and 2 and Brunner Island Unit 3, and a scrubber at Brunner Island Units 1 and 2. The scrubbers for both Montour units and Unit 3 at Brunner Island are expected to be in-service during 2008 and the scrubber for Units 1 and 2 at Brunner Island is expected to be in-service during 2009. Based on expected levels of generation and projected emission allowance prices, PPL has determined that it is more economic to install these scrubbers than to purchase significant additional emission allowances to make up the emission allowance shortfalls that would otherwise occur. In order to meet the year-round reductions in nitrogen oxides under CAIR, PPL's current plan is to operate the SCRs at Montour Units 1 and 2 year-round, optimize emission reductions from the existing combustion controls and purchase any needed emission allowances. PPL's current installation plan for the scrubbers and other pollution control equipment (primarily aimed at sulfur dioxide, particulate, nitrogen oxides and mercury emissions reduction) through 2011 reflects a total cost of approximately $1.5 billion. PPL expects a 30 MW reduction in generation capability at each of the Brunner Island and Montour plants, due to the estimated increases in station service usage during the scrubber operation.

Also citing its authority under the Clean Air Act, the EPA has finalized Clean Air Mercury Regulations (CAMR) that affect coal-fired plants. These regulations establish a cap-and-trade program to take effect in two phases, with a first phase to begin in January 2010, and a second phase with more stringent caps to begin in January 2018. Under CAMR, each state is allocated a mercury emissions cap and is required to develop state implementing regulations that can follow the federal requirements or be more restrictive. Several states, including Pennsylvania, have challenged CAMR in the U.S. Court of Appeals for the District of Columbia Circuit as not being sufficiently strict. PPL cannot predict the outcome and impact of that challenge.

Pennsylvania is proceeding with adoption of its own, more stringent mercury rules. Pennsylvania's rules will require that mercury controls be installed on each coal-fired generating unit; that the EPA's CAMR caps be met at each unit without the benefit of an emissions trading program; and that the second phase of CAMR be accelerated to begin in 2015.

PPL expects that it can achieve the 2010 requirements under Pennsylvania's more stringent mercury rules with only the addition of chemical injection systems. This expectation is based on the co-benefits of mercury removal from the scrubbers expected to be in place at its Pennsylvania plants as of 2010, and the SCRs already in place at Montour. PPL currently estimates that the capital cost of such chemical injection systems at its Pennsylvania plants will be approximately $20 million.

Because an emissions trading program is not allowed under Pennsylvania's mercury rules, adsorption/absorption technology with fabric filters may be required at most of PPL's Pennsylvania coal-fired generating units to meet Pennsylvania's second-phase caps beginning in 2015. Based on current analysis and industry estimates, PPL estimates that if this technology were required at every one of its Pennsylvania units the aggregate capital cost of compliance would be approximately $530 million.

Montana also has finalized its own more stringent rules that would require every coal-fired generating plant in the state to achieve by 2010 reduction levels more stringent than CAMR's 2018 cap. Because enhanced chemical injection technologies may not be sufficiently developed to meet this level of reductions by 2010, there is a risk that adsorption/absorption technology with fabric filters at both Colstrip and Corette would be required. Based on current analysis and industry estimates, PPL estimates that its capital cost to achieve compliance at its Montana units would be approximately $140 million.

PPL expects both Pennsylvania's and Montana's mercury rules to be challenged in court. If those rules are overturned and PPL is instead required to comply with CAMR, PPL expects that it could achieve the 2010 requirements under CAMR in both Pennsylvania and Montana with only the addition of chemical injection systems and allowance purchases. In addition to the capital cost for the chemical injection systems in Pennsylvania noted above, PPL estimates that its share of the capital cost for such systems in Montana would be approximately $5 million. With respect to the 2018 requirements under CAMR, PPL currently expects that it would be able to comply in Pennsylvania by installing adsorption/absorption technology with fabric filters on half of its generating capacity at a capital cost of approximately $265 million. In Montana, PPL currently expects that it could achieve the 2018 CAMR requirements with enhanced chemical injection at modest cost.

In addition to the above rules, the Clean Air Visibility Rule was issued by the EPA on June 15, 2005, to address regional haze or regionally-impaired visibility caused by multiple sources over a wide area. The rule defines Best Available Retrofit Technology (BART) requirements for electric generating units, including presumptive limits for sulfur dioxide and nitrogen oxides controls for large units. In 2007, PPL must submit to the Pennsylvania DEP and to the Montana DEQ its analyses of the visibility impacts of plants covered by the BART rule in each state. In Pennsylvania, this would include Martins Creek Units 3 and 4, Brunner Island Units 2 and 3 and Montour Units 1 and 2. In Montana, this would include Colstrip Units 1 and 2 and Corette.

The EPA has stated that the BART rule will not require states to make reductions in sulfur dioxide or nitrogen oxides beyond those required by CAIR, although states can establish more stringent rules. At this time, PPL cannot predict whether the Pennsylvania DEP will require additional reductions beyond the requirements established through CAIR. If the Pennsylvania DEP establishes regulations to require additional reductions, the additional costs to comply with such regulations, which are not now determinable, could be significant. In states like Montana that are not within the CAIR region, the need for and cost of additional controls as a result of this new rule are not now determinable, but could be significant.

In 1999, the EPA initiated enforcement actions against several utilities, asserting that older, coal-fired power plants operated by those utilities have, over the years, been modified in ways that subject them to more stringent "New Source" requirements under the Clean Air Act. The EPA subsequently issued notices of violation and commenced enforcement activities against other utilities. However, in the past several years, the EPA has shifted its position on New Source Review. In 2003, the EPA issued changes to its regulations that clarified what projects are exempt from "New Source" requirements as routine maintenance and repair. However, these regulations were stayed and subsequently struck down by the U.S. Court of Appeals for the District of Columbia Circuit. PPL is therefore continuing to operate under the "New Source" regulations as they existed prior to the EPA's 2003 clarifications.

In October 2005, the EPA proposed changing its rules on how to determine whether a project results in an emissions increase and is therefore subject to review under the "New Source" regulations. The EPA's proposed tests are consistent with the position of energy companies and industry groups and, if adopted, would substantially reduce the uncertainties under the current regulations. PPL cannot predict whether these proposed new tests will be adopted. In addition to proposing these new tests, the EPA also announced in October 2005 that it will not bring new enforcement actions with respect to projects that would satisfy the proposed new tests or the EPA's 2003 clarifications referenced above. Accordingly, PPL believes that it is unlikely that the EPA will follow up on the information requests that had been issued to PPL Montana's Corette and Colstrip plants by EPA Region VIII in 2000 and 2003, respectively, and to PPL Generation's Martins Creek plant by EPA Region III in 2002. However, states and environmental groups also have been bringing enforcement actions alleging violations of "New Source" requirements by coal-fired plants, and PPL is unable to predict whether such state or citizens enforcement actions will be brought with respect to any of its affiliates' plants.

The New Jersey DEP and some New Jersey residents raised environmental concerns with respect to the Martins Creek plant, particularly with respect to sulfur dioxide emissions and the opacity of the plant's plume. These issues were raised in the context of an appeal by the New Jersey DEP of the Air Quality Plan Approval issued by the Pennsylvania DEP to PPL's Lower Mt. Bethel generating plant. In October 2003, PPL finalized an agreement with the New Jersey DEP and the Pennsylvania DEP pursuant to which PPL will reduce sulfur dioxide emissions from its Martins Creek power plant. Under the agreement, PPL Martins Creek will shut down the plant's two 150 MW coal-fired generating units in September 2007 and may repower them any time after shutting them down so long as it follows all applicable state and federal requirements, including installing the best available pollution control technology. As a result of the agreement, the New Jersey DEP withdrew its challenge to the Air Quality Plan Approval for the Lower Mt. Bethel facility. The agreement will not result in material costs to PPL. The agreement does not address the issues raised by the New Jersey DEP regarding the visible opacity of emissions from the oil-fired units at the Martins Creek plant. Similar issues also are being raised by the Pennsylvania DEP. PPL is currently negotiating the matter with the Pennsylvania DEP. If it is determined that actions must be taken to address the visible opacity of these emissions, such actions could result in costs that are not now determinable, but could be significant.

In December 2003, PPL Montana, as operator of the Colstrip facility, received an Administrative Compliance Order (ACO) from the EPA pursuant to the Clean Air Act. The ACO alleges that Units 3 and 4 of the facility have been in violation of the Clean Air Act permit at Colstrip since 1980. The permit required Colstrip to submit for review and approval by the EPA an analysis and proposal for reducing emissions of nitrogen oxides to address visibility concerns upon the occurrence of certain triggering events. The EPA asserted that regulations it promulgated in 1980 triggered this requirement. PPL believes that the ACO is unfounded. PPL has been engaged in settlement negotiations on these matters with the EPA and the Northern Cheyenne Tribe. In late 2006, PPL and the other Colstrip owners as well as the Northern Cheyenne Tribe executed a settlement agreement that is now awaiting signature by the EPA. Following execution by all parties, the agreement is expected to be entered by the court and the EPA's action would then be discontinued. The agreement calls for installation of low nitrogen oxides emissions equipment on Colstrip Units 3 and 4, payment of a non-material penalty and financing of an energy efficient project. PPL Montana's cost of this settlement is anticipated to be approximately $4 million.

In addition to the requirements related to emissions of sulfur dioxide, nitrogen oxides and mercury noted above, there is a growing concern nationally and internationally about carbon dioxide emissions. In June 2005, the U.S. Senate adopted a resolution declaring that mandatory reductions in carbon dioxide are needed. Various legislative proposals are being considered in Congress, and several states already have passed legislation capping carbon dioxide emissions. The Bush administration is promoting a voluntary carbon dioxide reduction program, called the Climate VISION program. In support of this program, the electric power industry has committed to reducing its greenhouse gas emission intensity levels (measured as tons of carbon dioxide equivalent against electric power production in MWh) by 3% to 5% by the 2010 to 2012 period. Separate from the national initiatives, in December 2005, seven northeastern states signed an MOU establishing a cap and trade program commencing in January 2009 for stabilization of carbon dioxide emissions, at base levels established in 2005, from electric power plants larger than 25 MW in capacity. The MOU also provides for a 10% reduction in carbon dioxide emissions from the base levels by the end of 2018. In August 2006, a Model Rule was developed by these seven states that will form the basis for participants to adopt individual state laws and regulations for program implementation. Increased pressure for carbon dioxide emissions reduction also is coming from investor organizations and the international community.

Pennsylvania and Montana have not, at this time, established any formal programs to address carbon dioxide and other greenhouse gases. However, the governor of each state has declared support for state action on these issues. PPL has conducted an inventory of its carbon dioxide emissions and is continuing to evaluate various options for reducing, avoiding, off-setting or sequestering its carbon dioxide emissions. If Pennsylvania or Montana develops legislation or regulations imposing mandatory reductions of carbon dioxide and other greenhouse gases on generation facilities, the cost to PPL of such reductions could be significant.

Water/Waste (PPL and PPL Energy Supply)

In August 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 has determined that the problem was caused by a failure in the disposal basin's discharge structure. PPL has conducted extensive clean-up and is continuing to work with the Pennsylvania DEP and other appropriate agencies and consultants to assess whether the leak caused any environmental damage. PPL shut down the two units in September 2005 and placed the units back in service in December 2005 after completing the repairs and upgrades to the basin and obtaining the Pennsylvania DEP's approval.

The Pennsylvania DEP filed a complaint in Commonwealth Court against PPL Martins Creek and PPL Generation, alleging violations of various state laws and regulations and seeking penalties and injunctive relief. The Delaware Riverside Conservancy and several citizens have been granted the right, without objection from PPL, to intervene in the Pennsylvania DEP's action. PPL and the Pennsylvania DEP have reached a tentative settlement for the alleged violations. The proposed settlement requires PPL to pay $1.5 million in penalties and reimbursement of the DEP's costs, and requires PPL to undertake further studies of possible natural resource damages which PPL has been doing in conjunction with a group of natural resource trustees, along with the Delaware River Basin Commission. PPL expects the trustees and the Delaware River Basin Commission to seek to recover their costs and/or any damages they determine were caused by the leak. PPL has proposed a study plan under which the assessment will be completed and reported to the agencies by mid-2007. However, the agencies may require additional studies.

In March 2006, several citizens (including some that have intervened in the Pennsylvania DEP's lawsuit) and two businesses filed a lawsuit in the Superior Court of New Jersey, Warren County, alleging that the fly ash leak caused damage to property along a 40-mile stretch of the Delaware River and asserting that the named plaintiffs are representative of a class of citizens and businesses along the 40-mile stretch of the Delaware River. PPL has exercised its right to move this lawsuit to federal court in New Jersey.

PPL Energy Supply recognized a $33 million pre-tax charge in the third quarter of 2005 and an additional $15 million pre-tax charge in the fourth quarter of 2005 (or a total of $31 million after tax, or $0.08 per share for PPL) in connection with the then-expected on-site and off-site costs relating to the Martins Creek leak remediation. Based on its ongoing assessment of the expected remediation costs, in 2006, PPL Energy Supply reduced the estimate in connection with the current expected costs of the leak by $11 million, of which $10 million related to off-site costs and the remainder to on-site costs. At December 31, 2006, management's best estimate of the probable loss associated with the Martins Creek ash basin leak was $37 million, of which $31 million relates to off-site costs, and the balance to on-site costs. At December 31, 2006, the remaining contingency for this remediation was $9 million. PPL and PPL Energy Supply cannot be certain of the outcome of the action initiated by the Pennsylvania DEP, the outcome of the natural resource damage assessment, the outcome of the lawsuit brought by the citizens and businesses and 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 leak.

Seepages have been detected at active and retired wastewater basins at various PPL plants, including the Montour, Brunner Island and Martins Creek 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 is continuing to conduct assessments of other seepages at the Montour and Brunner Island facilities as well as seepages at the Martins Creek facility to determine the appropriate abatement actions. PPL plans to comprehensively address issues related to wastewater basins at all of its Pennsylvania plants, as part of the process to renew the residual waste permits for these basins that expire within the next two years. PPL has a remaining contingency of $1 million to assess and/or abate seepage from certain facilities and has $5 million budgeted in the 2007 capital budget to upgrade and/or replace certain waste water facilities in response to the seepage and other facility changes. The potential cost to address other seepages or to replace existing wastewater basins at PPL's Pennsylvania plants is not now determinable, but could be significant.

PPL has reached a settlement with the Pennsylvania DEP concerning the thermal discharge from its Brunner Island plant into the Susquehanna River. The settlement commits PPL to install mechanical draft cooling towers at the plant. PPL expects construction of the cooling towers to begin by the end of 2007 and for the towers to be in service in the spring of 2010. The expected capital cost of the installation of the towers is $125 million.

The settlement with the Pennsylvania DEP regarding the Brunner Island discharge has been incorporated into a new National Pollutant Discharge Elimination System permit for the plant. PPL has filed an appeal to the permit on issues other than the settlement. PPL and the DEP have reached a tentative settlement of this appeal. The costs of the settlement are not material.

In May 2003, approximately 50 plaintiffs brought an action now pending at the Montana Sixteenth Judicial District Court, Rosebud County, against PPL Montana and the other owners of the Colstrip plant alleging property damage from seepage from the freshwater and wastewater ponds at Colstrip. PPL Montana has undertaken certain groundwater investigation and remediation measures at the Colstrip plant to address groundwater contamination alleged by the plaintiffs as well as other groundwater contamination at the plant. These measures include proceeding with extending city water to certain residents who live near the plant, some of whom are plaintiffs in the litigation. Beyond the original estimated reserve of $1 million recorded by PPL Montana in 2004 (of which only an insignificant amount remains at December 31, 2006) for a proposed settlement of the property damage claims raised in the litigation, for extending city water and for a portion of the remedial investigation costs, PPL Montana may incur further costs based on its additional groundwater investigations and any related remedial measures, which costs are not now determinable, but could be significant.

The EPA has significantly tightened the water quality standard for arsenic. The revised standard became effective in January 2006 and at this time applies only to drinking water. The revised standard may result in action by individual states that could require several PPL subsidiaries to either further treat wastewater or take abatement action at their power plants, or both. The cost of complying with any such requirements is not now determinable, but could be significant.

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 that was finalized in 2004 addresses existing structures. Six northeastern states challenged the new rules for existing structures as being inadequate. In January 2007, the U.S. Court of Appeals for the Second Circuit remanded to the EPA all of the main requirements of the rule for further analysis and rulemaking. Depending on what changes the EPA makes to the rule in accordance with this decision, and/or what actions the states may take on their own, the impacts of the actions could result in stricter standards for existing structures that could impose significant costs on PPL subsidiaries.

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. Clean-up actions have been or are being undertaken at all of these sites, the costs of which have not been significant. However, should the EPA require significantly different or additional measures in the future, the costs of such measures are not determinable but could be significant.

In 1995, PPL Electric and PPL Generation and, in 1996, PPL Gas Utilities entered into consent orders with the Pennsylvania DEP to address a number of sites that were not being addressed under another regulatory program such as Superfund, but for which PPL Electric, PPL Generation or PPL Gas Utilities may be liable for remediation. These agreements have now been combined into a single agreement for the companies. The Consent Order and Agreement (COA) includes potential PCB contamination at certain PPL Electric substations and pole sites; potential contamination at a number of coal gas manufacturing facilities formerly owned or operated by PPL Electric; oil or other contamination that may exist at some of PPL Electric's former generating facilities; and potential contamination at abandoned power plant sites owned by PPL Generation. This also includes former coal gas manufacturing facilities and potential mercury contamination from gas meters and regulators at PPL Gas Utilities' sites.

As of December 31, 2006, PPL Electric and PPL Gas Utilities have 118 sites to address under the new combined COA, and currently no PPL Generation sites are included on the COA site list. Additional sites formerly owned or operated by PPL Electric, PPL Generation or PPL Gas Utilities are added to the COA on a case-by-case basis.

At December 31, 2006, PPL Electric and PPL Gas Utilities had accrued $2 million and $5 million, respectively, representing the estimated amounts each will have to spend for site remediation, including those sites covered by the COA noted above. 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.

There continues to be an issue with natural gas observed in several drinking water wells in and around Tioga County, Pennsylvania, that the Pennsylvania DEP has been working to address. The Pennsylvania DEP has raised concerns that potential leakage of natural gas from the Tioga gas storage field partially owned by PPL Gas Utilities could be contributing to this issue. PPL Gas Utilities continues to work with the Pennsylvania DEP and to discuss the matter with the co-owner and operator of the field. The costs to resolve this issue 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 operations. As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil clean-up. 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 measures 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, 2006, PPL Energy Supply had accrued a discounted liability of $29 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 at a rate of 5.82%. Expected undiscounted payments are estimated at $1 million for each of the years from 2007 through 2011, and the expected payments for the work after 2011 are $116 million.

In 1999, the Montana Supreme Court held in favor of several citizens' groups that the right to a clean and healthful environment is a fundamental right guaranteed by the Montana Constitution. Currently pending before the Court are three cases relating to the manner in which this fundamental right may be exercised and the proper measurement of damages for environmental impacts to property. These cases were consolidated for purposes of arguments before the Court. The Court's ruling on this consolidated litigation could result in significantly more lawsuits under Montana's environmental laws. The effect on PPL Montana of any such increase in legal actions is not currently determinable, but could be significant.

(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 of EMFs causing adverse effects. The agency further noted that there is some epidemiological evidence of an association with childhood leukemia, but that this evidence is difficult to interpret without supporting laboratory evidence. The U.K. National Radiological Protection Board (now 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. 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 abroad, and the associated cost, or what, if any, liabilities they might incur related to the EMF issue.

Environmental Matters - International (PPL and PPL Energy Supply)

U.K.

WPD's distribution businesses are subject to regulatory and statutory requirements with respect to environmental matters. 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. There are no material legal or administrative proceedings pending against WPD with respect to environmental matters. See "Environmental Matters - Domestic - Electric and Magnetic Fields" for a discussion of EMFs.

Latin America

Certain of PPL's affiliates have electric distribution operations in Latin America. PPL believes that these affiliates have taken and continue to take measures to comply with the applicable laws and governmental regulations for the protection of the environment. There are no material legal or administrative proceedings pending against PPL's affiliates in Latin America with respect to environmental matters.

Other

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, 2006, this maximum assessment was about $38 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 about $10.8 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 $201 million per incident, payable at $30 million per year.

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)

PPL, PPL Energy Supply and PPL Electric provide certain guarantees that are required to be disclosed in accordance with FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." The table below details guarantees provided as of December 31, 2006.

   
Recorded Liability at December 31,
  
Exposure at
December 31,
  
Expiration
    
   
2006
  
2005
  
2006 (a)
  
Date
  
Description
                       
PPL Energy Supply (b)
                          
                           
WPD LLP guarantee of obligations under SIUK Capital Trust I preferred securities
              
$
82
 
2027
  
WPD LLP guarantees all of the obligations of SIUK Capital Trust I, an unconsolidated wholly owned financing subsidiary of WPD LLP, under its trust preferred securities. The exposure at December 31, 2006, reflects principal payments only. See Note 8 for discussion on the redemption of these securities in February 2007.
                           
Letters of credit issued on behalf of affiliates
                
8
 
2007
  
Standby letter of credit arrangements under PPL Energy Supply's $300 million five-year credit facility for the purposes of protecting various third parties against nonperformance by PPL and PPL Gas Utilities. This is not a guarantee of PPL on a consolidated basis.
                           
Support agreements to guarantee partnerships' obligations for the sale of coal
                
9
  
2007
  
PPL Generation has entered into certain partnership arrangements for the sale of coal to third parties. PPL Generation also has executed support agreements for the benefit of these third-party purchasers pursuant to which it guarantees the partnerships' obligations in an amount up to its pro rata ownership interest in the partnerships.
                           
Retroactive premiums under nuclear insurance programs
                
38
      
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
                
201
 
    
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.
                         
Contingent purchase price payments to former owners of synfuel projects
                
19
  
2007
  
Certain agreements relating to the purchase of ownership interests in synfuel projects contain provisions that require certain PPL Energy Supply subsidiaries to make contingent purchase price payments to the former owners. These payments are non-recourse to PPL, PPL Energy Supply and their other subsidiaries and are based primarily upon production levels of the synfuel projects. See "IRS Synthetic Fuels Tax Credits" within this note for further discussion. The maximum potential amount of future payments is not explicitly stated in the related agreements.
                       
Indemnifications for entities in liquidation and sales of assets
  
$
1
  
$
1
    
309
  
2008
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 of the 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 noted is only for those cases in which the agreements provide for a specific limit on the amount of the indemnification.
 
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.
 
Certain of the indemnifications provided to the purchaser of the Sundance plant are triggered only if the purchaser's losses reach $1 million in the aggregate, are capped at 50% of the purchase price (or $95 million), and survive for a period of only 24 months after the May 13, 2005, transaction closing. The indemnification provision for unknown environmental and tort liabilities related to periods prior to the ownership by PPL Sundance Energy, LLC of the real property on which the Sundance plant is located are capped at $4 million in the aggregate and survive for a maximum period of five years after the transaction closing.
 
Certain of the indemnifications provided to the purchaser of the interest of PPL Southwest Generation Holdings, LLC in the Griffith plant are triggered only if the purchaser's losses reach $750,000 in the aggregate, are capped at 35% of the purchase price (or $41 million), and survive for a period of only 18 months after the June 30, 2006, transaction closing. In the case of most such indemnification obligations, the purchaser's existing 50% ownership of the Griffith plant prior to closing is taken into account for purposes of determining and calculating the purchaser's losses, and such indemnification obligations are therefore limited to 50% of any such purchaser losses.
 
PPL Energy Supply had also guaranteed the obligation of PPL Southwest Generation Holdings, LLC to (i) indemnify the purchaser of its interest in the Griffith plant for one-half of the total cost of repairing a damaged steam turbine at the plant, and (ii) pay the purchaser a variable amount until completion of repair of the turbine. In December 2006, PPL Southwest Generation Holdings, LLC and the purchaser entered into a settlement and release agreement relating to the steam turbine repair indemnification and payment obligations. As a result of this agreement, PPL Energy Supply has no further indemnification obligations relating to these matters.
 
                        
Assignment of Enron claims
                
11
      
In July 2006, two subsidiaries of PPL Energy Supply assigned their Enron claims to an independent third party (claims purchaser). In connection with the assignment, the subsidiaries agreed to repay a pro rata share of the purchase price paid by the claims purchaser, plus interest, in the event that any of the assigned claims are disallowed under certain circumstances. The bankruptcy court overseeing the Enron bankruptcy approved the assigned claims prior to their assignment to the claims purchaser. The subsidiaries' repayment obligations will remain in effect until the claims purchaser has received all distributions with respect to the assigned claims. See Note 1 for additional information regarding the assignment of the claims.
                           
WPD guarantee of pension and other obligations of unconsolidated entities
    
4
    
4
    
41
  
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, 2006, WPD has recorded an estimated discounted liability based on its current allocated percentage of the total expected costs. 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
                
10
  
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. At this time, WPD believes that the likelihood of such liabilities arising is remote.
                         
PPL Electric (b)
                          
                           
Guarantee of a portion of an unconsolidated entity's debt
                
7
  
2008
  
The exposure at December 31, 2006, 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 and PPL Electric also apply to PPL on a consolidated basis.


In September 2006, PPL's subsidiaries terminated master lease agreements under which they leased equipment. Therefore, the related residual value guarantees that had been previously disclosed for PPL, PPL Energy Supply and PPL Electric no longer exist. See Note 11 for additional information.

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 various indemnifications or warranties related to services or equipment and vary in duration. The obligated 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. As of December 31, 2006, the aggregate fair value of these indemnifications related to arrangements entered into subsequent to December 31, 2002, was insignificant. Among these guarantees are:

·
The companies' or their subsidiaries' leasing arrangements, including those discussed above, contain certain indemnifications in favor of the lessors (e.g., tax and environmental matters).
   
·
In connection with their issuances of securities, the companies and their subsidiaries engage underwriters, purchasers and purchasing agents to whom they provide indemnification for damages incurred by such parties arising from the companies' material misstatements or omissions in the related offering documents. In addition, in connection with these securities offerings and other financing transactions, the companies also engage trustees or custodial, escrow or other agents to act for the benefit of the investors or to provide other agency services. The companies and their subsidiaries typically provide indemnification to these agents for any liabilities or expenses incurred by them in performing their obligations.
   
·
In connection with certain of their credit arrangements, the companies provide the creditors or credit arrangers with indemnification that is standard for each particular type of transaction. For instance, under the credit agreement for the asset-backed commercial paper program, PPL Electric and its special purpose subsidiary have agreed to indemnify the commercial paper conduit, the sponsoring financial institution and the liquidity banks for damages incurred by such parties arising from, among other things, a breach by PPL Electric or the subsidiary of their various representations, warranties and covenants in the credit agreement, PPL Electric's activities as servicer with respect to the pledged accounts receivable and any dispute by PPL Electric's customers with respect to payment of the accounts receivable.
   
·
PPL EnergyPlus is party to numerous energy trading or purchase and sale agreements pursuant to which the parties indemnify each other for any damages arising from events that occur while the indemnifying party has title to the electricity or natural gas. For example, in the case of the party that is delivering the product, such party would be responsible for damages arising from events occurring prior to delivery. Similarly, interconnection agreements indemnify the interconnection owner for other interconnection participants failure to pay, allocating the loss to the other participants.
   
·
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.

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 $175 million. This insurance may be applicable to certain obligations under the contractual arrangements discussed above.

16.  Related Party Transactions

Affiliate Trust (PPL and PPL Energy Supply)

At both December 31, 2006 and 2005, PPL's and PPL Energy Supply's Balance Sheets reflect $89 million of "Long-term Debt with Affiliate Trust." This debt represents obligations of WPD LLP under 8.23% subordinated debentures maturing in February 2027 that are held by SIUK Capital Trust I, a variable interest entity whose common securities are owned by WPD LLP but which is not consolidated by WPD LLP. Interest expense on this obligation was $11 million, $12 million and $11 million in 2006, 2005 and 2004. This interest is reflected in "Interest Expense" for PPL and "Interest Expense with Affiliates" for PPL Energy Supply on the Statements of Income. See Note 8 for a discussion of the redemption of the subordinated debentures and the trust's common and preferred securities in February 2007 and Note 22 for additional information on the trust.

PLR Contracts (PPL Energy Supply and PPL Electric)

PPL Electric has power sales agreements with PPL EnergyPlus, effective July 2000 and January 2002, to supply all of PPL Electric's PLR load through December 31, 2009. Under these contracts, PPL EnergyPlus provides electricity at the predetermined capped prices that PPL Electric is authorized to charge its PLR customers. These purchases totaled $1.7 billion in 2006, $1.6 billion in 2005 and $1.5 billion in 2004. 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 is required to make performance assurance deposits with PPL EnergyPlus when the market price of electricity is less than the contract price by more than its contract collateral threshold. Conversely, PPL EnergyPlus is required to make performance assurance deposits with PPL Electric when the market price of electricity is greater than the contract price by more than its contract collateral threshold. PPL Electric estimated that at December 31, 2006, the market price of electricity would exceed the contract price by approximately $2.2 billion. Accordingly, at December 31, 2006, PPL Energy Supply was required to provide PPL Electric with performance assurance of $300 million, the maximum amount required under the contract. PPL Energy Supply's deposit with PPL Electric was $300 million at both December 31, 2006 and 2005. This deposit is shown on the Balance Sheets as "Collateral on PLR energy supply to/from affiliate," a current asset of PPL Energy Supply and a current liability of PPL Electric. PPL Electric pays 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 records this as affiliated interest income, which is included in "Other Income - net" on the Statements of Income.

In 2001, PPL Electric made a $90 million up-front payment to PPL EnergyPlus in connection with the PLR contracts. The up-front payment is being amortized by both parties over the term of the PLR contracts. The unamortized balance of this payment and other payments under the contract was $35 million at December 31, 2006, and $47 million at December 31, 2005. These current and noncurrent balances are reported on the Balance Sheets as "Deferred revenue on PLR energy supply to affiliate" by PPL Energy Supply, and as "Prepayment on PLR energy supply from affiliate" by PPL Electric.

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 $157 million in 2006, $148 million in 2005 and $154 million in 2004. These amounts are included in the Statements of Income as "Energy purchases from affiliate" by PPL Energy Supply, and as "Wholesale electric to affiliate" by PPL Electric.

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 bills 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 directly charged or 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.

   
2006
    
2005
    
2004
  
                         
PPL Energy Supply
  
$
217
    
$
197
    
$
172
  
PPL Electric
    
133
      
121
      
119
  

Intercompany Borrowings

(PPL Energy Supply)

PPL Energy Supply had no notes receivable from affiliates at December 31, 2006 and 2005. Interest earned on cash collateral and loans to affiliates, included in "Other Income - net" on the Statements of Income, was $21 million, $15 million and $6 million for 2006, 2005 and 2004.

In May 2006, PPL Energy Supply terminated a note payable to an affiliate which allowed borrowings up to $650 million until May 2010. At December 31, 2005, there was no balance outstanding. Interest was payable monthly in arrears at LIBOR plus 1%. There was an insignificant amount of interest expense on this note in 2006. Such interest expense totaled $9 million and $8 million in 2005 and 2004. Interest expense is reflected in "Interest Expense with Affiliates" on the Statements of Income.

In December 2005, PPL Energy Supply issued a $30 million demand note payable to an affiliate. In June 2006, this demand note payable was terminated. At December 31, 2005, there was a balance of $8 million, which is shown on the Balance Sheets as "Note Payable to Affiliate," a current liability. Interest was payable monthly at a rate equal to LIBOR plus 1.5%. Interest on this note was insignificant for both 2006 and 2005.

(PPL Electric)

In August 2004, a PPL Electric subsidiary issued a $300 million demand note to an affiliate. In February 2006, the demand note was amended to increase the maximum amount of the note to $450 million. In April 2006, the note was amended back to a maximum amount of $300 million. There was a balance of $300 million outstanding at both December 31, 2006 and 2005. Interest is due quarterly at a rate equal to the 3-month LIBOR plus 1.25%. This note is shown on the Balance Sheets as "Note receivable from affiliate." Interest earned on the note is included in "Other Income - net" on the Statements of Income, and was $20 million, $14 million and $3 million for 2006, 2005 and 2004.

In May 2006, a PPL Electric subsidiary issued a $150 million demand note to an affiliate. There was no outstanding balance at December 31, 2006. Interest is due monthly at a rate equal to the one-month LIBOR plus 1.25%.

Trademark Royalties (PPL Energy Supply)

A PPL subsidiary owns PPL trademarks and bills certain affiliates for their use. PPL Energy Supply was allocated $36 million of this license fee in 2006, $31 million in 2005 and $34 million in 2004. These allocations are primarily included in "Other operation and maintenance" on the Statements of Income.

Transmission (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 consolidated Statements of Income.

Other (PPL Energy Supply and PPL Electric)

See Note 1 for a discussion regarding the intercompany tax sharing policy. See Notes 1 and 8 for discussions regarding capital transactions. See Note 13 for discussions regarding intercompany allocations of pension and other postretirement benefits.

17.  Other Income - Net

(PPL, PPL Energy Supply and PPL Electric)

The breakdown of "Other Income - net" was:

   
2006
  
2005
  
2004
PPL
                        
                         
Other Income
                        
Interest income
 
$
41
    
$
23
    
$
16
  
Hyder liquidation distributions (Note 9)
    
27
                  
Realized earnings on nuclear decommissioning trust
   
6
      
5
      
(7
)
Gain on transfer of international equity investment (Note 9)
    
5
                  
Equity earnings
    
4
      
3
      
3
  
Gain on sale of investment in an unconsolidated affiliate (Note 9)
    
3
                  
Sale of CEMAR (Note 9)
                    
23
  
Interest income - IRS settlement
                    
23
  
Miscellaneous - Domestic
    
8
      
7
      
7
  
Miscellaneous - International
    
1
      
7
      
8
  
Total
    
95
      
45
      
73
  
                         
Other Deductions
                        
Impairment of investment in U.K. real estate
(Note 9)
    
8
                  
Impairment of investment in technology supplier (Note 9)
                    
10
  
Charitable contributions
    
4
      
4
      
2
  
Realized loss on available-for-sale investment
                    
6
  
Latin America asset write-downs
    
3
                  
Non-operating taxes, other than income
    
2
      
1
      
2
  
Miscellaneous - Domestic
    
6
      
6
      
6
  
Miscellaneous - International
    
4
      
5
      
8
  
Other Income - net
  
$
68
    
$
29
    
$
39
  
                         
PPL Energy Supply
                        
                         
Other Income
                        
Interest income
 
$
27
    
$
14
    
$
10
  
Hyder liquidation distributions (Note 9)
    
27
                  
Affiliated interest income (Note 16)
    
21
      
15
      
6
  
Realized earnings on nuclear decommissioning trust
   
6
      
5
      
(7
)
Gain on transfer of international equity investment (Note 9)
    
5
                  
Equity earnings
    
4
      
4
      
4
  
Gain on sale of investment in an unconsolidated affiliate (Note 9)
    
3
                  
Sale of CEMAR (Note 9)
                    
23
  
Interest income - IRS settlement
                    
15
  
Miscellaneous - Domestic
    
5
      
1
      
3
  
Miscellaneous - International
    
1
      
7
      
8
  
Total
    
99
      
46
      
62
  
                         
Other Deductions
                        
Impairment of investment in U.K. real estate
(Note 9)
    
8
                  
Latin America asset write-downs
    
3
                  
Non-operating taxes, other than income
    
2
      
1
      
2
  
Miscellaneous - Domestic
    
6
      
3
      
3
  
Miscellaneous - International
    
4
      
5
      
8
  
Other Income - net
  
$
76
    
$
37
    
$
49
  
                         
PPL Electric
                        
                         
Other Income
                        
Affiliated interest income (Note 16)
  
$
20
    
$
14
    
$
3
  
Interest income - IRS settlement
                    
8
  
Other interest income
    
12
      
7
      
5
  
Miscellaneous
    
1
      
2
          
Total
    
33
      
23
      
16
  
Other Deductions
    
2
      
2
      
1
  
Other Income - net
  
$
31
    
$
21
    
$
15
  

18.  Derivative Instruments and Hedging Activities

(PPL and PPL Energy Supply)

Management of Market Risk Exposures

Market risk is the potential loss PPL and PPL Energy Supply 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 risk for energy and energy-related products associated with the sale of electricity from its generating assets and other electricity marketing activities, the purchase of fuel for the generating assets and energy trading activities, and the purchase of certain metals necessary for the scrubbers PPL is installing at some of its coal-fired generating stations;
·
interest rate risk associated with variable-rate debt and the fair value of fixed-rate debt used to finance operations, as well as the fair value of debt securities invested in by PPL Energy Supply's nuclear decommissioning trust funds;
·
foreign currency exchange rate risk associated with investments in affiliates in Latin America and Europe, as well as purchases of equipment in currencies other than U.S. dollars; and
·
equity securities price risk associated with the fair value of equity securities invested in by PPL Energy Supply's nuclear decommissioning trust funds.

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 Vice President-Risk Management, 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, sensitivity analyses, and daily portfolio reporting, including open positions, mark-to-market valuations, and other risk measurement metrics.

PPL and PPL Energy Supply utilize forward contracts, futures contracts, options, swaps and structured deals such as tolling agreements as part of its risk management strategy to minimize unanticipated fluctuations in earnings caused by commodity price, interest rate and foreign currency volatility. All derivatives are recognized on the balance sheet at their fair value, unless they meet SFAS 133 criteria for exclusion (see discussion in "Accounting Designations" below).

Fair Value Hedges

PPL and PPL Energy Supply enter into financial or physical contracts to hedge a portion of the fair value of firm commitments of forward electricity sales and emission allowance positions. These contracts range in maturity through 2007. Additionally, PPL and PPL Energy Supply enter into financial contracts to hedge fluctuations in the market value of existing debt issuances. These contracts range in maturity through 2046. PPL and PPL Energy Supply also enter into foreign currency forward contracts to hedge the exchange rates associated with firm commitments denominated in foreign currencies. These forward contracts range in maturity through 2008.

PPL and PPL Energy Supply did not recognize significant gains or losses resulting from hedges of firm commitments that no longer qualified as fair value hedges for 2006, 2005 or 2004. PPL and PPL Energy Supply also did not recognize any gains or losses resulting from the ineffective portion of fair value hedges for these years.

Cash Flow Hedges

PPL and PPL Energy Supply enter into financial and physical contracts, including forwards, futures and swaps and options, to hedge the price risk associated with electric, gas, oil and other commodities. These contracts range in maturity through 2012. Additionally, PPL and PPL Energy Supply enter into financial interest rate swap contracts to hedge interest expense associated with both existing and anticipated debt issuances. These interest rate swap contracts range in maturity through 2017 for PPL and PPL Energy Supply. PPL and PPL Energy Supply also enter into foreign currency forward contracts to hedge the cash flows associated with foreign currency-denominated debt, the exchange rates associated with firm commitments denominated in foreign currencies and the net investment of foreign operations. These forward contracts range in maturity through 2028.

Net investment hedge activity is reported in the foreign currency translation adjustments component of other comprehensive income (loss). PPL recorded net investment hedge losses, after tax, of $6 million as of December 31, 2006 and 2005, and $7 million as of December 31, 2004.

Cash flow hedges may be discontinued if it is probable that the original forecasted transaction will not occur by the end of the originally specified time period. Due to the sale of PPL's 50% interest in the Griffith plant in the second quarter of 2006 and the conversion of a portion of PPL Energy Supply's 2.625% Convertible Senior Notes, PPL and PPL Energy Supply reclassified net gains of $5 million, after tax, from accumulated other comprehensive loss. There were no such events in 2005, and there was an insignificant impact from such an event in 2004.

At the end of 2006, 2005 and 2004, hedging ineffectiveness associated with energy derivatives was, after tax, a gain of $8 million, a loss of $3 million and insignificant.

Ineffectiveness associated with interest rate and foreign currency derivatives was not significant for 2006, 2005 and 2004.

As of December 31, 2006, the deferred net loss, after tax, on derivative instruments in "Accumulated other comprehensive loss" expected to be reclassified into earnings during the next twelve months is a loss of $8 million for PPL and a loss of $4 million for PPL Energy Supply. Amounts are reclassified as the energy contracts go to delivery and as interest payments are made.

This table shows the accumulated net unrealized losses on qualifying derivatives (excluding net investment hedges), after tax, which are included in accumulated other comprehensive loss.

   
2006
  
2005
PPL
                
 
Beginning of year
  
$
(246
)
  
$
(63
)
 
Net change associated with current period hedging activities and other
    
43
      
(160
)
 
Net change from reclassification into earnings
    
152
      
(23
)
 
End of year
  
$
(51
)
  
$
(246
)

PPL Energy Supply
                
 
Beginning of year
  
$
(237
)
  
$
(45
)
 
Net change associated with current period hedging activities and other
    
38
      
(162
)
 
Net change from reclassification into earnings
    
147
      
(30
)
 
End of year
  
$
(52
)
  
$
(237
)

Normal Purchase / Normal Sale Exception

PPL and PPL Energy Supply's non-trading portfolio includes contracts for full requirements energy, emission allowances, gas and capacity. These contracts range in maturity through 2026 and are exempt from SFAS 133. The value of these contracts at December 31 was:

   
Gains (Losses)
   
2006
  
2005
                 
PPL
  
$
162
    
$
(159
)
PPL Energy Supply
    
170
      
(166
)

Other Hedging Activity

PPL and PPL Energy Supply have entered into energy derivative transactions that hedge a specific risk, but do not qualify for hedge accounting under SFAS 133. The unrealized gains and losses on these transactions are considered non-trading activities and are reflected on the Statements of Income in "Wholesale energy marketing" or "Energy-related businesses" revenues, or "Fuel" or "Energy purchases" expenses.

Accounting Designations

For energy contracts that meet the definition of a derivative, the circumstances and intent existing at the time that energy transactions are entered into determine their accounting designation, which is subsequently verified by an independent internal group on a daily basis. The following summarizes the electricity guidelines that have been provided to the marketers who are responsible for contract designation for derivative energy contracts in accordance with SFAS 133.

·
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 under SFAS 133 are met.
   
·
Physical capacity-only transactions to sell excess capacity from PPL's generation are considered "normal." 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 deemed to be a "market call" is considered speculative, with unrealized gains or losses recorded immediately through earnings.
   
·
Financial transactions, which can be settled in cash, cannot be considered "normal" because they do not require physical delivery. These transactions can receive cash flow hedge treatment if they lock in the price PPL will receive or pay for energy expected to be sold or purchased in the spot market.
   
·
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 to offset probable transmission congestion expenses are recorded in "Energy purchases" on the Statements of Income. However, PPL records a reserve on the unrealized value of FTRs to take into account the illiquidity of the external market to value the contracts.
   
·
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 will pay and meet the definition of a derivative.
   
·
Certain option contracts that do not meet the requirements of DIG Issue C15, "Scope Exceptions: Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity," may receive hedge accounting treatment. Those that are not eligible are marked to market through earnings.

Any unrealized gains or losses on transactions receiving cash flow hedge treatment to the extent they are highly effective are recorded in other comprehensive income. These unrealized gains and losses become realized when the contracts settle and are recognized in income when the hedged transactions occur.

In addition to energy-related transactions, PPL enters into financial interest rate and foreign currency swap contracts to hedge interest rate and foreign currency risk associated with both existing and anticipated debt issuances. PPL and PPL Energy Supply also enter into foreign currency swap contracts to hedge the fair value of firm commitments denominated in foreign currency and net investments in foreign operations. As with energy transactions, the circumstances and intent existing at the time of the transaction determine a contract's accounting designation, which is subsequently verified by an independent internal group on a daily basis. The following is a summary of certain guidelines that have been provided to PPL's Finance Department, which is responsible for contract designation.

·
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 other comprehensive income and are amortized as a component of interest expense over the life of the debt.
   
·
Transactions entered into to hedge fluctuations in the 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 other comprehensive income/loss and will not be recorded in earnings until the investment is disposed of.
   
·
Derivative transactions that do not qualify for hedge accounting treatment are marked to market through earnings.

Credit Concentration

(PPL and PPL Energy Supply)

PPL and PPL Energy Supply 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 mark-to-market 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.

PPL and PPL Energy Supply have credit exposures to energy trading partners. The majority of these exposures is the fair value of multi-year contracts for energy sales and purchases. Therefore, if these counterparties fail to perform their obligations under such contracts, PPL and PPL Energy Supply would not experience an immediate financial loss but would experience lower revenues or higher costs in future years to the extent that replacement sales or purchases could not be made at the same prices as those under the defaulted contracts.

PPL and PPL Energy Supply generally have the right to request collateral from their counterparties in the event that the counterparties' credit ratings fall below investment grade. It is also the policy of PPL and PPL Energy Supply to enter into netting agreements with all of their counterparties to limit credit exposure.

At December 31, 2006, both PPL and PPL Energy Supply had credit exposures of $528 million to energy trading partners, excluding the effects of netting arrangements. Ten counterparties accounted for 72% of this exposure. No other individual counterparty accounted for more than 3% of the exposure. All ten of these counterparties had an investment grade credit rating from S&P. This credit exposure has been reduced to $48 million as a result of netting arrangements.

(PPL Electric)

PPL Electric has an exposure to PPL Energy Supply under the long-term contract for PPL EnergyPlus to supply PPL Electric's PLR load, as described in Note 16. This is the only credit exposure for PPL Electric that has a mark-to-market element. No other counterparty accounts for more than 1% of PPL Electric's total exposure.

19.  Restricted Cash

(PPL, PPL Energy Supply and PPL Electric)

The following table details the components of restricted cash by reporting entity and by type.

   
December 31, 2006
   
PPL
  
PPL Energy Supply
  
PPL Electric
Current:
                        
Collateral for letters of credit (a)
  
$
42
            
$
42
  
Deposits for trading purposes with NYMEX broker
    
42
    
$
42
          
Counterparty collateral
    
6
      
6
          
Client deposits
    
9
                  
Miscellaneous
    
3
      
3
      
1
  
Restricted cash - current
    
102
      
51
      
43
  
Noncurrent:
                        
Required deposits of WPD (b)
   
20
      
20
          
PPL Transition Bond Company Indenture reserves (c)
    
33
              
33
  
Restricted cash - noncurrent
    
53
      
20
      
33
  
Total restricted cash
  
$
155
    
$
71
    
$
76
  


   
December 31, 2005
   
PPL
  
PPL Energy Supply
  
PPL Electric
Current:
                        
Collateral for letters of credit (a)
  
$
42
            
$
42
  
Deposits for trading purposes with NYMEX broker
    
29
    
$
29
          
Counterparty collateral
    
9
      
9
          
Client deposits
    
12
                  
Miscellaneous
    
1
      
1
          
Restricted cash - current
    
93
      
39
      
42
  
Noncurrent:
                        
Required deposits of WPD (b)
   
16
      
16
          
PPL Transition Bond Company Indenture reserves (c)
    
32
              
32
  
Restricted cash - noncurrent
    
48
      
16
      
32
  
Total restricted cash
  
$
141
    
$
55
    
$
74
  

(a)
  
A deposit with a financial institution of funds from the asset-backed commercial paper program to fully collateralize $42 million of letters of credit. See Note 8 for further discussion on the asset-backed commercial paper program.
(b)
  
Includes insurance reserves of $19 million and $15 million at December 31, 2006 and 2005.
(c)
  
Credit enhancement for PPL Transition Bond Company's $2.4 billion Series 1999-1 Bonds to protect against losses or delays in scheduled payments.

20.  Goodwill and Other Acquired Intangible Assets

Goodwill (PPL and PPL Energy Supply)

Goodwill by segment at December 31 was:

   
2006
  
2005
  
2004
                   
Supply
 
$
94
    
$
94
    
$
94
  
International Delivery
   
1,005
      
921
      
978
  
PPL Energy Supply
    
1,099
      
1,015
      
1,072
  
Pennsylvania Delivery
   
55
      
55
      
55
  
PPL
  
$
1,154
    
$
1,070
    
$
1,127
  

In 2006, the increase of $84 million in the International Delivery segment was attributable to an increase of $100 million due to the effect of changes in foreign currency exchange rates, offset by $16 million of adjustments pursuant to EITF Issue 93-7, "Uncertainties Related to Income Taxes in a Purchase Business Combination." See Note 5 for a discussion of a $12 million adjustment to decrease goodwill related to the transfer of WPD tax items. The adjustments also include a $9 million net increase based upon actions taken by Inland Revenue, a U.K. government agency, and an $8 million decrease associated with monetary indexation of assets at WPD.

In 2005, the decrease of $57 million in the International Delivery segment was attributable to a decrease of $60 million due to the effect of changes in foreign currency exchange rates, offset by $3 million of adjustments pursuant to EITF Issue 93-7.

Other Acquired Intangible Assets

(PPL)

The gross carrying amount and the accumulated amortization of acquired intangible assets were:

   
December 31, 2006
  
December 31, 2005
   
Gross Carrying
Amount
  
Accumulated
Amortization
  
Gross Carrying
Amount
  
Accumulated
Amortization
Subject to amortization:
                                
Land and transmission rights
  
$
270
    
$
109
    
$
262
    
$
104
  
Emission allowances (a)
    
191
              
176
          
Licenses and other
    
104
      
46
      
83
      
27
  
Not subject to amortization due to indefinite life:
                                
Land and transmission rights
    
17
              
17
          
Easements
    
64
              
55
          
   
$
646
    
$
155
    
$
593
    
$
131
  

(a)
  
Removed from the Balance Sheets and amortized when consumed.

Current intangible assets and long-term intangible assets are included in "Other acquired intangibles" in their respective areas on the Balance Sheets.

Amortization expense was $9 million for 2006 and 2005, and $6 million for 2004. Amortization expense is estimated at $9 million per year for 2007 through 2011.

(PPL Energy Supply)

The gross carrying amount and the accumulated amortization of acquired intangible assets were:

 
December 31, 2006
    
December 31, 2005
  
 
Gross Carrying
Amount
    
Accumulated
Amortization
    
Gross Carrying
Amount
    
Accumulated
Amortization
  
Land and transmission rights
$
79
    
$
22
    
$
65
    
$
19
  
Emission allowances (a)
  
191
              
176
          
Easements (b)
  
64
              
55
          
Licenses and other
  
103
      
46
      
83
      
27
  
 
$
437
    
$
68
    
$
379
    
$
46
  

(a)
  
Removed from the Balance Sheets and amortized when consumed.
(b)
  
Not subject to amortization due to indefinite life.

Current intangible assets and long-term intangible assets are presented as "Other acquired intangibles" in their respective areas on the Balance Sheets.

Amortization expense was $4 million for 2006 and 2005, and $3 million for 2004. Amortization expense is estimated at $4 million per year for 2007 through 2011.

(PPL Electric)

The gross carrying amount and the accumulated amortization of acquired intangible assets, which consist only of land and transmission rights, were:

   
December 31, 2006
    
December 31, 2005
  
   
Gross Carrying
Amount
    
Accumulated
Amortization
    
Gross Carrying
Amount
    
Accumulated
Amortization
  
                                 
Subject to amortization
  
$
185
    
$
84
    
$
178
    
$
81
  
Not subject to amortization due to indefinite life
    
17
              
17
          
   
$
202
    
$
84
    
$
195
    
$
81
  

Intangible assets are shown as "Acquired intangibles" on the Balance Sheets.

Amortization expense was $2 million for 2006 and 2005, and $3 million for 2004. Amortization expense is estimated at $2 million per year for 2007 through 2011.

(PPL, PPL Energy Supply and PPL Electric)

The annual provisions for amortization have been computed principally in accordance with the following weighted-average assets lives (in years):

     
Weighted-Average Life
  
         
Land and transmission rights
    
64
  
Emission allowances
    
2
  
Licenses and other
    
30
  

21.  Asset Retirement Obligations and Nuclear Decommissioning

Asset Retirement Obligations

(PPL and PPL Energy Supply)

Based on the requirements of SFAS 143, "Accounting for Asset Retirement Obligations," PPL and PPL Energy Supply identified various legal obligations to retire long-lived assets, the largest of which relates to the decommissioning of the Susquehanna plant. PPL and PPL Energy Supply identified and recorded other AROs related to significant interim retirements at the Susquehanna plant, and various environmental requirements for coal piles, ash basins and other waste basin retirements at Susquehanna and other facilities.

PPL and PPL Energy Supply adopted FIN 47, "Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143," effective December 31, 2005. FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional ARO when incurred if the fair value of the ARO can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO. The adoption of FIN 47 resulted in an increase in net PP&E of $4 million, recognition of AROs of $17 million, recognition of deferred tax assets of $5 million and a cumulative effect of adoption that decreased net income by $8 million (net of tax benefit of $6 million), or $0.02 per share for PPL.

PPL and PPL Energy Supply identified several conditional AROs. The most significant of these related to the removal and disposal of asbestos-containing material at various generation plants. The fair value of the portion of these obligations that could be reasonably estimated was recorded at December 31, 2005, and resulted in AROs of $14 million and a cumulative effect of adoption that decreased net income by $8 million.

PPL Global identified and recorded conditional AROs that related to treated wood poles and fluid-filled cables, which had an insignificant impact on the financial statements.

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. See Note 1 for further discussion related to the extension of the useful lives of these assets. 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.

PPL and PPL Energy Supply also identified legal retirement obligations that could not be reasonably estimated at that time. These items included requirements associated with the retirement of a reservoir and certain transmission assets. These retirement obligations could not be reasonably estimated due to indeterminable settlement dates.

The changes in the carrying amounts of AROs were:

   
2006
  
2005
             
ARO at beginning of year
  
$
298
    
$
257
  
Accretion expense
    
24
      
21
  
Adoption of FIN 47
            
17
  
Change in estimated cash flow or settlement date
    
18
      
3
  
Obligations settled
    
(4
)
        
ARO at end of year
  
$
336
    
$
298
  

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 estimate of the obligations. PPL and PPL Energy Supply changed estimated settlement dates on several AROs, the most significant being the ash basins at the Brunner Island and Montour plants. In addition, revised estimates of asbestos-containing material that is expected to be remediated in future years were obtained. The effect of these changes was to increase the ARO liability and related plant balances by $18 million. The 2006 income statement impact of these changes was insignificant.

The pro forma income statement effects, including the effects on income from continuing operations, net income, and basic and diluted EPS, from the application of FIN 47 calculated as if it had been adopted prior to January 1, 2004, also would have been insignificant for 2004 and 2005.

(PPL Electric)

PPL Electric adopted FIN 47 effective December 31, 2005. PPL Electric did not record any AROs upon adoption of this standard. PPL Electric 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.

Nuclear Decommissioning (PPL and PPL Energy Supply)
 
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.

Beginning in January 1999, in accordance with the PUC Final Order, approximately $130 million of decommissioning costs are being recovered from PPL Electric's customers through the CTC over the 11-year life of the CTC rather than the remaining life of Susquehanna. The recovery includes a return on unamortized decommissioning costs. Under the power supply agreements between PPL Electric and PPL EnergyPlus, these revenues are passed on to PPL EnergyPlus. Similarly, these revenues are passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna.

Accrued nuclear decommissioning expenses, as determined under the provisions of SFAS 143, "Accounting for Asset Retirement Obligations," are $276 million and $255 million at December 31, 2006 and 2005, and are included in "Asset retirement obligations" on the Balance Sheets. Accretion expense, as determined under the provisions of SFAS 143, was $21 million in 2006, $19 million in 2005 and $18 million in 2004, and is included in "Other operation and maintenance" on the Statements of Income.

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.

In accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” securities held by the nuclear decommissioning trust funds are classified as available-for-sale. Available-for-sale securities are carried on the balance sheet at fair value. Unrealized gains and losses on available-for-sale securities are reported, net of tax, in other comprehensive income or are recognized currently in earnings when a decline in fair value is determined to be other than temporary.

Prior to 2006, PPL and PPL Energy Supply assessed a security’s impairment by, among other things, considering the cause of the security’s decline in value, the length of time and the magnitude of the security’s decline in value, and its expected period of recovery. As a result of this assessment, a security experiencing a decline in value was usually deemed temporarily impaired because the decline in value was generally not considered significant.

In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (FSP 115-1), which was effective for PPL and PPL Energy Supply beginning January 1, 2006. Among other things, FSP 115-1 indicated that existing guidance, particularly SEC Staff Accounting Bulletin Topic 5M, “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” (SAB Topic 5M), should be used to determine if a decline in a security’s value is other than temporary. Recent clarification related to applying the guidance in SAB Topic 5M has established the ability to hold an investment until it recovers its value as a required element in determining if an individual security is other than temporarily impaired. Based on this clarification and as a result of NRC requirements that nuclear decommissioning trusts be managed by independent investment managers, with discretion to buy and sell securities in the trusts, PPL Susquehanna has concluded that during 2006 it was unable to demonstrate the ability to hold an impaired security until it recovers its value. Accordingly, for 2006 unrealized losses represented other than temporary impairments, which required a current period charge to earnings. Unrealized gains continued to be recorded to other comprehensive income.

In the fourth quarter of 2006, PPL and PPL Energy Supply recorded a charge of $6 million ($3 million after tax, or $0.01 per share for PPL) to reflect the cumulative impact for 2006 of the other-than-temporary impairment of affected securities. The impairment charge is reflected in "Other Income-net" on PPL's and PPL Energy Supply's Statements of Income. The adjustment was recorded in the fourth quarter of 2006, as the adjustment was not material to the financial statements for the first three quarters of 2006, or as recorded in the fourth quarter of 2006. The adoption of this change in accounting in periods prior to 2006 would also not have been material to previously issued financial statements.

The following tables show the gross unrealized gains and losses recorded in OCI and the related fair values for the securities held in the nuclear decommissioning trust funds.

   
December 31, 2006
     
Gross Unrealized Gains
      
Fair Value
  
                 
Cash and cash equivalents
          
$
7
  
Equity securities
  
$
122
      
339
  
Debt securities
                
U.S. Treasury
   
2
      
78
  
Fannie Mae and Municipality
    
1
      
64
  
Other
           
22
  
Total debt securities
    
3
      
164
  
Total
 
$
125
    
$
510
  

   
December 31, 2005
   
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair Value
                         
Cash and cash equivalents
                  
$
10
  
Equity securities
  
$
85
    
$
(2
)
    
295
  
Debt securities
                        
U.S. Treasury
    
1
      
(1
)
    
63
  
Fannie Mae and Municipality
           
(1
)
    
56
  
Other
                   
20
  
Total debt securities
    
1
      
(2
)
    
139
  
Total
 
$
86
    
$
(4
)
  
$
444
  

At December 31, 2005, PPL Susquehanna's nuclear decommissioning trust funds contained investments with an aggregate unrealized loss position of $4 million, of which $2 million was attributable to investments with an aggregate fair value of $69 million that had been in a continuous unrealized loss position for less than 12 months, and $2 million was attributable to investments with an aggregate fair value of $40 million that had been in a continuous unrealized loss position for 12 months or longer. The equity securities' unrealized loss position consists of 132 investments with an aggregate fair value of $20 million and an average unrealized loss of 7%. The largest unrealized loss for any individual investment was $387 thousand, which represents a decrease in value of 15%. The minor decline in the value of government securities was primarily due to the impact of interest rates, as such securities are essentially free of credit risk. At December 31, 2005, PPL Susquehanna believed it was reasonable to expect these securities to recover from this temporary decline in value.

Of the $164 million of government obligations and other debt securities held at December 31, 2006, $6 million mature within one year, $64 million mature after one year through five years, $44 million mature after five years through ten years and $50 million mature after ten years.

The following table shows proceeds from and realized gains and (losses) on sales of securities held in the trust.

   
2006
  
2005
  
2004
                         
Proceeds from sales
  
$
211
    
$
223
    
$
113
  
Gross realized gains 
    
10
      
10
      
3
  
Gross realized losses
   
(6
)
    
(12
)
    
(17
)

The proceeds from the sales of securities are reinvested in the trust. These funds, along with deposits of amounts collected from customers, are used to pay income taxes and fees related to managing the trust. Due to the restricted nature of these investments, they are not included in cash and cash equivalents.

Unrealized gains (net of unrealized losses for 2005 and 2004) associated with the period decreased accumulated other comprehensive loss by:

   
2006
  
2005
  
2004
                         
Pre-tax
  
$
49
    
$
12
    
$
24
  
After-tax
    
13
      
7
      
15
  

Net gains (losses) reclassified from accumulated other comprehensive loss and realized in "Other Income - net" on the Statements of Income were:

   
2006
  
2005
  
2004
                         
Pre-tax
  
$
6
    
$
(2
)
  
$
(14
)
After-tax
    
3
      
(1
)
    
(8
)

In September 2006, PPL Susquehanna applied to the NRC for 20-year license renewals for each of the Susquehanna units to extend their expiration dates from 2022 to 2042 for Unit 1 and from 2024 to 2044 for Unit 2.
 
22.  Variable Interest Entities

(PPL, PPL Energy Supply and PPL Electric)

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 clarified that variable interest entities, as defined therein, that do not disperse risks among the parties involved should be consolidated by the entity that is determined to be the primary beneficiary. In December 2003, the FASB revised FIN 46 by issuing Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which is known as FIN 46(R) and replaces FIN 46. FIN 46(R) does not change the general consolidation concepts of FIN 46. Among other things, FIN 46(R) clarifies certain provisions of FIN 46 and provides additional scope exceptions for certain types of businesses.

As permitted by FIN 46(R), PPL and its subsidiaries adopted FIN 46 effective December 31, 2003, for entities created before February 1, 2003, that are considered to be SPEs. This adoption resulted in the consolidation of the lessors under the operating leases for the Sundance, University Park and Lower Mt. Bethel generation facilities, as well as the deconsolidation of two wholly owned trusts. See below for further discussion. Also, as permitted by FIN 46(R), PPL and its subsidiaries deferred the application of FIN 46 for other entities and adopted FIN 46(R) for all entities on March 31, 2004. The adoption of FIN 46(R) did not have a material impact on the results of PPL and its subsidiaries.

(PPL and PPL Energy Supply)

Additional Entities Consolidated

In May 2001, a subsidiary of PPL Energy Supply entered into a lease arrangement, as lessee, for the development, construction and operation of commercial power generation facilities. The lessor was created for the sole purpose of owning the facilities and incurring the related financing costs. The $660 million operating lease arrangement covered the 450 MW gas-fired Sundance project located in Pinal County, Arizona and the 540 MW gas-fired University Park project near University Park, Illinois. These facilities were substantially complete in July 2002, at which time the initial lease term commenced. In June 2004, PPL Energy Supply subsidiaries purchased the Sundance and University Park generation assets from the lessor. In May 2005, a subsidiary of PPL Energy Supply completed the sale of its Sundance generation assets to Arizona Public Service Company. See Note 9 for further discussion of the sale.

In December 2001, another subsidiary of PPL Energy Supply entered into a $455 million operating lease arrangement, as lessee, for the development, construction and operation of a 582 MW gas-fired combined-cycle generation facility located in Lower Mt. Bethel Township, Northampton County, Pennsylvania. The lessor was created for the sole purpose of owning the facilities and incurring 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. The lease financing, which is included in "Long-term Debt," is secured by, among other things, the generation facility. At December 31, 2006 and 2005, the facility had a carrying value of $448 million and $459 million, net of accumulated depreciation and amortization of $27 million and $25 million, and was included in "Property, Plant and Equipment" and "Other acquired intangibles" on the Balance Sheets.

Entities Deconsolidated

(PPL)

In May 2001, PPL and PPL Capital Funding Trust I, a wholly owned financing subsidiary of PPL, issued $575 million of 7.75% PEPS Units. Each PEPS Unit consisted of (i) a contract to purchase shares of PPL common stock on or prior to May 2004 and (ii) a trust preferred security of PPL Capital Funding Trust I with a maturity date of May 2006. The trust's sole source of funds for distributions were from payments of interest on 7.29% subordinated notes of PPL Capital Funding, due May 18, 2006, that were issued to the trust. PPL guaranteed the payment of principal and interest on the subordinated notes issued to the trust by PPL Capital Funding. PPL also fully and unconditionally guaranteed all of the trust's obligations under the trust preferred securities. All of the preferred securities of PPL Capital Funding Trust I were cancelled in 2004, and the trust was terminated in June 2004.

(PPL and PPL Energy Supply)

SIUK Capital Trust I issued $82 million of 8.23% preferred securities maturing in February 2027 and invested the proceeds in 8.23% subordinated debentures maturing in February 2027 issued by SIUK Limited. Thus, the preferred securities are supported by a corresponding amount of subordinated debentures. SIUK Limited owned all of the common securities of SIUK Capital Trust I and guaranteed all of SIUK Capital Trust I's obligations under the preferred securities. In January 2003, SIUK Limited transferred its assets and liabilities, including the common securities of SIUK Capital Trust I and the obligations under the subordinated debentures, to WPD LLP. Therefore, WPD LLP currently guarantees all of SIUK Capital Trust I's obligations under the preferred securities. SIUK Capital Trust I may, at the discretion of WPD LLP, be required to redeem the preferred securities, in whole or in part, at 104.115% of par beginning February 2007 and thereafter at an annually declining premium over par through January 2017, after which time they are redeemable at par. See Note 16 for a discussion regarding the presentation of the related party transactions and Note 8 for a discussion regarding the redemption of the subordinated debentures as well as the common and preferred securities of SIUK Capital Trust I in February 2007.

23.  New Accounting Standards

(PPL, PPL Energy Supply and PPL Electric)

FIN 48

In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109." FIN 48 requires an entity to evaluate 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 percent 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 measurement of the benefit equals the largest amount of benefit that has a likelihood of realization, upon ultimate settlement, that exceeds 50 percent. If the more-likely-than-not threshold is unmet, it is inappropriate to recognize the tax benefits associated with the tax position. FIN 48 also provides guidance on derecognition of previously recognized tax benefits, classification, interest and penalties, accounting in interim periods, disclosure and transition.

PPL and its subsidiaries will adopt FIN 48 effective January 1, 2007. The adoption will result in the recognition of a cumulative effect adjustment to the opening balance of retained earnings for that fiscal year. There is an exception for uncertain tax positions related to pre-acquisition tax contingencies, in which case the impact of adoption, first, adjusts goodwill in accordance with EITF Issue 93-7, "Uncertainties Related to Income Taxes in a Purchase Business Combination."

The primary impact of the adoption of FIN 48 is expected to be a reclassification between current liabilities and noncurrent liabilities. PPL and its subsidiaries currently estimate that current liabilities will decrease and noncurrent liabilities will increase within the following ranges:

   
PPL
  
PPL Energy Supply
  
PPL Electric
                         
Current to Noncurrent Liability Reclassification
  
$
140-165
    
$
115-140
    
$
10-25
  

The cumulative effect adjustment as well as the remaining impact of the adoption is not expected to be material.

In addition to the Balance Sheet impacts, PPL and its subsidiaries expect that the adoption of FIN 48 will result in greater volatility in their effective tax rates. PPL and its subsidiaries do not expect that the adoption of FIN 48 will result in an inability to comply with financial covenants under their debt agreements.

FSP No. FIN 46(R)-6

In April 2006, the FASB issued FSP No. FIN 46(R)-6, "Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)." FSP No. FIN 46(R)-6 provides that the variability to be considered in applying FIN 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB 51," (FIN 46(R)) should be based on the design of the entity involved. PPL and its subsidiaries adopted FSP No. FIN 46(R)-6 effective July 1, 2006. PPL and its subsidiaries did not elect to apply retrospective application to any period prior to the date of adoption. The initial adoption of FSP No. FIN 46(R)-6 did not have an impact on PPL and its subsidiaries. However, the impact in periods subsequent to adoption could be material.

SAB 108

In September 2006, the SEC staff issued SAB No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB 108 addresses the observed diversity in the quantification of financial statement misstatements and the potential, under current practice, for the build-up of improper amounts on the balance sheet.

The two most commonly used methods cited by the SEC for quantifying the effect of financial statement misstatements are the "roll-over" and "iron-curtain" methods. The roll-over method quantifies a misstatement based on the amount of the error originating in the current year income statement. This method ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years. Conversely, the iron-curtain method quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, regardless of the misstatement's year(s) of origin.

In SAB 108, the SEC requires a dual approach combining the roll-over method and the iron-curtain method. The dual approach requires quantification of financial statement errors based on the effects of the error on each of the company's financial statements and the related financial statement disclosures.

SAB 108 permits registrants to initially apply its provisions either by (i) restating prior financial statements as if the dual approach had always been used or (ii) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006, with an offsetting adjustment recorded to the opening balance of retained earnings. Use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.

PPL and its subsidiaries adopted SAB 108 effective December 31, 2006. PPL and its subsidiaries previously utilized the dual approach when quantifying the impact of identified errors. Therefore, the adoption of SAB 108 did not have a material impact on PPL and its subsidiaries.

SFAS 123(R)

In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment," which is known as SFAS 123(R) and replaces SFAS 123, "Accounting for Stock-Based Compensation," as amended by SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." Among other things, SFAS 123(R) eliminates the alternative to use the intrinsic value method of accounting for stock-based compensation. SFAS 123(R) requires public entities to recognize compensation expense for awards of equity instruments to employees based on the grant-date fair value of the awards. PPL and its subsidiaries adopted SFAS 123(R) effective January 1, 2006. PPL and its subsidiaries applied the modified prospective application transition method of adoption. Under this application, entities must recognize compensation expense based on the grant-date fair value for new awards granted or modified after the effective date and for unvested awards outstanding on the effective date. The adoption of SFAS 123(R) did not have a material impact on PPL and its subsidiaries, since PPL and its subsidiaries adopted the fair value method of accounting for stock-based compensation, as described by SFAS 123, effective January 1, 2003. See Note 12 for the disclosures required by SFAS 123(R).

SFAS 155

In February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140." Among other things, SFAS 155 addresses certain accounting issues surrounding securitized financial assets and hybrid financial instruments with embedded derivatives that require bifurcation. PPL and its subsidiaries adopted SFAS 155 effective January 1, 2007. The initial adoption did not have an impact on PPL or its subsidiaries.

SFAS 157

In September 2006, the FASB issued SFAS 157, "Fair Value Measurements." SFAS 157 provides a definition of fair value as well as a framework for measuring fair value. In addition, SFAS 157 expands the fair value measurement disclosure requirements of other accounting pronouncements to require, among other things, disclosure of the methods and assumptions used to measure fair value as well as the earnings impact of certain fair value measurement techniques. SFAS 157 does not expand the use of fair value in existing accounting pronouncements. PPL and its subsidiaries will adopt the provisions of SFAS 157 prospectively, except for financial instruments that were previously measured at fair value in accordance with footnote 3 of EITF Issue No. 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities," which require retrospective application. PPL and its subsidiaries must adopt SFAS 157 no later than January 1, 2008. PPL and its subsidiaries are in the process of evaluating the impact of adopting SFAS 157. The potential impact of adoption is not yet determinable, but it could be material.

SFAS 158
 
In September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)." PPL and its subsidiaries adopted the recognition and measurement date provisions of SFAS 158 effective December 31, 2006. See Note 13 for the disclosures required by SFAS 158.
 
SFAS 159

In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115." SFAS 159 provides entities with an option to measure, upon adoption of this pronouncement and at specified election dates, certain financial assets and liabilities at fair value, including available-for-sale and held-to-maturity securities, as well as other eligible items. The fair value option (i) may be applied on an instrument by instrument basis, with a few exceptions, (ii) is irrevocable (unless a new election date occurs), and (iii) is applied to an entire instrument not to only specified risks, cash flows, or portions of that instrument. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.

SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between similar assets and liabilities measured using different attributes. Upon adoption of SFAS 159, an entity may elect the fair value option for eligible items that exist at that date, and shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings.

PPL and its subsidiaries must adopt SFAS 159 no later than January 1, 2008. Early adoption is permitted as of January 1, 2007, for PPL and its subsidiaries provided that PPL and its subsidiaries (i) have not issued interim financial statements for 2007 and choose to early adopt SFAS 159 on or before April 30, 2007, and (ii) also elect to apply the provisions of Statement 157.

PPL and its subsidiaries are in the process of evaluating the impact of adopting SFAS 159. The potential impact of adoption is not yet determinable, but it could be material.
(Millions of Dollars)
 
         
Additions
              
   
Balance at
Beginning
of Period
    
Charged
to Income
    
Charged to Other Accounts
    
Deductions
    
Balance
at End
of Period
  
Reserves deducted from assets on the Balance Sheet
                                        
                                         
PPL Corporation
                                        
Uncollectible accounts including unbilled
revenues (a)
                                        
2006
  
$
90
    
$
33
            
$
71
    
$
52
  
2005
    
89
      
28
    
$
2
      
29
      
90
  
2004
    
96
      
25
      
1
      
33
      
89
  
Obsolete inventory - Materials and supplies
                                        
2006
    
2
      
3
              
3
      
2
  
2005
    
2
      
2
              
2
      
2
  
2004
    
3
      
2
              
3
      
2
  
Mark-to-market valuation reserves
                                        
2006
    
11
      
9
              
2
      
18
  
2005
    
2
      
9
                      
11
  
2004
    
4
                      
2
      
2
  
Deferred tax valuation allowance
                                        
2006
    
148
              
44
      
3
      
189
  
2005
    
164
              
2
      
18
      
148
  
2004
    
293
              
24
      
153
 (b)
    
164
  
                                         
PPL Energy Supply, LLC
                                        
Uncollectible accounts including unbilled
revenues (a)
                                        
2006
  
$
67
    
$
5
            
$
41
    
$
31
  
2005
    
70
      
2
              
5
      
67
  
2004
    
71
      
1
    
$
1
      
3
      
70
  
Obsolete inventory - Materials and supplies
                                        
2006
    
2
      
2
              
2
      
2
  
2005
    
2
      
2
              
2
      
2
  
2004
    
3
      
2
              
3
      
2
  
Mark-to-market valuation reserves
                                        
2006
    
11
      
9
              
2
      
18
  
2005
    
2
      
9
                      
11
  
2004
    
4
                      
2
      
2
  
Deferred tax valuation allowance
                                        
2006
    
144
              
37
      
3
      
178
  
2005
    
160
              
2
      
18
      
144
  
2004
    
288
              
24
      
152
 (b)
    
160
  
                                         
PPL Electric Utilities Corporation
                                        
Uncollectible accounts
                                       
2006
  
$
20
    
$
26
            
$
27
    
$
19
  
2005
    
18
      
23
    
$
1
      
22
      
20
  
2004
    
24
      
22
              
28
      
18
  
 
(a)
  
Includes reserves for customer accounts receivable, receivables from Enron and the California ISO and other.
(b)
  
Includes write-off of WPD $152 million acquired tax asset and associated 100% valuation allowance as it was determined that there was no likelihood of recovering the asset.
PPL Corporation and Subsidiaries
(Millions of Dollars, except per share data)
     
For the Quarters Ended (a)
       
     
March 31
  
June 30
  
Sept. 30
  
Dec. 31
 
2006
                                
Operating revenues as previously reported
  
$
1,783
                          
 
Reclassification of Griffith discontinued operations (b)
    
(2
)
                        
 
Operating revenues
    
1,781
    
$
1,642
    
$
1,752
    
$
1,724
  
Operating income as previously reported
    
488
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Operating income
    
489
      
377
      
380
      
353
  
Income from continuing operations as previously reported
    
280
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Income from continuing operations
    
281
      
200
      
226
      
178
  
Loss from discontinued operations as previously reported
                                
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Loss from discontinued operations
    
1
      
19
                  
Net income
    
280
      
181
      
226
      
178
  
Basic earnings per common share: (c)
                                
 
Income from continuing operations
    
0.74
      
0.53
      
0.59
      
0.47
  
 
Net income
    
0.74
      
0.48
      
0.59
      
0.47
  
Diluted earnings per common share: (c)
                                
 
Income from continuing operations
    
0.73
      
0.52
      
0.58
      
0.46
  
 
Net income
    
0.73
      
0.47
      
0.58
      
0.46
  
Dividends declared per common share (d)
    
0.275
      
0.275
      
0.275
      
0.275
  
Price per common share:
                                
 
High
  
$
32.16
    
$
32.31
    
$
35.23
    
$
37.34
  
 
Low
    
29.21
      
27.83
      
32.20
      
32.39
  
                                   
 
2005
                                
Operating revenues as previously reported
  
$
1,600
                          
 
Reclassification of Griffith discontinued operations (b)
    
(2
)
                        
 
Operating revenues
    
1,598
    
$
1,467
    
$
1,620
    
$
1,494
  
Operating income as previously reported
    
335
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Operating income
    
336
      
334
      
383
      
296
  
Income from continuing operations as previously reported
    
170
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Income from continuing operations
    
171
      
178
      
195
      
195
  
Loss from discontinued operations as previously reported
    
2
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Loss from discontinued operations
    
3
      
50
      
(2
)
    
2
  
Net income
    
168
      
128
      
197
      
185
  
Basic earnings per common share: (c)
    
 
                          
 
Income from continuing operations
    
0.45
      
0.47
      
0.51
      
0.51
  
 
Net income
    
0.45
      
0.34
      
0.52
      
0.49
  
Diluted earnings per common share: (c)
    
 
      
 
      
 
          
 
Income from continuing operations
    
0.45
      
0.46
      
0.50
      
0.50
  
 
Net income
    
0.44
      
0.33
      
0.51
      
0.48
  
Dividends declared per common share (d)
    
0.23
      
0.23
      
0.25
      
0.25
  
Price per common share:
                                
 
High
  
$
27.95
    
$
29.99
    
$
33.51
    
$
33.68
  
 
Low
    
25.52
      
26.13
      
29.75
      
28.25
  
                                   
(a)
  
Quarterly results can vary depending on, among other things, weather and the forward pricing of power. In addition, earnings in 2006 and 2005 were affected by unusual items. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations.
(b)
  
In June 2006, a subsidiary of PPL Energy Supply sold its 50% ownership interest in the 600 MW Griffith power plant. See Note 10 to the Financial Statements for further information.
(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. In February 2007, PPL announced an increase to its quarterly common stock dividend, payable April 1, 2007, to 30.5 cents per share (equivalent to $1.22 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.
 
 
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
     
For the Quarters Ended (a)
       
     
March 31
  
June 30
  
Sept. 30
  
Dec. 31
 
2006
                                
Operating revenues as previously reported
  
$
1,312
                          
 
Reclassification of Griffith discontinued operations (b)
    
(2
)
                        
 
Operating revenues
    
1,310
    
$
1,267
    
$
1,372
    
$
1,323
  
Operating income as previously reported
    
355
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Operating income
    
356
      
285
      
266
      
225
  
Income from continuing operations as previously reported
    
230
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Income from continuing operations
    
231
      
177
      
182
      
128
  
Loss from discontinued operations as previously reported
                                
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Loss from discontinued operations
    
1
      
19
                  
Net income
    
230
      
158
      
182
      
128
  
                                   
 
2005
                                
Operating revenues as previously reported
  
$
1,151
                          
 
Reclassification of Griffith discontinued operations (b)
    
(2
)
                        
 
Operating revenues
    
1,149
    
$
1,093
    
$
1,223
    
$
1,076
  
Operating income as previously reported
    
251
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Operating income
    
252
      
232
      
254
      
195
  
Income from continuing operations as previously reported
    
157
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Income from continuing operations
    
158
      
154
      
157
      
134
  
Loss from discontinued operations as previously reported
    
2
                          
 
Reclassification of Griffith discontinued operations (b)
    
1
                          
 
Loss from discontinued operations
    
3
      
50
      
(2
)
    
2
  
Net income
    
155
      
104
      
159
      
124
  
                                   
(a)
  
Quarterly results can vary depending on, among other things, weather and the forward pricing of power. In addition, earnings in 2006 and 2005 were affected by unusual items. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations.
(b)
  
In June 2006, a subsidiary of PPL Energy Supply sold its 50% ownership interest in the 600 MW Griffith power plant. See Note 10 to the Financial Statements for further information.
 
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
   
For the Quarters Ended (a)
  
   
March 31
  
June 30
  
Sept. 30
  
Dec. 31
  
2006
                                
Operating revenues
  
$
852
    
$
759
    
$
841
    
$
807
  
Operating income
    
114
      
83
      
109
      
112
  
Net income
    
52
      
34
      
55
      
53
  
Income available to PPL
    
51
      
30
      
50
      
49
  
                                 
2005
                                
                                 
Operating revenues
  
$
819
    
$
729
    
$
824
    
$
791
  
Operating income
    
68
      
99
      
122
      
88
  
Net income
    
16
      
36
      
53
      
42
  
Income available to PPL
    
15
      
36
      
52
      
42
  

(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 certain quarters were affected by unusual items. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations.
ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

Effective March 3, 2006, PPL dismissed PricewaterhouseCoopers LLP (PwC) as the independent registered public accounting firm for PPL, PPL Energy Supply and PPL Electric and appointed Ernst & Young LLP. This change was previously disclosed in a Form 8-K filed March 3, 2006.

There were no disagreements with PwC through March 3, 2006, and there have been no disagreements with Ernst & Young LLP since they have been appointed.

 
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, 2006, 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)
  
Change in internal controls 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, 2006. Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report contained on page 87.
 
PPL Energy Supply, LLC and PPL Electric Utilities Corporation
     
   
Omitted since PPL Energy Supply and PPL Electric are not subject to the Sarbanes-Oxley 404 requirements for the year ended December 31, 2006.
 
     
PPL Corporation, PPL Energy Supply, LLC and PPL Electric Utilities Corporation
     
None.

PART III


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 2007 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, 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 2006 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, and are available in print, free of charge, to any shareholder who requests them. 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 and are available in print to any shareholder who requests them.

PPL Energy Supply, LLC

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

PPL Electric Utilities Corporation

Information for this item will be set forth in the sections entitled "Nominees for Directors" in PPL Electric's 2007 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, and which information is incorporated herein by reference. 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 2007 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, and which information is incorporated herein by reference.

PPL Energy Supply, LLC

Item 11 is omitted as PPL Energy Supply meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K.

PPL Electric Utilities Corporation

Information for this item will be set forth in the sections entitled "Compensation of Directors," "Executive Compensation" in PPL Electric's 2007 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, 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 2007 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, and which information is incorporated herein by reference. In addition, provided below in tabular format is information as of December 31, 2006, 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)
 
3,485,828 - ICP
1,898,002 - ICPKE
5,383,830 - Total
 
$25.15 - ICP
$23.82 - ICPKE
$24.68 - Combined
   5,336,148 - ICP
  11,769,060 - ICPKE
  14,682,617 - DDCP
  31,787,825 - 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, 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, 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 12 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 shareholders.
     
(3)
  
Relates to common stock issuable upon the exercise of stock options awarded under the ICP and ICPKE as of December 31, 2006. In addition, as of December 31, 2006, the following other securities had been awarded and are outstanding under the ICP, ICPKE and DDCP: 120,000 shares of restricted stock and 666,495 restricted stock units under the ICP; 157,100 shares of restricted stock and 912,170 restricted stock units under the ICPKE; and 305,088 stock units under the DDCP.
     
(4)
  
Based upon the following aggregate award limitations under the ICP, ICPKE and DDCP: (a) under the ICP, 15,769,431 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, 14,199,796 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; 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

Item 12 is omitted as PPL Energy Supply meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K.

PPL Electric Utilities Corporation

Information for this item will be set forth in the section entitled "Stock Ownership" in PPL Electric's 2007 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, and which information is incorporated herein by reference.


PPL Corporation

Information for this item will be set forth in the section entitled "Transactions with Related Persons" and "Independence of Directors" in PPL's 2007 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, and is incorporated herein by reference.

PPL Energy Supply, LLC

Item 13 is omitted as PPL Energy Supply meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K.

PPL Electric Utilities Corporation

Information for this item will be set forth in the section entitled "Transactions with Related Persons" and "Nominations" in PPL Electric's 2007 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, 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 2006 and 2005" in PPL's 2007 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, and which information is incorporated herein by reference.

PPL Energy Supply, LLC

For the fiscal year ended December 31, 2006, Ernst & Young LLP (E&Y) served as our independent auditor. For the fiscal year ended December 31, 2005, PricewaterhouseCoopers LLP (PwC) served as our independent auditor. The following table presents an allocation of fees billed by E&Y and PwC to PPL for the fiscal years ended December 31, 2006 and 2005, for professional services rendered for the audit of PPL Energy Supply's annual financial statements and for fees billed for other services rendered.

   
2006
    
2005
   
(in thousands)
               
Audit fees (a)
  
$
2,950
    
$
2,211
Audit-related fees (b)
    
22
      
14
Tax fees (c)
              
All other fees (d)
    
15
      
2

(a)
  
Includes 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. Additionally, 2006 includes $70 thousand of fees in connection with audits performed by PwC.
     
(b)
  
Fees for consultation to ensure appropriate accounting and reporting in connection with various business and financing transactions.
     
(c)
  
The independent auditor does not provide tax consulting and advisory services to PPL Energy Supply or any of its affiliates.
     
(d)
  
Fees for 2006 relate to access to an E&Y online accounting research tool, and fees for 2005 relate to access to a research database licensed by PwC that provides authoritative accounting and reporting guidance.

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. The 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 2006 and 2005 audit and non-audit related fees.

PPL Electric Utilities Corporation

Information for this item will be set forth in the section entitled "Fees to Independent Auditor for 2006 and 2005" in PPL Electric's 2007 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2006, and which information is incorporated herein by reference.


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES


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.
     
   
Schedule II - Valuation and Qualifying Accounts and Reserves for the Three Years Ended December 31, 2006.
     
   
All other 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 2007 annual meeting of shareowners of PPL Corporation will be held on Wednesday, May 23, 2007, at the Holiday Inn in Fogelsville, Pennsylvania, in Lehigh County. The 2007 meeting for PPL Electric will be held on Thursday, May 24, 2007, 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 28, 2007.

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 contact PPL Investor Services 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 day of April, July, October and January. Dividend checks are mailed in advance of those dates with the intention that they arrive as close as possible to the payment dates. The 2007 record dates for dividends are expected to be March 9, June 8, September 10, and December 10.

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.

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 E-mail address and indicate their desire to receive future earnings or news releases automatically.

Online Account Access: Registered shareowners can access account information by visiting www.shareowneronline.com.

PPL Investor Services: For questions about PPL Corporation or its subsidiaries, or information concerning:

Lost Dividend Checks
Bond Interest Checks
Direct Deposit of Dividends
Bondholder Information

Please contact:

Manager - PPL Investor Services
Two North Ninth Street (GENTW8)
Allentown, PA 18101

Toll Free: 1-800-345-3085
FAX: 610-774-5106
Via e-mail: invserv@pplweb.com

Lost Dividend or Bond Interest Checks: Checks lost by investors, or those that may be lost in the mail, will be replaced if the check has not been located by the 10th business day following the payment date.

Direct Deposit of Dividends: Shareowners may choose to have their dividend checks deposited directly into their checking or savings account.

Wells Fargo Shareowner Services: For information concerning:

PPL's Dividend Reinvestment Plan
Stock Transfers
Lost Stock Certificates
Certificate Safekeeping

Please contact:

Wells Fargo Bank, N.A.
Shareowner Services
161 North Concord Exchange
South St. Paul, MN 55075-1139

Toll Free: 1-866-280-0245
Outside U.S.: 651-453-2129

Dividend Reinvestment Plan: Shareowners may choose to have dividends on their PPL common stock or PPL Electric preferred stock and preference stock reinvested in PPL common stock instead of receiving the dividend by check.

Certificate Safekeeping: PPL Corporation participates in the Direct Registration System (DRS). Shareowners may choose to have their common stock certificates deposited into Direct Registration. Participants of PPL's Dividend Reinvestment Plan may choose to have their common stock certificates deposited into their Plan account.

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)

Philadelphia Stock Exchange
 
PPL Corporation:
Common Stock (Code: PPL)

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: 1-866-280-0245
Outside U.S.: 651-453-2129

Dividend Disbursing Office
PPL Investor Services
Two North Ninth Street (GENTW8)
Allentown, PA 18101

Toll Free: 1-800-345-3085
FAX: 610-774-5106

Mortgage Bond Trustee and
Transfer Agent
Deutsche Bank Trust Company Americas
Attn: Security Transfer Unit
648 Grassmere Park Road
Nashville, TN 37211

Toll Free: 1-800-735-7777
FAX: 615-835-2727

Bond Interest Paying Agent
PPL Investor Services
Two North Ninth Street (GENTW8)
Allentown, PA 18101

Toll Free: 1-800-345-3085
FAX: 610-774-5106

Indenture Trustee
The Bank of New York
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/ John R. Biggar
      
Principal Financial Officer and Director
John R. Biggar -
        
Executive Vice President and
       
Chief Financial Officer
        
         
By /s/ Matt Simmons
      
Principal Accounting Officer
Matt Simmons -
        
Vice President and Controller
       
         
Directors:
        
         
Frederick M. Bernthal
 
Craig A. Rogerson
    
John W. Conway
  
W. Keith Smith
    
E. Allen Deaver
  
Susan M. Stalnecker
    
Louise K. Goeser
  
Keith H. Williamson
    
Stuart Heydt
        
         
By /s/ James H. Miller
        
James H. Miller, Attorney-in-fact
  
Date: February 28, 2007
    
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 -
        
Senior Vice President
        
         
By /s/ Matt Simmons
      
Principal Accounting Officer
Matt Simmons -
        
Vice President and Controller
        
         
Managers:
        
         
/s/ John R. Biggar
        
John R. Biggar
        
         
/s/ Robert J. Grey
        
Robert J. Grey
        
         
/s/ William H. Spence
        
William H. Spence
        
         
/s/ James E. Abel
        
James E. Abel
       
         
         
Date: February 28, 2007
        
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/ William H. Spence
        
William H. Spence -
        
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/ William H. Spence
      
Principal Executive Officer and Director
William H. Spence -
        
President
        
         
By /s/ Paul A. Farr
      
Principal Financial Officer
Paul A. Farr -
        
Senior Vice President-Financial
       
         
By /s/ Matt Simmons
      
Principal Accounting Officer
Matt Simmons -
        
Vice President and Controller
        
         

         
Directors:
        
         
/s/ James H. Miller
  
/s/ Dean A. Christiansen
    
James H. Miller
  
Dean A. Christiansen
    
         
/s/ John R. Biggar
  
/s/ Robert J. Grey
    
John R. Biggar
  
Robert J. Grey
    
         
         
Date: February 28, 2007
        

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 August 17, 2005 (Exhibit 3.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated August 19, 2005)
     
3(b)-1
-
Amended and Restated Articles of Incorporation of PPL Electric Utilities Corporation (Exhibit 3(a)-3 to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2001)
     
3(b)-2
-
Amendment to 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)
-
Bylaws of PPL Corporation, as amended and restated effective August 17, 2005 (Exhibit 3.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated August 19, 2005)
     
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))
     
-
Amended and Restated Employee Stock Ownership Plan, executed January 12, 2007 (and effective, as amended and restated, January 1, 2002)
     
4(b)-1
-
Mortgage and Deed of Trust, dated as of October 1, 1945, between PPL Electric Utilities Corporation and Bankers Trust Company (as successor Trustee) (Exhibit 2(a)-4 to Registration Statement No. 2-60291)
     
4(b)-2
-
Supplement, dated as of July 1, 1954, to said Mortgage and Deed of Trust (Exhibit 2(b)-5 to Registration Statement No. 219255)
     
4(b)-3
-
Supplement, dated as of March 1, 1994, to said Mortgage and Deed of Trust (Exhibit 4(b) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated March 11, 1994)
     
4(b)-4
-
Supplement, dated as of March 15, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated March 30, 1994)
     
4(b)-5
-
Supplement, dated as of October 1, 1994, to said Mortgage and Deed of Trust (Exhibit 4(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated October 3, 1994)
     
4(b)-6
-
Supplement, dated as of August 1, 2001, to said Mortgage and Deed of Trust (Exhibit 4.5 to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated August 21, 2001)
     
4(b)-7
-
Supplement, dated as of January 1, 2002, to said Mortgage and Deed of Trust (Exhibit 4(b)-19 to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2001)
     
4(b)-8
-
Supplement, dated as of February 1, 2003, to said Mortgage and Deed of Trust (Exhibit 4(b)-20 to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2002)
     
4(b)-9
-
Supplement, dated as of May 1, 2003, to said Mortgage and Deed of Trust (Exhibit 10(c) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for quarter ended June 30, 2003)
     
4(b)-10
-
Supplement, dated as of February 1, 2005, to said Mortgage and Deed of Trust (Exhibit 4(b)-20 to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2004)
     
4(b)-11
-
Supplement, dated as of May 1, 2005, to said Mortgage and Deed of Trust (Exhibit 4(a) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 2005)
     
4(b)-12
-
Supplement, dated as of June 1, 2005, to said Mortgage and Deed of Trust (Exhibit 4(b)-12 to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2005)
     
4(b)-13
-
Supplement, dated as of December 1, 2005, to said Mortgage and Deed of Trust (Exhibit 4(b) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated December 22, 2005)
     
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 November 1, 1997, to said Indenture (Exhibit 4.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated November 12, 1997)
     
4(c)-3
-
Supplement, dated as of March 1, 1999, to said Indenture (Exhibit 4.3 to Registration Statement Nos. 333-87847, 333-87847-01 and 333-87847-02)
     
4(c)-4
-
Supplement, dated as of October 1, 1999, to said Indenture (Exhibit 4(c)-4 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 1999)
     
4(c)-5
-
Supplement, dated as of June 1, 2000, to said Indenture (Exhibit 4 to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2000)
     
4(c)-6
-
Supplement, dated as of January 21, 2004, to said Indenture (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2004)
     
4(c)-7
-
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(d)-1
-
Subordinated Indenture, dated as of May 9, 2001, between PPL Capital Funding, Inc., PPL Corporation 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 May 9, 2001)
     
4(d)-2
-
Supplement, dated as of May 9, 2001, to said Subordinated Indenture (Exhibit 4.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 9, 2001)
     
4(e)-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(e)-2
-
Supplement, dated as of August 1, 2001, to said Indenture (Exhibit 4.2 to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated August 21, 2001)
     
4(e)-3
-
Supplement, dated as of February 1, 2003, to said Indenture (Exhibit 4(g)-3 to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2002)
     
4(e)-4
-
Supplement, dated as of May 1, 2003, to said Indenture (Exhibit 10(d) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 2002)
     
4(e)-5
-
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(e)-6
-
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(e)-7
-
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(f)-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(f)-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(f)-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(f)-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(f)-5
-
Supplement, dated as of October 1, 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(f)-6
-
Form of Note for PPL Energy Supply, LLC's $300 million aggregate principal amount of 5.70% REset Put Securities due 2035 (REPSSM) (Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated October 28, 2005)
     
4(f)-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(f)-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(f)-9
-
Supplement, dated as of July 1, 2006, to said Indenture (Exhibit 4(c) to Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended June 30, 2006)
     
-
Supplement, dated as of December 1, 2006, to said Indenture
     
4(g)-1
-
Indenture, dated as of May 21, 2003, by PPL Energy Supply, LLC, PPL Corporation and JPMorgan Chase Bank, as Trustee (Exhibit 4.3 to PPL Energy Supply, LLC and PPL Corporation Form S-4 (Registration Statement No. 333-106200))
     
4(g)-2
-
Registration Rights Agreement, dated as of May 21, 2003, by PPL Energy Supply, LLC, PPL Corporation and the Representatives of the Initial Purchasers (Exhibit 4.2 to PPL Energy Supply, LLC and PPL Corporation Form S-4 (Registration Statement No. 333-106200))
     
4(g)-3
-
Supplement, dated November 12, 2004, to said Indenture (Exhibit 99.1 to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated November 17, 2004)
     
4(h)-1
-
Indenture, dated as of February 26, 2004, among PPL Corporation, PPL Capital Funding, Inc. and JPMorgan Chase Bank, as Trustee (Exhibit 4(b) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2004)
     
4(h)-2
-
Registration Rights Agreement, dated as of February 26, 2004, among PPL Corporation, PPL Capital Funding, Inc. and the Representatives of the Initial Purchasers (Exhibit 4(c) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2004)
     
-
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
     
-
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
     
-
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
     
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 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)
-
Pollution Control Facilities Loan Agreement, dated as of February 1, 2003, between PPL Electric Utilities Corporation and the Lehigh County Industrial Development Authority
     
10(l)-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(l)-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(m)
-
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(n)-1
-
Credit and Security Agreement, dated as of August 1, 2004, among PPL Receivables Corporation, as Borrower, PPL Electric Utilities Corporation, as Servicer, Blue Ridge Asset Funding Corporation, the Liquidity Banks from time to time party thereto and Wachovia Bank, National Association, as Agent (Exhibit 10(e) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 2004)
     
-
First Amendment and Limited Waiver to said Credit and Security Agreement, dated as of October 10, 2004
     
-
Second Amendment to said Credit and Security Agreement, dated as of August 1, 2005
     
-
Third Amendment to said Credit and Security Agreement, dated as of March 15, 2006
     
10(n)-5
-
Fourth Amendment to said Credit and Security Agreement, dated as of July 31, 2006 (Exhibit 10(d) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 2006)
     
10(o)
-
$300 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(p)
-
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(q)-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(q)-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(q)-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(q)-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(q)-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)
     
-
Fifth Amendment to said Reimbursement Agreement, dated as of November 1, 2006
     
10(r)
-
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)
     
-
Amended and Restated £150 million Credit Agreement, dated as of October 15, 2005, among Western Power Distribution (South West) plc and the banks named therein
     
10(t)-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)
     
-
First Amendment to said Letter of Credit and Revolving Credit Agreement, dated as of December 29, 2006
     
10(u)-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)
     
-
First Amendment to said Letter of Credit and Reimbursement Agreement, dated as of December 29, 2006
     
10(v)
-
$200 million Second Amended and Restated Five-Year Credit Agreement, dated as of June 9, 2006, 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 June 14, 2006)
     
10(w)
-
$1.9 billion Amended and Restated Five-Year Credit Agreement, dated as of June 9, 2006, 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 June 14, 2006)
     
-
£100 million Credit Agreement, dated as of November 17, 2006, among Western Power Distribution (South West) plc and the banks named therein
     
-
£150 million Credit Agreement, dated as of January 24, 2007, among Western Power Distribution Holdings Limited and the banks named therein
     
[_]10(z)-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(z)-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(z)-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(z)-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(aa)
-
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(bb)-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(bb)-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)
     
 
Amendment No. 2 to said Amended and Restated Officers Deferred Compensation Plan, dated as of January 22,  2007
     
[_]10(cc)-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(cc)-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(cc)-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)
     
-
Amendment No. 3 to said Supplemental Executive Retirement Plan, dated as of January 22, 2007
     
[_]10(dd)-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(dd)-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)
     
-
Amendment No. 2 to said Incentive Compensation Plan, dated as of January 26, 2007
     
[_]10(dd)-4
-
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(dd)-5
-
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(dd)-6
-
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(ee)-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(ee)-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
     
-
Amendment No. 2 to said Incentive Compensation Plan for Key Employees, dated as of January 26, 2007
     
[_]10(ff)
-
Short-term Incentive Plan (Schedule A to Proxy Statement of PPL Corporation, dated March 20, 2006)
     
[_]10(gg)
-
Form of Severance Agreement entered into between PPL Corporation and the Executive Officers listed in this Form 10-K Report (Exhibit 10(r) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2001)
     
[_]10(hh)
-
Form of Retention Agreement entered into between PPL Corporation and Messrs. Champagne, Farr, Miller and Petersen (Exhibit 10(s) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2001)
     
[_]10(ii)
-
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)
     
-
Employment letter dated December 19, 2005 between PPL Services Corporation and Jerry Matthews Simmons, Jr.
     
[_]10(kk)
-
2006 compensation matters regarding PPL Corporation Named Executive Officers (PPL Corporation Form 8-K Report (File No. 1-11459) dated February 1, 2006)
     
[_]10(ll)
-
Restricted Stock Unit Agreement with Mr. Hecht for restricted stock unit award under PPL Corporation's Incentive Compensation Plan (Exhibit 10(d) to PPL Corporation Form 8-K Report (File No. 1-11459) dated February 1, 2006)
     
[_]10(mm)
-
2006 compensation matters regarding PPL Electric Utilities Corporation Named Executive Officers (PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated February 1, 2006, and Form 8-K/A Report (File No. 1-905) dated February 16, 2006)
     
[_]10(nn)
-
Establishment of 2006 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 March 23, 2006)
     
[_]10(oo)
-
Establishment of 2006 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 March 23, 2006)
     
-
Employment letter dated May 31, 2006 between PPL Services Corporation and William H. Spence
     
-
Employment letter dated August 29, 2006, between PPL Services Corporation and David G. DeCampli
     
[_]10(rr)
-
Compensation arrangement changes regarding James H. Miller (PPL Corporation Form 8-K Report (File No. 1-11459) dated September 15, 2006)
     
[_]10(ss)
-
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)
     
[_]10(tt)
-
2007 compensation matters regarding PPL Corporation Named Executive Officers (PPL Corporation Form 8-K Report (File No. 1-11459) dated January 31, 2007)
     
-
Restricted Stock Unit Agreement with Mr. Biggar for restricted stock unit award under PPL Corporation's Incentive Compensation Plan
     
[_]10(vv)
-
2007 compensation matters regarding PPL Electric Utilities Corporation Named Executive Officers (PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated January 31, 2007)
     
-
Compensation arrangement changes regarding Mr. DeCampli
     
-
PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
     
-
PPL Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
     
-
PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
     
-
Subsidiaries of PPL Corporation
     
-
Subsidiaries of PPL Electric Utilities Corporation
     
-
Consent of Ernst & Young LLP - PPL Corporation
     
-
Consent of Ernst & Young LLP - PPL Energy Supply, LLC
     
-
Consent of Ernst & Young LLP - PPL Electric Utilities Corporation
     
-
Consent of PricewaterhouseCoopers LLP - PPL Corporation
     
-
Consent of PricewaterhouseCoopers LLP - PPL Energy Supply, LLC
     
-
Consent of PricewaterhouseCoopers LLP - PPL Electric Utilities Corporation
     
-
Power of Attorney
     
-
Certificate of PPL's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
-
Certificate of PPL's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
-
Certificate of PPL Energy Supply's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
-
Certificate of PPL Energy Supply's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
-
Certificate of PPL Electric's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
-
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
     
-
PPL Corporate Organization (Selected Subsidiaries)
     
-
Examples of Wholesale Energy, Fuel and Emission Allowance Price Fluctuations - 2002 through 2006

EX-4.A 2 ppl10-k2006exhibit4a.htm EXHIBIT 4(A) Exhibit 4(a)

Exhibit 4(a)

 

 

 

 
PPL
 
 
 
EMPLOYEE STOCK OWNERSHIP PLAN
 
EFFECTIVE JANUARY 1, 1975
 
 
 
 
 
 
Amended and Restated
Effective January 1, 2002
 



 
PPL
 
EMPLOYEE STOCK OWNERSHIP PLAN
 
EFFECTIVE January 1, 1975
 
TABLE OF CONTENTS
 
ARTICLE
PAGE

I.
PURPOSE
  
I-1
       
II.
DEFINITIONS
  
II-1

 
2.1
Account
II-1
 
2.2
Affiliated Company or Affiliated Companies
II-1
 
2.3
Board of Directors
II-1
 
2.4
Code
II-2
 
2.5
Compensation
II-2
 
2.6
Credited Service
II-2
 
2.7
Deferred Savings Plan
II-3
 
2.8
Dividend-based Contribution
 II-3
 
2.9
Effective Date
II-3
 
2.10
Eligible Employee
 II-3
 
2.11
Employee
 II-3
 
2.12
Employee Benefit Plan Board
II-4
 
2.13
Employee Savings Plan
 II-4
 
2.14
ERISA
 II-4
 
2.15
Fund
 II-4
 
2.16
Highly Compensated Eligible Employee
 II-4
 
2.17
Hour of Service
 II-5
 
2.18
Leased Employee
 II-6
 
2.19
Matching Contributions
 II-6
 
2.20
Market Value
 II-6
 
2.21
Officer
 II-7
 
2.22
Participant
 II-7
 
2.23
Participating Company
 II-7
 
2.24
PAYSOP Contributions
 II-7
 
2.25
Plan
 II-7
 
2.26
Plan Year
 II-7
 
2.27
PPL
 II-7
 
2.28
PPL Corporation
 II-7
 
2.29
Qualified Military Service
 II-8
 
2.30
Retirement Plan
 II-8
 
2.31
Returning Veteran
 II-8
 
2.32
Spouse
 II-8
 
2.33
Stock
 II-8
 
2.34
Total Disability
 II-8
 
2.35
TRASOP Contributions
 II-8
 
2.36
Trust or Trust Agreement
 II-8
 
2.37
Trustee
 II-8
 
2.38
Uniformed Services
 II-8
 
2.39
Valuation Date
 II-9
 
III
ELIGIBILITY
  
III-1

 
3.1
Eligibility.
III-1
 
3.2
Participation
 III-1
 
3.3
Reemployment after Break of Service
 III-2
 
3.4
Officers, Directors, and Shareholders
 III-2
 
3.5
Rights Affected
 III-2
 
3.6
Data
 III-2
 
IV.
CONTRIBUTIONS TO THE FUND
  
IV-1
 
 
4.1
TRASOP Contributions
IV-1
 
4.2
Matching Contributions
 IV-1
 
4.3
PAYSOP Contributions
 IV-1
 
4.4
Dividend-based Contribution
 IV-1
 
4.5
Investment in Stock
 IV-1
 
V.
ALLOCATION
  
V-1
 
 
5.1
Accounts
V-1
 
5.2
Allocation of Contributions
V-1
 
5.3
Allocation of Earnings.
V-2
 
5.4
Special Allocation Rule
V-3
 
5.5
Maximum Allocation
V-3
 
VI.
PATICIPANTS’ ACCOUNTS
  
VI-1
 
 
6.1
Accounts
VI-1
 
6.2
Valuation
VI-1
 
6.3
Accounting for Allocations
VI-1
 
VII.
DISTRIBUTION
  
VII-1
 
 
7.1
General
VII-1
 
7.2
Death
 VII-1
 
7.3
Beneficiary Designation.
 VII-1
 
7.4
Disability.
VII-2
 
7.5
Termination of Employment
 VII-3
 
7.6
Valuation for Distribution
 VII-3
 
7.7
Timing of Distribution.
 VII-4
 
7.8
Mode of Distribution
 VII-6
 
7.9
Withdrawals.
 VII-6
 
7.10
Optional Direct Transfer of Eligible Rollover Distributions.
 VII-8
 
VIII.
ADMINISTRATION
  
VIII-1
 
 
8.1
Administration by Employee Benefit Plan Board.
 VIII-1
 
8.2
Duties and Powers of Employee Benefit Plan Board and
Administrative Committee.
 
VIII-2
 
8.3
Reliance on Reports and Certificates
 VIII-4
 
8.4
Functions
 VIII-4
 
8.5
Indemnification of the Employee Benefit Plan Board
 VIII-4
 
8.6
Allocation of Fiduciary Responsibilities
 VIII-5
 
IX.
THE FUND
  
IX-1
 
 
9.1
Designation of Trustee
 IX-1
 
9.2
Exclusive Benefit
 IX-1
 
9.3
No Interest in Fund
 IX-1
 
9.4
Trustee
 IX-1
 
9.5
Expenses
 IX-1
 
X.
AMENDMENT OR TERMINATION OF THE PLAN
  
X-1
 
 
10.1
Amendment
 X-1
 
10.2
Termination
 X-2
 
10.3
Special Rule
 X-2
 
10.4
Merger
 X-3
 
XI.
TOP HEAVY PROVISIONS
  
XI-1
 
 
11.1
General
 XI-1
 
11.2
Definitions
 XI-1
 
11.3
Minimum Contributions for Non-Key Employees.
 XI-4
 
11.4
Social Security
 XI-6
 
XII.
GENERAL PROVISIONS
  
XII-1
 
 
12.1
No Employment Rights
 XII-1
 
12.2
Source of Benefits
 XII-1
 
12.3
Governing Law
 XII-1
 
12.4
Spendthrift Clause.
 XII-1
 
12.5
Incapacity
 XII-2
 
12.6
Gender and Number
 XII-3
 
12.7
Voting or Tendering Stock
 XII-3
 
12.8
Use of Loan Proceeds
 XII-6
 
12.9
Put Option
 XII-6
 
12.10
Compliance with Rule 16b-3
 XII-7
 
XIII.
TREATMENT OF RETURNING VETERANS
  
XIII-1
 
 
13.1
Applicability and Effective Date
 XIII-1
 
13.2
Eligibility to Participate
 XIII-1
 
13.3
Restoration of Dividend-based Contributions
 XIII-1
 
13.4
Determination of Compensation
 XIII-1
 
13.5
Application of Certain Limitations
 XIII-2
 
13.6
Administrative Rules and Procedures
 XIII-2

 
Appendix A
  
1
       
 
Schedule A
  
A-1
       
 
Schedule B
  
B-1

 


WHEREAS, PPL Services Corporation ("PPL") adopted the PPL Employee Stock Ownership Plan, effective July 1, 2000, on behalf of various affiliated companies; and
WHEREAS, PPL desires to further amend and restate the PPL Employee Stock Ownership Plan,
NOW, THEREFORE, effective January 1, 2002, except as may be provided to the contrary herein, the PPL Employee Stock Ownership Plan is amended as hereinafter set forth:

ARTICLE I
PURPOSE
 
1.1 The purpose of this Plan is to provide Employees some ownership of stock of PPL Corporation, without requiring any reduction in pay or other employee benefits, or the surrender of any other rights on the part of Employees, and to invest primarily in the stock of PPL Corporation.

 
ARTICLE II
DEFINITIONS
 
2.1 "Account" shall mean the separate record maintained at the direction of the Employee Benefit Plan Board which represents the individual interest of a Participant in the Fund.
2.2 "Affiliated Company" or "Affiliated Companies" shall mean with respect to any Participating Company, (a) any corporation that is a member of a controlled group of corporations, as determined under section 414(b) of the Code, which includes such Participating Company; (b) any member of an affiliated service group, as determined under section 414(m) of the Code, of which such Participating Company is a member; (c) any trade or business (whether or not incorporated) that is under common control with such Participating Company, as determined under section 414(c) of the Code; and (d) any other organization or entity which is required to be aggregated with the Participating Company under section 414(o) of the Code and regulations issued thereunder. "50% Affiliated Company" means an Affiliated Company, but determined with "more than 50%" substituted for the phrase "at least 80%" in section 1563(a) of the Code, when applying sections 414(b) and (c) of the Code.
2.3 "Board of Directors" shall mean the Board of Directors of PPL or the Executive Committee of the Board of Directors with respect to any powers which have been assigned thereto by the Board of Directors. Effective upon the closing of the PPL Corporation corporate realignment pursuant to which PPL will separate its electric generation and energy marketing operations from its regulated electric transmission and distribution business,“Board of Directors” shall mean the Board of Directors of PPL Services Corporation.
2.4 "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time or any predecessor or successor thereto.
2.5 "Compensation" shall have the meaning set forth in Schedule A, for Participants in the Participating Company listed therein, except as provided in the next sentence. Solely for purposes of the maximum allocation rules of Section 5.5 and the definition of “Highly Compensated Eligible Employee” in this Article, “Compensation” shall mean total wages as reported in the box titled “Wages, tips, other compensation” of Form W-2 (i.e. wages as defined in section 3401(a) of the Code and all other payments of compensation for which the Participating Company is required to furnish the employee a written statement under sections 6041(d) and 6051(a)(3) of the Code) plus salary reduction contributions and other amounts excluded from gross income under section 125 (relating to cafeteria plans), 132(f)(4) (relating to qualified transportation fringe benefit plans), 402(e)(3) (relating to section 401(k) cash or deferred plans), 402(h)(1)(B) (relating to simplified employee pensions) or 403(b) (relating to tax-deferred annuities) of the Code; and compensation deferred under an eligible deferred compensation plan within the meaning of section 457(b) of the Code.
2.6 "Credited Service" shall mean that portion of an Employee's employment with PPL and all Affiliated Companies which is used to calculate the Employee's eligibility for participation and vesting status hereunder.
2.7 "Deferred Savings Plan" shall mean the PPL Deferred Savings Plan.
2.8 "Dividend-based Contribution" shall mean the contribution made by a Participating Company or PPL Corporation in accordance with Section 4.4.
2.9 "Effective Date" shall mean January 1, 2002, the effective date of this amended and restated Plan, except as provided to the contrary herein. The Plan was effective originally on January 1, 1975.
2.10 "Eligible Employee" shall mean an Employee who has satisfied the eligibility requirements of Section 3.1.
2.11 "Employee" shall mean each person who is classified by a Participating Company as a common law employee of such Participating Company, and who:
(a) is classified by the Participating Company as (1) a Managers Compensation Plan employee, (2) a Professional Associate - Part-Time, (3) an Administrative Associate - Part-Time, or (4) a Specific Professional; or
(b) is a member of the International Brotherhood of Electrical Workers and is in a classification eligible to participate in this Plan pursuant to a collective bargaining agreement between such union and a Participating Company.
An individual who is not classified by a Participating Company as a common law employee shall not be an Employee regardless of whether (1) the individual is considered an employee by reason of being a leased employee (whether or not within the meaning of section 414(n) or (o) of the Code), (2) the individual is classified by a Participating Company as an independent contractor, or (3) for employment tax or other purposes, the individual is subsequently determined to be a common law employee, or not to be a leased employee or independent contractor. For purposes of determining eligibility under the Plan, the classification to which an individual is assigned by a Participating Company shall be final and conclusive, regardless of whether a court, a governmental agency or any entity subsequently finds that such individual should have been assigned to a different classification.
2.12 "Employee Benefit Plan Board" shall mean the Board described in Article VIII.
2.13 "Employee Savings Plan" shall mean the PPL Employee Savings Plan (prior to February 14, 2000, the PP&L Employee Savings Plan).
2.14 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time.
2.15 "Fund" shall mean the separate fund established for this Plan, administered under the Trust Agreement, out of which benefits payable under this Plan shall be paid.
2.16 "Highly Compensated Eligible Employee" shall mean an Eligible Employee who:
(a) is a five-percent owner, as defined in section 416(i)(1) of the Code, either for the current Plan Year or the immediately preceding Plan Year; or
 
(b) (1) received more than $80,000 (as indexed) in Compensation in the immediately preceding Plan Year, from a Participating Company or an Affiliated Company; and
(2) was among the top 20% of Employees of the Participating Company and Affiliated Companies ranked by Compensation in the immediately preceding Plan Year (excluding Employees described in section 414(q)(5) of the Code to the extent (A) permitted under the Code and regulations thereunder and (B) elected by the Employee Benefit Plan Board, for purposes of identifying the number of Employees in the top 20%).
2.17 "Hour of Service" shall mean an hour for which:
(a) an employee is directly or indirectly paid or entitled to payment by PPL or an Affiliated Company for the performance of employment duties;
(b) back pay, irrespective of mitigation of damages, is either awarded or agreed to; or
(c) an employee is directly or indirectly paid or entitled to payment by PPL or an Affiliated Company on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.
There shall be excluded from the foregoing those periods during which payments are made or due under a plan maintained solely for the purpose of complying with applicable workers' for the compensation, unemployment compensation or disability insurance laws. No more than 501 Hours of Service shall be credited under Subsection (c) on account of any single continuous period during which no duties are performed except to the extent otherwise provided in this Plan. An Hour of Service shall not be credited where an employee is being reimbursed solely for medical or medically related expenses. An Hour of Service shall be credited in accordance with the rules set forth in U.S. Department of Labor Reg. §2530.200b-2(b) and (c).
Hours of Service shall also be credited for any individual who is considered a leased employee for purposes of this Plan under section 414(n) of the Code.
Notwithstanding the foregoing, Hours of Service shall be credited for an employee for whom no records of hours are maintained on the basis of 45 Hours of Service for each week of employment.
2.18 “Leased Employee” shall mean any person (other than an employee of a Participating Company or Affiliated Company) who pursuant to an agreement between a Participating Company or Affiliated Company and any other person (“leasing organization”) has performed services for a Participating Company or Affiliated Company (or for a Participating Company or Affiliated Company and related persons determined in accordance with section 414(n)(6) of the Code) on a substantially full time basis for a period of at least one year, which services are performed under primary direction or control of a Participating Company or Affiliated Company.
A Leased Employee shall not be considered an employee of a Participating Company or Affiliated Company if (a) such individual is covered by a money purchase pension plan maintained by the leasing organization and providing (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined in section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee’s gross income under section 125, section 132(f)(4), section 402(e)(3), section 402(h)(1)(B) or section 403(b) of the Code, (2) immediate participation, and (3) full and immediate vesting; and (b) leased employees do not constitute more than 20 percent of the recipient’s nonhighly compensated work force.
2.19 "Matching Contributions" shall mean the contributions made by Participants in accordance with Section 4.2.
2.20 "Market Value" shall mean, with respect to the Stock the average of the closing prices of the Stock based on consolidated trading as defined by the Consolidated Tape Association and reported as part of the consolidated trading prices of New York Stock Exchange listed securities for the twenty consecutive trading days immediately preceding the date on which the Stock is contributed to the Plan.
2.21 "Officer" shall mean those persons who are defined as officers in Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934.
2.22 "Participant" shall mean an Employee entitled to participate in this Plan under Article III hereof or any former Employee for whom an Account is maintained under the Plan.
2.23 "Participating Company" shall mean PPL (prior to February 14, 2000, PP&L, Inc.), PPL EnergyPlus, LLC (prior to February 14, 2000, PP&L EnergyPlus Co., LLC) and each other Affiliated Company which is authorized by the Board to adopt this Plan by action of its board of directors, as Listed in Appendix A.
2.24 "PAYSOP Contributions" shall mean the contributions made by PPL in accordance with Section 4.3.
2.25 "Plan" shall mean the PPL Employee Stock Ownership Plan (prior to February 14, 2000, the PP&L Employee Stock Ownership Plan), an employee stock ownership plan within the meaning of section 4975(e)(7) of the Code, as set forth herein and as hereafter amended from time to time.
2.26 "Plan Year" shall mean the fiscal year of PPL, which shall commence each January 1 and end on the next following December 31.
2.27 "PPL" shall mean PPL Services Corporation and its successors. Prior to February 14, 2000, “PPL” shall mean PP&L, Inc.
2.28 “PPL Corporation” shall mean PPL Corporation and its successors. Prior to February 14, 2000, “PPL Corporation” shall mean PP&L Resources, Inc.
2.29 "Qualified Military Service" means any service (either voluntary or involuntary) by an individual in the Uniformed Services if such individual is entitled to reemployment rights with a Participating Company with respect to such service.
2.30 "Retirement Plan" shall mean the PPL Retirement Plan.
2.31 "Returning Veteran" means a former Employee who on or after December 12, 1994, returns from Qualified Military Service to employment by a Participating Company within the period of time during which his reemployment rights are protected by law.
2.32 "Spouse" shall mean the person to whom a Participant is married on any date of reference.
2.33 "Stock" shall mean the common stock of PPL Corporation.
2.34 "Total Disability" shall mean a disability of a nature which renders a Participant eligible to participate in PPL's Long Term Disability Plan.
2.35 "TRASOP Contributions" shall mean the contributions made by PPL in accordance with Section 4.1.
2.36 "Trust" or "Trust Agreement" shall mean the Agreement and Declaration of Trust, if any, executed under this Plan.
2.37 "Trustee" shall mean the corporate Trustee or one or more individuals collectively appointed and acting under the Trust Agreement, if any.
2.38 "Uniformed Services" means the Armed Forces, the Army National Guard and Air National Guard (when engaged in active duty for training, inactive duty training, or full-time National Guard duty), the commissioned corps of the Public Health Service, and any other category of persons designated by the President of the United States in time of war or emergency.
2.39 "Valuation Date" shall mean the last day of each Plan Year and each interim date on which a valuation of the Fund is made.

ARTICLE III
ELIGIBILITY
 
3.1 Eligibility.
(a) All persons who were participants in the Plan immediately prior to the Effective Date and who are in the employ of a Participating Company on the Effective Date shall be Participants hereunder as of such date. All Employees as of the Effective Date (but who are not eligible to participate under the preceding sentence) who have completed one year of Credited Service shall be Participants as of that date. Effective before July 31, 2006, other Employees shall become Participants on the first day of the calendar month next following the date on which an Employee completes one year of Credited Service, or if later, on which an individual becomes an Employee. Effective on and after July 31, 2006, other Employees shall become Participants on the first day of the calendar month next following the date on which an individual becomes an Employee. A "year of Credited Service," for the purposes of this Article, shall require completion of at least 1,000 Hours of Service during the 12 months from commencement of employment. An Employee who fails to complete 1,000 Hours of Service during his initial 12 months of employment shall complete a year of Credited Service as of the end of any Plan Year in which he completes 1,000 Hours of Service; provided, however, that the first Plan Year during which such Employee shall have the opportunity to complete such 1,000 Hours of Service shall include the anniversary of his commencement of employment.
(b) An Employee may elect in writing not to become a Participant by filing such election with the Employee Benefit Plan Board.
3.2 Participation. A Participant shall share in contributions under Article V for any Plan Year during which he (a) completes at least one Hour of Service and (b) receives Compensation. A Participant shall cease to be a Participant on the date on which his entire Account is distributed to him. Notwithstanding the foregoing, for Plan Year 1990, any Participant who is totally and permanently disabled shall share in contributions under Article V.
3.3 Reemployment after Break of Service. In the event a Participant ceases to be an Employee and subsequently again becomes an Employee, he shall be readmitted as a Participant as of the date of his reemployment.
3.4 Officers, Directors, and Shareholders. Officers, directors, and shareholders of a Participating Company who are Participants shall participate in the Plan on the same basis as other Participants.
3.5 Rights Affected. Except as expressly provided to the contrary in the Plan, any former Employee who has retired or whose employment has terminated before the Effective Date shall receive no additional rights as a result of this amended and restated Plan, but shall have his rights and benefits determined solely under the Plan as it existed prior to the Effective Date. However, any former Employee who has terminated employment and who is reemployed as an Employee after the Effective Date shall have the rights and benefits provided hereunder.
3.6 Data. Each Participant shall furnish to the Employee Benefit Plan Board such data as may be considered necessary by the Employee Benefit Plan Board for the determination of his rights and benefits under the Plan.
 
ARTICLE IV
CONTRIBUTIONS TO THE FUND
 
4.1 TRASOP Contributions. Prior to January 1, 1983, PPL contributed certain TRASOP contributions subject to section 409 of the Code. Effective January 1, 1983, no further TRASOP contributions shall be made.
4.2 Matching Contributions. Prior to January 1, 1983, Participants contributed certain Matching Contributions to be matched by PPL TRASOP contributions. Effective January 1, 1983, no further Matching Contributions shall be made.
4.3 PAYSOP Contributions. Prior to January 1, 1987, PPL contributed certain PAYSOP contributions subject to section 409 of the Code. Effective January 1, 1987, no further PAYSOP contributions shall be made.
4.4 Dividend-based Contribution. Commencing with the 1990 Plan Year, a Participating Company or PPL Corporation may contribute to the Plan an amount determined at the sole discretion of PPL or PPL Corporation relating to the reduction in taxes arising out of the payment of dividends to participants and the contribution thereof to the Plan. The Dividend-based Contribution is in addition to contributions made pursuant to Sections 4.1, 4.2 and 4.3. All contributions by PPL, PPL Corporation or a Participating Company are expressly conditioned upon their deductibility for federal income tax purposes.
4.5 Investment in Stock. All TRASOP, PAYSOP, Dividend-based, and Matching Contributions may be in cash or in Stock; provided, however, that if a Contribution is in cash, the Trustee shall use such Contribution to purchase Stock from PPL Corporation or others, effective July 31, 2006, with the exception of such funds necessary to implement a Participant’s direction for investment in investment options for diversification of investments pursuant to Code Section 401(a)(28)(B) and Section 7.9(b) of the Plan. If a Contribution is in Stock, the number of shares contributed will be determined by the Market Value of the Stock.

ARTICLE V
ALLOCATION
 
5.1 Accounts. A separate Account shall be created for each Participant. Separate subaccounts shall also be maintained with respect to the Stock acquired with (a) TRASOP and PAYSOP Contributions, (b) Matching Contributions and (c) Dividend-based Contributions. Additional subaccounts may be established at the Employee Benefit Plan Board's discretion.
5.2 Allocation of Contributions. Contributions made for any Plan Year shall be allocated among the Participants entitled to share in the allocation of contributions pursuant to Section 3.2 in accordance with the following rules.
(a) Subject to Section 5.2(b), Stock acquired with the Dividend-based Contribution made with respect to a Plan Year shall be allocated, as of the close of such Plan Year, as follows:
 
(1)
75% of the Dividend-based Contribution shall be allocated to the Account of each Participant to whom or on whose behalf dividends were paid at any time during the portion of such Plan Year in which the Participant was an Employee. The amount of such Stock allocated to each Participant's Account shall bear the same proportion to the total amount of such Stock allocated with respect to such Plan Year as the amount of dividends paid to such Participant during the portion of the Plan Year in which he was an Employee bears to the total amount of dividends paid to all Participants during the portion of such Plan Year in which they were Employees; and
 
(2)
25% of the Dividend-based Contribution shall be allocated to the Account of each Participant who was a Participant at any time during such Plan Year. The amount of such Stock allocated to each Participant's Account shall bear the same proportion to the total amount of such Stock allocated with respect to such Plan Year as the amount of the Compensation paid to such Participant bears to the total Compensation paid to all Participants during such Plan Year.
(b) In the event the allocation under Section 5.2(a)(1) fails the general test as set forth in Treas. Reg. section 1.401(a)(4)-2(c), the percentage of such contribution to be allocated under Section 5.2(a)(1) shall be decreased and the percentage of such contribution to be allocated under Section 5.2(a)(2) shall be correspondingly increased until the allocation under Section 5.2(a)(1) passes such general test. For purposes of the preceding sentence, the general test shall be performed without imputing disparity and without cross-testing, in accordance with any method permitted under Treas. Reg. 1.401(a)(4)-2(c) and related regulations, provided the general test is passed using such method; if the general test is failed using all methods permitted under Treas. Reg. 1.401(a)(4)-2(c) and related regulations, the general test shall be performed in accordance with the method that causes the smallest required adjustment under the preceding sentence in the relative percentages under Section 5.2(a)(1) and (2).
5.3 Allocation of Earnings.
(a) Any cash dividends paid prior to July 1, 2003 with respect to Stock that is allocated to a Participant's Account as of the record date of such dividend shall be paid no later than 90 days after the close of the Plan Year to the Participant in cash either by the Trustee or directly by PPL, a Participating Company or PPL Corporation.
(b) Any cash dividends paid on or after July 1, 2003 with respect to Stock that is allocated to a Participant’s Account as of the record date of such dividend shall be, as elected by the Participant in the manner and at the time prescribed by the Employee Benefit Plan Board, (1) distributed in cash to the Participant as soon as administratively practicable following the date such dividend is paid by PPL Corporation (but in no event later than 90 days after the close of the Plan Year in which such dividend is paid by PPL Corporation) or (2) credited to the Participant’s Account and invested in additional Stock. Dividends that are invested in Stock in the Plan pursuant to an election under section 404(k)(A)(iii) of the Code shall be treated as earnings under the Plan. Pursuant to rules established by the Employee Benefit Plan Board, a Participant’s failure to elect either a cash distribution or investment in Stock shall be deemed an election of cash distribution.
(c) Effective July 1, 2003, any non-cash distributions paid with respect to Stock allocated to a Participant’s Account shall be credited to the Participant’s Account and invested in additional Stock and treated as earnings under the Plan.
5.4 Special Allocation Rule. No Participant may receive an allocation under the Dividend-based Contribution provided for in Section 5.2(a) above which equals or exceeds 5% of such Participant's Compensation for the Plan Year for which such allocation is being made.
5.5 Maximum Allocation. Notwithstanding anything in this Article to the contrary, in no event shall contributions under the Plan violate the limitations set forth in section 415 of the Code, which are hereby incorporated into the Plan.
If the amount otherwise allocable to the accounts of a Participant would exceed the limitations of section 415 of the Code as a result of a reasonable error in estimating the Participant's Compensation, the Employee Benefit Plan Board shall determine which portion of such excess amount is attributable to the Participant's (1) voluntary after-tax employee contributions under the Employee Savings Plan or Deferred Savings Plan, (2) before-tax elective deferrals under the Employee Savings Plan or Deferred Savings Plan, (3) company matching contributions under the Deferred Savings Plan or Employee Savings Plan, (4) contributions under other plans maintained by a Participating Company or 50% Affiliated Company, and (5) Dividend-based Contributions under Article IV; and the following action shall be taken, in the order of priority set forth below.
(a) Amounts attributable to voluntary after-tax employee contributions under the Employee Savings Plan or Deferred Savings Plan and earnings thereon shall be returned to the Participant.
(b) Amounts attributable to before-tax elective deferrals under the Employee Savings Plan or Deferred Savings Plan and earnings thereon shall be returned to the Participant.
(c) Amounts attributable to company matching contributions under the Deferred Savings Plan or Employee Savings Plan will be held in a suspense account until the following Plan Year at which time the amounts will be used to reduce matching contributions for the year.
(d) Amounts attributable to contributions made under other plans maintained by a Participating Company or 50% Affiliated Company shall be corrected as provided in such plans.
(e) Amounts attributable to excess Dividend-based Contributions under this Plan shall be allocated to the accounts of other Participants in accordance with Section 5.2. Any excess Contributions or Stock purchased with such Contributions which cannot be allocated in a Plan Year to Participants' Accounts shall be held in a suspense account until the Plan Year in which it is first possible to allocate such Contributions or Stock to Participants' Accounts.

ARTICLE VI
PARTICIPANTS' ACCOUNTS
 
6.1 Accounts. All contributions and earnings thereon may be invested in one commingled Fund for the benefit of all Participants. However, in order that the interest of each Participant may be accurately determined and computed, a separate Account shall be maintained for each Participant which shall represent his interest in the Fund.
6.2 Valuation. The value of each investment medium in the Fund shall be computed by the Trustee as of the close of business on each Valuation Date on the basis of the fair market value of all assets of the Fund.
6.3 Accounting for Allocations. The Employee Benefit Plan Board shall provide for the establishment of accounting procedures for the purpose of making the allocations, valuations and adjustments to Participants' Accounts provided for in this Article. From time to time, such procedures may be modified for the purpose of achieving equitable and nondiscriminatory allocations among the Accounts of Participants in accordance with the general concepts of the Plan and the provisions of this Article.

 
ARTICLE VII
DISTRIBUTION
 
7.1 General. The interest of each Participant in the Fund shall be distributed in the manner, in the amount and at the time provided in this Article, except that in the event of termination of the Plan the provisions of Article X shall govern. Prior to July 1, 2003, each Participant shall have a nonforfeitable right to all Stock allocated to his Account, except as set forth in Sections 4.1(f), 4.7(c) and 5.5. Effective July 1, 2003, except as set forth in Section 5.5, each Participant shall have a nonforfeitable right to his Account including Stock or other amounts that are attributable to cash dividends paid on Stock to which the Participant has made or is deemed to have made an investment election pursuant to section 404(k)(A)(iii) of the Code. The provisions of this Article shall be construed in accordance with section 401(a)(9) of the Code and regulations thereunder.
7.2 Death. If a Participant dies either while in the employment of a Participating Company or after termination of employment but prior to the commencement of benefit payments, the full amount of his interest in the Fund shall be paid to the Participant's beneficiary in a single sum.
7.3 Beneficiary Designation.
(a) Death benefits under the Plan shall be paid to the surviving Spouse of a Participant, including the Spouse of a Participant who has retired or whose employment has terminated before the Effective Date, (1) unless (A) such Spouse consents in writing not to receive such benefit and consents to the specific beneficiary designated by the Participant, (B) such consent acknowledges its own effect, and (C) such consent is witnessed by a notary public; or (2) unless the Participant establishes to the satisfaction of a Plan representative either that he has no Spouse, that his Spouse cannot be located, or that his Spouse's consent is not required under such other circumstances as are prescribed under governmental regulations.
(b) Except as provided in this Section, each Participant shall have the unrestricted right at any time to designate the beneficiary or beneficiaries who shall receive, upon or after his death, his interest in the Fund by executing and filing with the Employee Benefit Plan Board a written instrument in such form as may be prescribed by the Employee Benefit Plan Board for that purpose. Except as provided in this Section, the Participant shall have the unrestricted right to revoke and to change, at any time and from time to time, any beneficiaries previously designated by him by executing and filing with the Employee Benefit Plan Board a written instrument in such form as may be prescribed by the Employee Benefit Plan Board for that purpose. No designation, revocation or change of beneficiaries shall be valid and effective unless and until filed with the Employee Benefit Plan Board.
If no designation is made, or if the beneficiaries named in such designation predecease the Participant, or if the beneficiary cannot be located by the Employee Benefit Plan Board, the interest of the deceased Participant shall be paid to the surviving spouse or if none, to the Participant's estate.
The amount payable upon the death of a Participant shall be paid in Stock or cash as elected by the recipients.
7.4 Disability.
(a) If a Participant suffers a Total Disability prior to his termination of employment with PPL and all Affiliated Companies and is on inactive status on account of such Total Disability, the full amount of his interest in the Fund shall be paid to him or applied for his benefit upon Participant's consent in writing to such payment or application following the determination of his Total Disability in accordance with the provisions of this Article VII.
(b) Total Disability shall be determined by the Employee Benefit Plan Board which may consult with a medical examiner selected by it. The medical examiner shall have the right to make such physical examinations and other investigations as may be reasonably required to determine Total Disability.
7.5 Termination of Employment. Upon a Participant's retirement or other termination of employment with PPL and all Affiliated Companies, he shall be entitled to receive his interest in the Fund. Subject to Subsection 7.7(c), (a) if the value of his interest in the Fund exceeds $5,000 ($1,000 effective Mach 28, 2005), his interest shall not be paid to him or applied for his benefit until (1) he consents in writing to such payment or application, or (2) he attains his 65th birthday or (3) he dies; whichever occurs first; (b) otherwise, his interest shall be paid to him or applied for his benefit in a single sum within 60 days after such termination takes place.
7.6 Valuation for Distribution. For the purposes of paying the amounts to be distributed to a Participant or his beneficiaries under the provisions of this Article, the value of the Fund and the amount of the Participant's interest shall be determined in accordance with the provisions of Article VI as of the Valuation Date coincident with or next following the event which gives rise to a payment under this Article. There shall be added to such amount the additional contributions, if any, which are to be allocated to the Participant's Account pursuant to Article IV.
7.7 Timing of Distribution.
(a) A Participant entitled under this Article to receive benefits shall commence to receive benefits as soon as administratively practicable, but in no event shall any Participant receive benefits later than the earlier of the dates determined under (1), (2) or (3) below:
(1) the later of
(A) the 60th day after the close of the Plan Year in which the Participant attains his Normal Retirement Date or
(B) the 60th day after the close of the Plan Year in which the Participant's employment with all Participating Companies and all Affiliated Companies terminates;
(2) the later of
(A) the April 1st that follows the end of the calendar year in which the Participant attains age 70½; or
(B) (Effective only for Participants who attain age 70½ on or after January 1, 2002.) the April 1st that follows the end of the calendar year in which the Participant’s employment terminates; provided, however, that this Paragraph (a)(2)(B) shall not apply for a Participant who is a five-percent (5%) owner (as defined in section 416 of the Code) of a Participating Company at any time during the five-Plan Year period ending in the calendar year in which he attains Age 70½ or thereafter; or
(3) in the event of the Participant's death, December 31 of the calendar year following the year of the Participant's death.
(b) If a Participant attains age 70½ after December 31, 1995 but before January 1, 2002, and is not a 5-percent owner (within the meaning of section 416 of the Code) of a Participating Company at any time during the five-Plan Year period ending in the calendar year in which he attained age 70½ or thereafter, such Participant may elect to receive benefits on either (1) April 1 of the calendar year following the calendar year in which he attains age 70½, or (2) April 1 of the calendar year following the calendar year in which he terminates employment with all Participating Companies and all Affiliated Companies. Such election must be made, in a form provided by the Administrative Committee, not later than April 1 of the calendar year following the calendar year in which the Participant attains age 70½. If the Participant fails to make a timely election, such Participant shall receive benefits not later than April 1 of the calendar year following the calendar year in which he attained age 70½.
(c) A Participant who terminates employment with a Participating Company on or after age 55, and whose Account exceeds $5,000 ($1,000 effective Mach 28, 2005), shall be entitled to defer payment of his benefits until a date not later than that specified in Section 7.7(a)(2).
(d) The Employee Benefit Plan Board shall supply to each Participant who is entitled to distribution before his death or attainment of age 65 and the value of whose Account exceeds $5,000 ($1,000 effective Mach 28, 2005), written information relating to his right to defer distribution under Section 7.4, 7.5 or 7.7(c). Such notice shall be furnished not less than 30 days nor more than 90 days prior to the Participant's benefit commencement date, except that such notice may be furnished less than 30 days prior to the Participant's benefit commencement date if (1) the Employee Benefit Plan Board informs the Participant that the Participant has the right to a period of at least 30 days after receiving such notice to consider the decision whether to elect a distribution, and the mode in which he desires such distribution to be made, and (2) the Participant, after receiving such notice, affirmatively elects a distribution.
7.8 Mode of Distribution. The sole form of benefit under Sections 7.2, 7.4 and 7.5 shall be a single sum payment. Any additional Stock which is subsequently allocated to the Participant's Account shall be distributed within 60 days following the date on which such allocation is actually made. At the election of the Participant, all distributions will be either in cash or in full shares of Stock and cash in lieu of fractional shares based on the price at which the Trustee sells such Stock or the fair market value thereof, if the Stock is not sold.
7.9 Withdrawals.
(a) Prior to July 31, 2006, a Participant could, by filing a written election with the Employee Benefit Plan Board, withdraw from his Account all Stock which had been allocated with respect to a Plan Year ending at least 84 months prior to the end of the Plan Year in which such election was made. The number of shares eligible for withdrawal during a Plan Year were determined on or before October 1 of the preceding Plan Year. Elections had to be received by the first day of March, June, September or December of the year in which the withdrawal was made. Payments of withdrawals were made within 60 days following the end of the quarter for which the election was made. As of July 31, 2006, a Participant may, by filing a written election with the Trustee, withdraw from his Account all Stock which has been allocated to the Participant’s Account for at least 36 months prior to the date such election is made.
(b) (1) Any Participant who has completed at least ten years of participation in the Plan and attained age 55 may elect within 90 days after the close of each Plan Year in the election period (as defined in Subsection (b)(2) below) to withdraw 25% of his Account attributable to Stock acquired by or contributed to the Plan on or after December 31, 1986 to the extent such portion of his Account exceeds the sum of (A) the amount to which a prior election under this Subsection applies and (B) any amount withdrawn under Subsection (a) pursuant to an election made within 90 days after the close of any Plan Year in the election period. In the case of a Participant's final election, "50%" shall be substituted for "25%" in the preceding sentence to determine the amount the Participant may withdraw or, effective July 31, 2006, re-invest. The determination of the date on which Stock is acquired by or contributed to the Plan shall be made in accordance with section 401(a)(28) of the Code and regulations thereunder.
(2) The election period for purposes of this Subsection is the six Plan Year period that begins with the Plan Year in which occurs the later of (A) the Participant's attainment of age 55 or (B) the first Plan Year in which the Participant has completed ten years of participation, except that the election period shall not begin before December 31, 1986.
(3) Payments of withdrawals under this Subsection 7.9(b) will be made within 90 days following the end of the 90-day period during which the withdrawal election is made.
(4) Effective July 31, 2006, if the Participant elects a re-investment, the portion of the Account specified in Section 7.9(b)(1) will be invested by the Trustee on behalf of the Participant in such investment choices as the Participant may select among the investments utilized by the Deferred Savings Plan and Employee Savings Plan. The transfer of investments, fees and charges, and limitations on investment withdrawals and deposits shall be the same as that imposed on such investments by the Trustee of the Deferred Savings Plan and Employee Savings Plan. The Participant shall have the right to withdraw any and all funds so invested, subject to investment administrative timing rules as may be imposed by the Trustee.
(c) Notwithstanding the provisions of Section 7.9(a) and (b) above, Officers may not withdraw or, effective July 31, 2006, re-invest, any Stock which has been in the Plan less than six months. Any election by an Officer to make a withdrawal or, effective July 31, 2006, re-invest, pursuant to this Section 7.9 must be made not less than six months prior to the date of the withdrawal and such election shall be irrevocable.
7.10 Optional Direct Transfer of Eligible Rollover Distributions.
(a) Except to the extent otherwise provided by section 401(a)(31) of the Code and regulations thereunder, a Participant, a surviving Spouse or an alternate payee under a Qualified Domestic Relations Order who is the spouse or former spouse of a Participant, entitled to receive a withdrawal or distribution from the Plan may elect to have the Trustee transfer all or a portion of the amount to be distributed directly to:
(1) an individual retirement account described in section 408(a) of the Code,
(2) an individual retirement annuity described in section 408(b) of the Code (other than an endowment contract),
(3) a qualified defined contribution retirement plan described in section 401(a) of the Code, the terms of which permit the acceptance of rollover contributions from this Plan,
(4) an annuity plan described in section 403(a) of the Code, the terms of which permit the acceptance of rollover contributions from this Plan,
(5) an annuity contract described in section 403(b) of the Code, or
(6) an eligible plan under section 457(b) of the Code which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this Plan.
A beneficiary entitled to receive a distribution from the Plan who is the spouse of a Participant shall have the right to transfer all or a portion of the amount to be distributed directly to a section 408(a) or 408(b) plan described in Subsections (a)(1) and (a)(2) above.
(b) the Participant or beneficiary must specify the name of the plan to which the amount is to be transferred, on a form and in a manner prescribed by the Employee Benefit Plan Board.
(c) Subsection (a) shall not apply to the following distributions:
(1) any distribution of Matching Contributions,
(2) any distribution which is one of a series of substantially equal installments over either (1) a period of ten (10) years or more, or (2) a period equal to the life or life expectancy of the Participant or the joint lives or life expectancy of the Participant and his beneficiary,
(3) that portion of any distribution after the Participant's Required Beginning Date that is required to be distributed to the Participant by the minimum distribution rules of section 401(a)(9) of the Code, or
(4) such other distributions as may be exempted by applicable statute or regulation from the requirements of section 401(a)(31) of the Code.

ARTICLE VIII
ADMINISTRATION
 
8.1 Administration by Employee Benefit Plan Board.
(a) The Plan shall be administered by an Employee Benefit Plan Board, consisting of not more than five persons nor fewer than three persons. Members of the Employee Benefit Plan Board shall be appointed from time to time by the Board of Directors of PPL Corporation and shall serve at the pleasure of the Board of Directors of PPL Corporation. Vacancies shall be filled in the same manner as appointments. Any member of the Employee Benefit Plan Board may resign by delivering a written resignation to the Board of Directors or to the Secretary of the Employee Benefit Plan Board effective upon delivery or at any other future date specified therein.
(b) The Employee Benefit Plan Board shall elect a chairman from its members and shall appoint a secretary who may be, but need not be, a member of the Employee Benefit Plan Board. The Employee Benefit Plan Board shall not receive any compensation for its services.
(c) The Employee Benefit Plan Board may act at a meeting or in writing without a meeting. A majority of the members of the Employee Benefit Plan Board at the time in office shall constitute a quorum for the transaction of business at all meetings and a majority of those present at any meeting shall be required for action. All decisions by the Employee Benefit Plan Board arrived at without a meeting shall be made by the vote or assent of a majority of its members. No member of the Employee Benefit Plan Board may act, vote or otherwise influence a decision of the Employee Benefit Plan Board specifically relating to the Employee Benefit Plan Board member's own participation under the Plan.
(d) The Employee Benefit Plan Board may adopt such rules and regulations as it deems desirable for the conduct of its affairs. All rules and decisions of the Employee Benefit Plan Board shall be uniformly and consistently applied. The Employee Benefit Plan Board shall have the final right of interpretation, construction and determination under the Plan and decisions of the Employee Benefit Plan Board are final and conclusive for all purposes.
8.2 Duties and Powers of Employee Benefit Plan Board and Administrative Committee.
(a) In addition to the duties and powers described elsewhere hereunder, the Employee Benefit Plan Board shall have all such powers as may be necessary to discharge its duties hereunder including but not limited to the following specific duties and powers:
(1) to retain such consultants, accountants, agents, clerical assistants and attorneys as may be deemed necessary or desirable to render statements, reports and advice with respect to the Plan and to assist the Employee Benefit Plan Board in complying with all applicable rules and regulations affecting the Plan. Any consultants, accountants, or attorneys may be the same as those retained by PPL;
(2) to make such amendments as provided for in Article X;
(3) to enact uniform and nondiscriminatory rules and regulations to carry out the provisions of the Plan;
(4) to compute the amount of any distribution payable to a Participant or other amounts payable under the Plan and authorize disbursement from the Fund;
(5) to interpret the provisions of the Plan;
(6) to determine whether any domestic relations order received by the Plan is a qualified domestic relations order as provided in section 414(p) of the Code;
(7) to evaluate administrative procedures;
(8) to delegate such duties and powers as the Employee Benefit Plan Board shall determine from time to time to any person or persons or to an administrative committee. To the extent of any such delegation, the delegate shall have the duties, powers, authority, and discretion of the Employee Benefit Plan Board; and
(9) to establish a claims procedure under which claims will be reviewed by the Manager-Employee Benefits of PPL (effective upon the closing of the PPL Corporation corporate realignment pursuant to which PPL will separate its electric generation and energy marketing operations from its regulated electric transmission and distribution business, by the Manager-Employee Benefits of PPL Services Corporation), or such other individual as may be designated by the Vice President-Human Resources of PPL (effective upon the closing of the PPL Corporation corporate realignment pursuant to which PPL will separate its electric generation and energy marketing operations from its regulated electric transmission and distribution business, by the Vice President-Human Resources of PPL Services Corporation) and under which each claimant shall receive notice in writing in the event any claim for benefits with respect to a Participant's participation in the Plan has been denied; such notice shall set forth the specific reasons for such denial. Such claims procedure shall also provide an opportunity for full and fair review by the Administrative Committee of the Employee Benefit Plan Board;
(b) In addition, to any other duties and powers it may possess, the Administrative Committee of the Employee Benefit Plan Board shall have the following specific duties and powers:
(1) to resolve questions or disputes relating to eligibility for distributions or the amount of distributions under the Plan;
(2) to interpret the provisions of the Plan;
The Employee Benefit Plan Board and the Administrative Committee of the Employee Benefit Plan Board shall have the discretionary authority and final right to interpret, construe and make benefit determinations (including eligibility and amount) under the Plan. The decisions of the Employee Benefit Plan Board and the Administrative Committee of the Employee Benefit Plan Board are final and conclusive for all purposes.
8.3 Reliance on Reports and Certificates. The members of the Employee Benefit Plan Board and the officers and directors of PPL, any Participating Company and PPL Corporation shall be entitled to rely upon all valuations, certificates and reports made by the Trustee or by any duly appointed accountant, and upon all opinions given by any duly appointed legal counsel.
8.4 Functions. The Employee Benefit Plan Board shall cause to be maintained such books of account, records and other data as may be necessary or advisable in its judgment for the purpose of the proper administration of the Plan.
8.5 Indemnification of the Employee Benefit Plan Board. Each member of the Employee Benefit Plan Board, the Administrative Committee, and each of their designees shall be indemnified by the Participating Companies against expenses (other than amounts paid in settlement to which a Participating Company does not consent) reasonably incurred by him in connection with any action to which he may be a party by reason of the delegation to him of administrative functions and duties, except in relation to matters as to which he shall be adjudged in such action to be personally guilty of negligence or willful misconduct in the performance of his duties. The foregoing right to indemnification shall be in addition to such other rights as the member of the Employee Benefit Plan Board, the Administrative Committee, and each of their designees may enjoy as a matter of law or by reason of insurance coverage of any kind. Rights granted hereunder shall be in addition to and not in lieu of any rights to indemnification to which the member of the Employee Benefit Plan Board, the Administrative Committee and each of their designees may be entitled pursuant to the bylaws of PPL. Service on the Employee Benefit Plan Board shall be deemed in partial fulfillment of the Employee Benefit Plan Board member's function as an employee, officer and/or director of PPL or PPL Corporation, if he serves in such other capacity as well.
8.6 Allocation of Fiduciary Responsibilities. A fiduciary shall have only those specific powers, duties, responsibilities and obligations as are specifically given under this Plan or the Trust Agreement. A fiduciary may serve in more than one fiduciary capacity with respect to the Plan. It is intended that each fiduciary shall be responsible for the proper exercise of the fiduciary's own powers, duties, responsibilities and obligations under this Plan and the Trust Agreement, and generally shall not be responsible for any act or failure to act of another fiduciary.

ARTICLE IX
 
THE FUND
 
9.1 Designation of Trustee. PPL, by appropriate resolution of its Board of Directors, shall name and designate a Trustee and enter into a Trust Agreement with such Trustee. PPL shall have the power to amend the Trust Agreement, remove the Trustee, and designate a successor Trustee, all as provided in the Trust Agreement. All of the assets of the Plan shall be held by the Trustee for use in accordance with this Plan in providing for the benefits hereunder.
9.2 Exclusive Benefit. Prior to the satisfaction of all liabilities under the Plan in the event of termination of the Plan, no part of the corpus or income of the Fund shall be used for or diverted to purposes other than for the exclusive benefit of Participants and their beneficiaries except as expressly provided in this Plan and in the Trust Agreement.
9.3 No Interest in Fund. No persons shall have any interest in, or right to, any part of the assets or income of the Fund, except as to and to the extent expressly provided in this Plan and in the Trust Agreement.
9.4 Trustee. The Trustee shall be the fiduciary with respect to management and control of Plan assets held by it and shall have exclusive and sole responsibility for the custody and investment thereof in accordance with the Trust Agreement.
9.5 Expenses. All expenses of administration of this Plan shall be paid from the Fund unless they are paid directly by a Participating Company.

ARTICLE X
AMENDMENT OR TERMINATION OF THE PLAN
 
10.1 Amendment. Each Participating Company shall have the power to amend the Plan by or pursuant to action of its board of directors, but any such amendment to the Plan must be approved by PPL Services Corporation, and shall only apply to those Participants who are employees of the Participating Company authorizing the amendment. Any amendment that significantly affects the cost of the Plan or significantly alters the benefit design or eligibility requirements of the Plan shall be adopted by both PPL Services Corporation and any Participating Company whose employees are affected. In addition, the Employee Benefit Plan Board may adopt any amendment that does not significantly affect the cost of the Plan or significantly alter the benefit design or eligibility requirements of the Plan. Each amendment to the Plan will be binding on the Participating Company to which it applies. Except as expressly provided elsewhere in the Plan, prior to the satisfaction of all liabilities with respect to the benefits provided under this Plan, no such amendment or termination shall cause any part of the monies contributed hereunder to revert to PPL or to be diverted to any purpose other than for the exclusive benefit of Participants and their beneficiaries. No amendment shall have the effect of retroactively depriving Participants of benefits already accrued under the Plan. Upon complete termination of the Plan without establishment or maintenance of a successor plan (other than an employee stock ownership plan as defined in section 4975(e)(7) of the Code), Participants may receive distribution of their Accounts. Amendments to the allocation formulas contained in Article V shall not be made more frequently than once every six months.
10.2 Termination. The Plan and the Fund forming part of the Plan may be terminated or contributions completely discontinued at any time by or pursuant to action of the board of directors of PPL Corporation. In the event of a termination, partial termination, or a complete discontinuance of contributions or in the event PPL Corporation is dissolved, liquidated, or adjudicated a bankrupt, the interest of the Participants, their estates and beneficiaries, shall be nonforfeitable and shall be fully vested, and distributions shall be made to them in full shares of Stock and cash in lieu of fractional shares based on the price at which the Trustee sells such Stock or the fair market value thereof. When all assets have been paid out by the Trustee, the Fund shall cease. Any distribution after termination of the Plan may be made at any time, and from time to time, in whole or in part in full shares of Stock and cash in lieu of fractional shares based on the price at which the Trustee sells such Stock or the fair market value thereof; provided, however, that no Stock may be distributed to a Participant within seven years after the month in which such Stock was allocated to the Participant's Account except in the case of the Participant's retirement, Total Disability, death or other termination of employment with PPL and all Affiliated Companies. In making such distributions, any and all determinations, divisions, appraisals, apportionments and allotments so made shall be final and conclusive.
10.3 Special Rule. In the event that the Plan is terminated in accordance with Section 10.2, unallocated amounts held in a suspense account described in Section 5.5 shall be allocated among Participants, subject to the limitations of Section 5.5, in the year of termination and amounts which cannot be allocated by reason of the limitations of Section 5.5 may be withdrawn from the Fund and returned to PPL or PPL Corporation.
10.4 Merger. The Plan shall not be merged with or consolidated with, or its assets be transferred to, any other qualified retirement plan unless each Participant would (assuming the Plan then terminated) receive a benefit after such merger, consolidation or transfer which is of actuarial value equal to or greater than the benefit he would have received from the value of his Account if the Plan had been terminated on the day before such merger, consolidation or transfer. No amounts shall be transferred to this Plan which would cause the Plan to be a direct or indirect transferee of a plan to which the joint and survivor annuity and pre-retirement survivor annuity requirements of sections 401(a)(11) and 417 of the Code apply.

ARTICLE XI
TOP HEAVY PROVISIONS
 
11.1 General. The following provisions shall apply automatically to the Plan and shall supersede any contrary provisions for each Plan Year in which the Plan is a Top Heavy Plan (as defined below). It is intended that this Article shall be construed in accordance with the provisions of section 416 of the Code.
11.2 Definitions. The following definitions shall supplement those set forth in Article II of the Plan:
(a) "Aggregation Group" shall mean:
(1) each plan (including a frozen plan or a plan which has been terminated during the 1-year period ending on the Determination Date) of PPL or an Affiliated Company in which a Key Employee is a participant,
(2) each other plan (including a frozen plan or a plan which has been terminated during the 1-year period ending on the Determination Date) of PPL or an Affiliated Company which enables any plan in which a Key Employee participates to meet the requirements of section 401(a)(4) or 410 of the Code, and
(3) each other plan (including a frozen plan or a plan which has been terminated during the 1-year period ending on the Determination Date) of PPL or an Affiliated Company which is included by the Employee Benefit Plan Board if the Aggregation Group, including such plan, would continue to meet the requirements of sections 401(a)(4) and 410 of the Code.
(b) "Determination Date" shall mean the last day of the preceding Plan Year, except for the first Plan Year, it shall mean the last day of that Plan Year.
(c) "Key Employee" shall mean any Employee or former Employee (including any deceased Employee) who at any time during the Plan Year that includes the Determination Date was an officer of the employer having annual compensation greater than $130,000 (as adjusted under section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002), a 5-percent owner of the employer, or a 1-percent owner of the employer having annual compensation of more than $150,000. For this purpose, “annual compensation” means compensation within the meaning of section 415(c)(3) of the Code. The determination of who is a Key Employee will be made in accordance with section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder.
(d) "Key Employee Ratio" shall mean the ratio for any Plan Year, calculated as of the Determination Date of such Plan Year, determined by comparing the amount described in Subsection (d)(1) with the amount described in Subsection (d)(2) after deducting from each such amount any portion thereof described in Subsection (d)(3).
(1) The sum of (A) the present value of all accrued benefits of Key Employees under all qualified defined benefit plans included in the Aggregation Group, (B) the balances in all of the accounts of Key Employees under all qualified defined contribution plans included in the Aggregation Group, and (C) the amounts distributed from all plans in such Aggregation Group to or on behalf of any Key Employee during the 1-year period ending on the Determination Date, except benefits paid on account of death in excess of the accrued benefit or account balances immediately prior to death. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than separation from service, death, or disability, the provisions of the foregoing subsection (C) shall be applied by substituting "5-year period" for "1-year period."
(2) The sum of (A) the present value of all accrued benefits of all participants under all qualified defined benefit plans included in the Aggregation Group, (B) the balances in all of the accounts of all participants under all qualified defined contribution plans included in the Aggregation Group and (C) the amounts distributed from all plans in such Aggregation Group to or on behalf of any participant during the 1-year period ending on the Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for a reason other than separation from service, death, or disability, the provisions of the foregoing subsection (C) shall be applied by substituting "5-year period" for "1-year period."
(3) The sum of (A) all rollover contributions (or fund to fund transfers) to the Plan by an Employee after December 31, 1983, from a plan sponsored by an employer which is not PPL or an Affiliated Company, (B) any amount that is included in Subsections (d)(1) and (2) for a person who is a Non-Key Employee as to the Plan Year of reference but who was a Key Employee as to any earlier Plan Year, and (C) for Plan Years beginning after December 31, 1984, any amount that is included in Subsections (d)(1) and (2) for a person who had not performed any services for PPL during the 1-year period ending on the Determination Date.
(4) The present value of accrued benefits under all qualified defined benefit plans included in the Aggregation Group shall be determined (A) on the basis of the 1971 TPF&C Forecast Mortality Table and an interest rate of six and one-half percent (6½%) and (B) under the accrual method used for all qualified defined benefit plans maintained by PPL or any Affiliated Company, if a single method is used for all such plans, or otherwise, the slowest accrual method permitted under section 411 (b) (1) (C) of the Code.
(e) "Non-Key Employee" shall mean any person who is an Employee or a former Employee of PPL or an Affiliated Company in any Plan Year but who is not a Key Employee as to that Plan Year. The term Non-Key Employee shall also include the beneficiaries of such persons.
(f) "Top Heavy Plan" shall mean each plan in an Aggregation Group if, as of the applicable Determination Date, the Key Employee Ratio exceeds sixty percent (60%) determined in accordance with section 416 of the Code.
11.3 Minimum Contributions for Non-Key Employees.
(a) In each Plan Year in which the Plan is a Top Heavy Plan, each Eligible Employee who is not a Key Employee (except an Eligible Employee who is not a Key Employee as to the Plan Year of reference but who was a Key Employee as to any earlier Plan Year or an Eligible Employee who is covered by a collective bargaining agreement) and who is actively employed by PPL on the last day of such Plan Year will receive a total minimum Company Contribution (including forfeitures) under all plans described in Section 11.2(a)(1) and (2) of not less than three percent (3%) of the Eligible Employee's annual compensation as defined in section 415 of the Code. Salary reduction contributions to such plans made on behalf of an Eligible Employee in plan years beginning after December 31, 1984 but before January 1, 1989, shall be deemed to be Company Contributions for the purpose of this Subsection. Company Contributions shall be taken into account for purposes of satisfying the minimum contribution requirements of section 416(c)(2) of the Code and the Plan. The preceding sentence shall apply with respect to Company Contributions under the Plan or, if the Plan provides that the minimum contribution requirement shall be met in another plan, such other plan. Company Contributions that are used to satisfy the minimum contribution requirements shall be treated as Company Contributions for purposes of the actual contribution percentage test and other requirements of section 401(m) of the Code.
(b) The percentage set forth in Section 11.3(a) shall be reduced to the percentage at which contributions, including forfeitures are made (or are required to be made) for a Plan Year for the Key Employee for whom such percentage is the highest for such Plan Year. This percentage shall be determined for each Key Employee by dividing the contribution for such Key Employee by his compensation, as defined in section 415 of the Code, for the Plan Year, determined under Section 11.4. All defined contribution plans required to be included in an Aggregation Group shall be treated as one plan for the purpose of this Section 11.3; however, this Section 11.3(b) shall not apply to any plan which is required to be included in an Aggregation Group if such plan enables a defined benefit plan in such group to meet the requirements of section 401(a)(4) or section 410 of the Code.
(c) If a Non-Key Employee described in Subsection (a), participates in both a defined benefit plan and a defined contribution plan described in Sections 11.2(a)(1) and (2) maintained by PPL, PPL is not required to provide such Employee with both the minimum benefit and the minimum contribution. Regulations prescribed by the Secretary of the Treasury shall serve to prevent inappropriate omissions or duplications of minimum benefits or contributions.
11.4 Social Security. The Plan for each Plan Year in which it is a Top Heavy Plan, must meet the requirements of this Article XI without regard to any Social Security or similar contributions or benefits.

ARTICLE XII
GENERAL PROVISIONS
 
12.1 No Employment Rights. Neither the action of PPL in establishing the Plan, nor any provisions of the Plan, nor any action taken by it or by the Employee Benefit Plan Board shall be construed as giving to any employee of a Participating Company the right to be retained in its employ, or any right to payment except to the extent of the benefits provided in the Plan to be paid from the Fund.
12.2 Source of Benefits. All benefits payable under the Plan shall be paid or provided for solely from the Fund, and neither any Participating Company nor PPL Corporation assume liability or responsibility therefor.
12.3 Governing Law. All questions pertaining to the validity, construction and operation of the Plan shall be determined in accordance with the laws of Pennsylvania, except to the extent superseded by ERISA.
12.4 Spendthrift Clause.
(a) No benefit payable at any time under this Plan, and no interest or expectancy herein shall be anticipated, assigned, or alienated by any Participant or beneficiary, or be subject to attachment, garnishment, levy, execution or other legal or equitable process, except for (1) an amount necessary to satisfy a federal tax levy made pursuant to section 6331 of the Code, (2) any benefit payable pursuant to a domestic relations order within the meaning of the Code or (3) an offset of a Participant's benefit as described in section 206(d)(4) of ERISA on account of a crime or fiduciary breach.
(b) Any attempt to alienate or assign such benefit, whether presently or thereafter payable, shall be void. No benefit shall in any manner be liable for or subject to the debts or liability of any Participant or beneficiary. If any Participant or beneficiary shall attempt to, or shall, alienate or assign his benefits under the Plan or any part thereof, or if by reason of his bankruptcy or other event happening at any time, such benefits would devolve upon anyone else or would not be enjoyed by him, then the Employee Benefit Plan Board may terminate payment of such benefit and hold or apply it to or for the benefit of the Participant or beneficiary.
(c) The Employee Benefit Plan Board shall review any domestic relations order to determine whether it is qualified within the meaning of section 414(p) of the Code. An order shall not be qualified unless it complies with all applicable provisions of the Plan concerning mode of payment and manner of elections. Notwithstanding the preceding sentence and any restrictions on timing of distributions and withdrawals under the Plan, an order may provide for distribution immediately or at any other time specified in the order.
12.5 Incapacity. If the Employee Benefit Plan Board deems any Participant who is entitled to receive payments hereunder incapable of receiving or disbursing the same by reason of age, illness or infirmity or incapacity of any kind, the Employee Benefit Plan Board may direct the Trustee to apply such payment directly for the comfort, support and maintenance of such Participant or to pay the same to any responsible person caring for the Participant as determined by the Employee Benefit Plan Board to be qualified to receive and disburse such payments for the Participant's benefit, and the receipt of benefit such person shall be a complete acquittance for the payment of benefit. Payments pursuant to this Section 12.5 shall be complete discharge to the extent thereof of any and all liability of the Participating Companies, PPL Corporation, the Employee Benefit Plan Board, the Administrative Committee (if any), the Trustee, and the Fund.
12.6 Gender and Number. Except where otherwise clearly indicated by context, the masculine shall include the feminine, the singular shall include the plural, and vice versa.
12.7 Voting or Tendering Stock. Each Participant (or, in the event of his or her death, his or her beneficiary) is, for purposes of this Section 12.7, hereby designated a “named fiduciary,” within the meaning of section 403(a)(1) of ERISA with respect to his or her proportionate number of shares of Stock (such proportionate number of shares being determined at the respective times such fiduciary rights are exercisable, as set forth below).
(a) Voting Rights. Each Participant (or beneficiary) shall have the right, to the extent of his or her proportionate number of shares of Stock (as determined in the last sentence of this Section 12.7(a)) to instruct the Trustee in writing as to the manner in which to vote such Stock at any stockholders’ meeting of PPL Corporation. PPL shall use its best efforts to timely distribute or cause to be distributed to each Participant (or beneficiary) the information distributed to stockholders of PPL Corporation in connection with any such stockholders' meeting, together with a form requesting confidential instructions to the Trustee on how such shares of Stock shall be voted on each such matter. Upon timely receipt of such instructions, the Trustee shall, on each such matter, vote as directed the appropriate number of shares of Stock (including fractional shares). An individual’s proportionate number of shares of Stock held in the trust shall be equal to the product of multiplying the total number of shares of Stock by a fraction, the numerator of which shall be the respective number of shares of Stock which are held in such individual’s account for which he or she provides instructions to the Trustee and the denominator of which shall be the number of shares of Stock in all such accounts for which instructions are provided to the Trustee.
(b) Rights on Tender or Exchange Offer. Each Participant (or beneficiary) shall have the right, to the extent of his or her proportionate number of shares of Stock (as determined in the last sentence of this Section 12.7(b)) of shares to instruct the Trustee in writing as to the manner in which to respond to a tender or exchange offer with respect to such Stock. PPL shall use its best efforts to timely distribute or cause to be distributed to each such Participant (or beneficiary) the information distributed to stockholders of PPL Corporation in connection with any such tender or exchange offer. Upon timely receipt of such instructions, the Trustee shall respond as instructed with respect to such shares. If, and to the extent that, the Trustee shall not have received timely instructions from any individual given a right to instruct the Trustee with respect to certain shares of Stock by the first sentence of this Section 12.7(b), such individual shall be deemed to have timely instructed the Trustee not to tender or exchange such shares of Stock. An individual’s proportionate number of shares of Stock shall be equal to the product of multiplying the total number of shares of Stock by a fraction, the numerator of which shall be the number of shares which are held in such individual’s account and the denominator of which shall be the total number of shares of Stock.
(c) Confidentiality. All instructions received by the Trustee from individual participants (or beneficiaries) pursuant to this Section 12.7 shall be held by the Trustee in strict confidence and shall not be divulged or released to any person; provided, that, to the extent necessary for the operation of the Plan or compliance with applicable law, such instructions may be relayed by the Trustee to a recordkeeper, auditor or other person providing services to the Plan or responsible for monitoring compliance with applicable laws, if such person is either:
 
(1)
a person who is not a Participating Company or an Affiliated Company or an employee, officer or director of a Participating Company or an Affiliated Company and who agrees not to divulge such instructions to any other person, including a Participating Company, an Affiliated Company, or employees, officers and directors of a Participating Company or an Affiliated Company; or
 
(2)
a person who is an employee of a Participating Company or an Affiliated Company, if such person is specifically authorized by the Employee Benefit Plan Board to receive such information pursuant to confidentiality procedures designed to safeguard the confidentiality of such information. The Employee Benefit Plan Board shall be responsible for monitoring compliance with such procedures, for the adequacy of such procedures, and for appointing an independent fiduciary to carry out activities relating to any situation that, in the determination of the Employee Benefit Plan Board, involves a potential for undue employer influence on Participants (or beneficiaries) with regard to their exercise of rights under this Section 12.7.
12.8 Use of Loan Proceeds. Subject to 12.9, no Stock acquired with the proceeds of an exempt loan (within the meaning of section 4975(e)(7) of the Code) shall be subject to a put, call, or other option or buy-sell or similar arrangement while held by or when distributed from the Plan, whether or not the Plan is an employee stock ownership plan at such time.
12.9 Put Option. In the event the Stock is ever not readily tradeable on an established market (whether or not the Plan is an employee stock ownership plan at such time), PPL or PPL Corporation shall issue a "put option" to each Participant or beneficiary receiving a distribution of Stock from the Plan. Such put option shall permit the Participant or beneficiary to sell such Stock to PPL or PPL Corporation, at any time during two option periods (described below), at the then fair-market value, as determined by an independent appraiser (as defined in section 401(a)(28) of the Code). The first put option period shall be a period of 60 days commencing on the date the Stock is distributed to the Participant or beneficiary. If the put option is not exercised within that period, it will temporarily lapse. Upon the close of the Plan Year in which such temporary lapse of the put option occurs, the Employee Benefit Plan Board shall establish the value of the Stock, as determined by an independent appraiser, and shall notify each distributee who did not exercise the initial put option prior to its temporary lapse in the preceding Plan Year of the revised value of the Stock. The second period during which the put option may be exercised shall commence on the date such notice of revaluation is given and shall permanently terminate 60 days thereafter. The Trustee may be permitted by PPL to purchase Stock tendered to PPL or PPL Corporation under a put option. The Participant may elect that the payment for Stock sold pursuant to a put option shall be made in one of the following forms:
(a) in substantially equal annual installments commencing within 30 days from the date of the exercise of the put option and over a period not exceeding five years, with interest payable at a reasonable rate on any unpaid installment balance, with adequate security provided, and without penalty for any prepayment of such installments; or
(b) in a lump sum as soon as practicable after the exercise of the put option.
The Trustee, on behalf of the Trust, may offer to purchase any shares of Stock (which are not sold pursuant to a put option) from any former Participant or beneficiary, at any time in the future, at their then fair-market value as determined by an independent appraiser.
12.10 Compliance with Rule 16b-3. With respect to Participants subject to section 16 of the Securities Exchange Act of 1934, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any provision of the Plan or action by the Board of Directors, the board of directors of PPL Corporation or Employee Benefit Plan Board involving such a Participant is deemed not to comply with an applicable condition of Rule 16b-3, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Board of Directors, the board of directors of PPL Corporation or Employee Benefit Plan Board.

ARTICLE XIII
TREATMENT OF RETURNING VETERANS
 
13.1 Applicability and Effective Date. The rights of any Returning Veteran who resumes employment with a Participating Company on or after December 12, 1994 shall be modified as set forth in this Article.
13.2 Eligibility to Participate. For purposes of Section 3.1,
(a) A Returning Veteran who was an Eligible Employee immediately prior to his Qualified Military Service shall be deemed to have remained an Eligible Employee throughout his Qualified Military Service.
(b) A Returning Veteran who would have become an Eligible Employee during the period of his Qualified Military Service, but for the resulting absence from employment, shall be deemed to have become an Eligible Employee as of the date he would have become an Eligible Employee if he had not entered into Qualified Military Service.
13.3 Restoration of Dividend-based Contributions. With respect to any Plan Year for which a Returning Veteran would have been a Participant, but failed to share in Dividend-based Contributions solely by reason of his Qualified Military Service, the Participating Company shall contribute to such Participant's Account an amount equal to the Dividend-based Contributions that would have been allocated to his Account, but for his absence for Qualified Military Service. Such contribution shall not include the earnings that would have accrued on such amount.
13.4 Determination of Compensation. For purposes of determining the amount of any contributions under Section 13.3 and for applying the limits of Section 5.5, a Participant's compensation during any period of Qualified Military Service shall be deemed to equal either:
(a) the compensation he would have received but for such Qualified Military Service, based on the rate of pay he would have received from a Participating Company; or
(b) if the amount described in (a) above is not reasonably certain, his average compensation from a Participating Company during the 12-month period immediately preceding the Qualified Military Service (or, if shorter, the period of employment immediately preceding the Qualified Military Service). Such amount shall be adjusted as necessary to reflect the length of the Participant's Qualified Military Service.
13.5 Application of Certain Limitations. For purposes of applying the limitations of Section 5.5, any contributions described in Section 13.3, shall be treated as contributions for the Limitation Year to which they relate, rather than the Limitation Year in which they are actually made.
13.6 Administrative Rules and Procedures. The Employee Benefit Plan Board shall establish such rules and procedures as it deems necessary or desirable to implement the provisions of this Article, provided that they are not in violation of the Uniformed Services Employment and Reemployment Rights Act of 1994, any regulations thereunder, or any other applicable law.
Executed this ___day of January, 2007.
PPL SERVICES CORPORATION
 
By _____________________________
 
Ronald Schwarz
Vice President-Human Resources
 
Appendix A
 
Participating Company
 
 
Name
 
 
Effective Date
 
1.
 
PPL Services Corporation
 
July 1, 2000
 
2.
 
PPL Electric Utilities Corporation
 
January 1, 1975
 
3.
 
PPL EnergyPlus, LLC
 
July 14, 1998
 
4.
 
PPL Generation, LLC
 
July 1, 2000
 
5.
 
PPL Brunner Island, LLC
 
July 1, 2000
 
6.
 
PPL Holtwood, LLC
 
July 1, 2000
 
7.
 
PPL Martins Creek, LLC
 
July 1, 2000
 
8.
 
PPL Montour, LLC
 
July 1, 2000
 
9.
 
PPL Susquehanna, LLC
 
July 1, 2000
 
10.
 
PPLSolutions, LLC
 
January 1, 2002
 
11.
 
PPL Telcom, LLC
 
February 5, 2001
 
12.
 
Lower Mount Bethel Energy, LLC
 
September 30, 2002
 
13.
 
PPL Edgewood Energy, LLC
 
April 1, 2003
 
14.
 
PPL Maine, LLC
 
April 1, 2003
 
15.
 
PPL Wallingford Energy, LLC
 
April 1, 2003
 
16.
 
PPL Development Company, LLC
 
January 1, 2006
 
17.
 
PPL Global, LLC
 
January 1, 2006
 
18.
PPL Energy Services Group, LLC
September 25, 2006
 
Schedule A
 
Effective July 1, 2000
 
A.
For all Participating Companies, "Compensation" shall mean the annual compensation received by an Employee from a Participating Company as reported on Internal Revenue Service Form W-2 or a successor form plus the Employee's elective deferrals under the Employee Savings Plan or Deferred Savings Plan; provided, however, that Compensation shall not include bonuses or fringe benefits not normally included in compensation, such as tuition refunds, moving expenses, etc. and shall not, for purposes of allocation under Section 5.2(a), include any amount in excess of (i) for the 1975 and 1976 Plan Years, $16,000 and (ii) commencing with the 1977 Plan Year, the median annual compensation of all Participants during the Plan Year or $100,000, whichever is less. Such median compensation shall be determined as of the close of a Plan Year and shall be rounded to an even thousand dollars. Compensation shall also include the additional compensation listed below, for Participants in the Participating Company listed herein.
B.
Effective January 1, 2000 only the following additional compensation for the following Participating Companies shall be included in Compensation, as defined in this Schedule A.
 
1.
PPL Electric Utilities Corporation (formerly PP&L, Inc.), PPL EnergyPlus, LLC (formerly PP&L EnergyPlus Co., LLC), PPL Services Corporation, PPL Generation, LLC, PPL Brunner Island, LLC, PPL Holtwood, LLC, PPL Martins Creek, LLC, PPL Montour, LLC, PPL Susquehanna, LLC, PPL Telcom, LLC (effective 2/5/01), PPLSolutions, LLC (effective 1/1/02), Lower Mount Bethel Energy, LLC (effective 9/30/02), PPL Edgewood Energy, LLC (effective 4/1/03), PPL Maine, LLC (effective 4/1/03), PPL Wallingford Energy, LLC (effective 4/1/03), PPL Development Company, LLC (effective 1/1/06), PPL Global, LLC (effective 1/1/06), and PPL Energy Services Group, LLC (effective 9/25/06).
 
 
a)
Any single sum award paid from the variable compensation fund created annually with a percentage of annualized base salaries in accordance with the Managers Compensation Plan.
 
2. PPL EnergyPlus, LLC (formerly PP&L EnergyPlus Co., LLC):
 
a) Any sales incentive award paid as a single sum on an annual basis.
SCHEDULE B
 
Schedule Of Minimum Distribution Requirements
 
Section 1. General Rules
 
1.1 Effective Date. The provisions of this Schedule will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year.
1.2 Precedence. The requirements of this Schedule will take precedence over any inconsistent provisions of the Plan.
1.3 Requirements of Treasury Regulations Incorporated. All distributions required under this Schedule will be determined and made in accordance with the Treasury regulations under section 401(a)(9) of the Code.
1.4 TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this Schedule, distributions may be made under a designation made before January 1, 1984, in accordance with section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (TEFRA) and the provisions of the Plan that relate to section 242(b)(2) of TEFRA.
 
Section 2. Time and Manner of Distribution.
 
2.1 Required Beginning Date. The Participant's entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant's required beginning date.
2.2 Death of Participant Before Distributions Begin. If the Participant dies before distributions begin, the Participant's entire interest will be distributed, or begin to be distributed, no later than as follows:
(a) If the Participant's surviving spouse is the Participant's sole designated beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70 1/2, if later.
(b) If the Participant's surviving spouse is not the Participant's sole designated beneficiary, then distributions to the designated beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.
(c) If there is no designated beneficiary as of September 30 of the year following the year of the Participant's death, the Participant's entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant's death.
(d) If the Participant's surviving spouse is the Participant's sole designated beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this section 2.2, other than section 2.2(a), will apply as if the surviving spouse were the Participant.
For purposes of this section 2.2 and section 4, unless section 2.2(d) applies, distributions are considered to begin on the Participant's required beginning date. If section 2.2(d) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under section 2.2(a). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant's required beginning date (or to the Participant's surviving spouse before the date distributions are required to begin to the surviving spouse under section 2.2(a)), the date distributions are considered to begin is the date distributions actually commence.
2.3 Forms of Distribution. Unless the Participant's interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the required beginning date, as of the first distribution calendar year distributions will be made in accordance with sections 3 and 4 of this Schedule. If the Participant's interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of section 401(a)(9) of the Code and the Treasury regulations.
 
Section 3. Required Minimum Distributions During Participant's Lifetime.
 
3.1 Amount of Required Minimum Distribution For Each Distribution Calendar Year. During the Participant's lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:
(a) the quotient obtained by dividing the Participant's account balance by the distribution period in the Uniform Lifetime Table set forth in section 1.401(a)(9)-9 of the Treasury regulations, using the Participant's age as of the Participant's birthday in the distribution calendar year; or
(b) if the Participant's sole designated beneficiary for the distribution calendar year is the Participant's spouse, the quotient obtained by dividing the Participant's account balance by the number in the Joint and Last Survivor Table set forth in section 1.401(a)(9)-9 of the Treasury regulations, using the Participant's and spouse's attained ages as of the Participant’s and spouse's birthdays in the distribution calendar year.
3.2 Lifetime Required Minimum Distributions Continue Through Year of Participant's Death. Required minimum distributions will be determined under this section 3 beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Participant's date of death.
 
Section 4. Required Minimum Distributions After Participant's Death.
 
4.1 Death On or After Date Distributions Begin.
(a) Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant's death is the quotient obtained by dividing the Participant's account balance by the longer of the remaining life expectancy of the Participant or the remaining life expectancy of the Participant's designated beneficiary, determined as follows:
(1)  The Participant's remaining life expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
(2)  If the Participant's surviving spouse is the Participant's sole designated beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the Participant's death using the surviving spouse's age as of the spouse's birthday in that year. For distribution calendar years after the year of the surviving spouse's death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse's birthday in the calendar year of the spouse's death, reduced by one for each subsequent calendar year.
(3)  If the Participant's surviving spouse is not the Participant's sole designated beneficiary, the designated beneficiary's remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the Participant's death, reduced by one for each subsequent year.
(b) No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no designated beneficiary as of September 30 of the year after the year of the Participant's death, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant's death is the quotient obtained by dividing the Participant's account balance by the Participant's remaining life expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
4.2 Death Before Date Distributions Begin.
(a) Participant Survived by Designated Beneficiary. If the Participant dies before the date distributions begin and there is a designated beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Participant's death is the quotient obtained by dividing the Participant's account balance by the remaining life expectancy of the Participant's designated beneficiary, determined as provided in section 4.1.
(b) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no designated beneficiary as of September 30 of the year following the year of the Participant's death, distribution of the Participant's entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death.
(c) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant's surviving spouse is the Participant's sole designated beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under section 2.2(a), this section 4.2 will apply as if the surviving spouse were the Participant.
 
Section 5. Definitions.
 
5.1 Designated beneficiary. The individual who is designated as the beneficiary under Section 7.3 of the Plan and is the designated beneficiary under section 401(a)(9) of the Code and section 1.401(a)(9)-1, Q&A-4, of the Treasury regulations.
5.2 Distribution calendar year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin under section 2.2. The required minimum distribution for the Participant's first distribution calendar year will be made on or before the Participant's required beginning date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the Participant's required beginning date occurs, will be made on or before December 31 of that distribution calendar year.
5.3 Life expectancy. Life expectancy as computed by use of the Single Life Table in section 1.401(a)(9)-9 of the Treasury regulations.
5.4 Participant's account balance. The account balance as of the last valuation date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year.
5.5 Required beginning date. The date specified in Section 7.7 of the Plan.
 EX-4.F10 3 ppl10-k2006exhibit4f10.htm EXHIBIT 4(F)-10 Exhibit 4(f)-10

Exhibit 4(f)-10






PPL ENERGY SUPPLY, LLC,
Issuer
 
 
TO
 
 
THE BANK OF NEW YORK
(as successor Trustee to JPMorgan Chase Bank, N.A.
(formerly known as The Chase Manhattan Bank)),
Trustee
 
 
_________
 
 
Supplemental Indenture No. 7
 
 
Dated as of December 1, 2006
 
 
Supplemental to the Indenture
dated as of October 1, 2001
 
 
Establishing a series of Securities designated
Senior Notes, 6.00% Series due 2036
initially limited in aggregate principal amount to $300,000,000




SUPPLEMENTAL INDENTURE NO. 7, dated as of December 1, 2006 between PPL ENERGY SUPPLY, LLC, a limited liability company duly organized and existing under the laws of the State of Delaware (herein called the “Company”), and THE BANK OF NEW YORK, a New York banking association (as successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank)), as Trustee (herein called the “Trustee”), under the Indenture dated as of October 1, 2001 (hereinafter called the “Original Indenture”), this Supplemental Indenture No. 7 being supplemental thereto. The Original Indenture and any and all indentures and instruments supplemental thereto are hereinafter sometimes collectively called the “Indenture.”
 
Recitals of the Company
 
The Original Indenture was authorized, executed and delivered by the Company to provide for the issuance by the Company from time to time of its Securities (such term and all other capitalized terms used herein without definition having the meanings assigned to them in the Original Indenture), to be issued in one or more series as contemplated therein.
 
As contemplated by Sections 301 and 1201(f) of the Original Indenture, the Company wishes to establish a series of Securities to be designated “Senior Notes, 6.00% Series due 2036” to be limited in aggregate principal amount (except as contemplated in Section 301(b) and the last paragraph of Section 301 of the Original Indenture) to $300,000,000 (such series of Securities to be hereinafter sometimes called “Series No. 7”).
 
The Company has duly authorized the execution and delivery of this Supplemental Indenture No. 7 to establish the Securities of Series No. 7, and has duly authorized the issuance of such Securities. All acts necessary to make this Supplemental Indenture No. 7 a valid agreement of the Company and to make the Securities of Series No. 7 valid obligations of the Company have been performed.
 
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE NO. 7 WITNESSETH:
 
For and in consideration of the premises and of the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities of Series No. 7 as follows:
 
ARTICLE ONE 
 
Seventh Series of Securities
 
Section 1.  There is hereby created a series of Securities designated “Senior Notes, 6.00% Series due 2036” and limited in aggregate principal amount (except as contemplated in Section 301(b) and the last paragraph of Section 301 of the Original Indenture) to $300,000,000. The form and terms of the Securities of Series No. 7 shall be established in an Officer’s Certificate of the Company, as contemplated by Section 301 of the Original Indenture.
 
Section 2.  The Company hereby agrees that, if the Company shall make any deposit of money and/or Eligible Obligations with respect to any Securities of Series No. 7 or any portion of the principal amount thereof, as contemplated by Section 701 of the Indenture, the Company shall not deliver an Officer’s Certificate described in clause (z) in the first paragraph of said Section 701 unless the Company shall also deliver to the Trustee, together with such Officer’s Certificate, either:
 
(A)  an instrument wherein the Company, notwithstanding the satisfaction and discharge of its indebtedness in respect of such Securities, shall assume the obligation (which shall be absolute and unconditional) to irrevocably deposit with the Trustee or Paying Agent such additional sums of money, if any, or additional Eligible Obligations (meeting the requirements of Section 701), if any, or any combination thereof, at such time or times, as shall be necessary, together with the money and/or Eligible Obligations theretofore so deposited, to pay when due the principal of and premium, if any, and interest due and to become due on such Securities or portions thereof, all in accordance with and subject to the provisions of said Section 701; provided, however, that such instrument may state that the obligation of the Company to make additional deposits as aforesaid shall arise only upon the delivery to the Company by the Trustee of a notice asserting the deficiency and showing the calculation thereof and shall continue only until the Company shall have delivered to the Trustee an opinion of an independent public accountant of nationally recognized standing to the effect that no such deficiency exists and showing the calculation of the sufficiency of the deposits then held by the Trustee; or
 
(B)  an Opinion of Counsel to the effect that the Holders of such Securities, or portions of the principal amount thereof, will not recognize income, gain or loss for United States federal income tax purposes as a result of the satisfaction and discharge of the Company’s indebtedness in respect thereof and will be subject to United States federal income tax on the same amounts, at the same times and in the same manner as if such satisfaction and discharge had not been effected.
 
Section 3.  The Company agrees that for so long as any Securities of Series No. 7 shall remain Outstanding, without consent of the Holders of a majority in principal amount of the Outstanding Securities of such series, the Company shall not create, incur or assume any Lien (other than Permitted Liens) upon any property of the Company, whether now owned or hereafter acquired, in order to secure any Debt of the Company. The foregoing agreement shall not restrict the ability of Subsidiaries or Affiliates of the Company to create, incur or assume any Lien upon their properties or assets.
 
Section 4.  The provisions of Section 3 above shall not prohibit the creation, issuance, incurrence or assumption of any Lien if either
 
(A)  the Company shall make effective provision whereby all Securities of Series No. 7 then Outstanding shall be secured equally and ratably with all other Debt then outstanding under such Lien; or
 
(B)  the Company shall deliver to the Trustee bonds, notes or other evidences of indebtedness secured by the Lien which secures such Debt (hereinafter called “Secured Obligations”) (I) in an aggregate principal amount equal to the aggregate principal amount of the Securities of Series No. 7 then Outstanding, (II) maturing (or being subject to mandatory redemption) on such dates and in such principal amounts that, at each Stated Maturity of the Outstanding Securities of Series No. 7, there shall mature (or be redeemed) Secured Obligations equal in principal amount to such Securities then to mature and (III) containing, in addition to any mandatory redemption provisions applicable to all Secured Obligations outstanding under such Lien and any mandatory redemption provisions contained therein pursuant to clause (II) above, mandatory redemption provisions correlative to the provisions, if any, for the mandatory redemption (pursuant to a sinking fund or otherwise) of the Securities of Series No. 7 or for the redemption thereof at the option of the Holder, as well as a provision for mandatory redemption upon an acceleration of the maturity of all Outstanding Securities of Series No. 7 following an Event of Default (such mandatory redemption to be rescinded upon the rescission of such acceleration); it being expressly understood that such Secured Obligations (X) may, but need not, bear interest, (Y) may, but need not, contain provisions for the redemption thereof at the option of the issuer, any such redemption to be made at a redemption price or prices not less than the principal amount thereof and (Z) shall be held by the Trustee for the benefit of the Holders of all Securities of Series No. 7 from time to time Outstanding subject to such terms and conditions relating to surrender to the Company, transfer restrictions, voting, application of payments of principal and interest and other matters as shall be set forth in an indenture supplemental hereto specifically providing for the delivery to the Trustee of such Secured Obligations.
 
Section 5.  If the Company shall elect either of the alternatives described in Section 4 above, the Company shall deliver to the Trustee:
 
(A)  an indenture supplemental to the Original Indenture (I) together with any appropriate inter-creditor arrangements, whereby such Securities of Series No. 7 then Outstanding shall be secured by the Lien referred to in Section 4 above equally and ratably with all other indebtedness secured by such Lien or (II) providing for the delivery to the Trustee of Secured Obligations; and
 
(B)  an Officer’s Certificate (I) stating that, to the knowledge of the signer, (1) no Event of Default has occurred and is continuing and (2) no event has occurred and is continuing which entitles the secured party under such Lien to accelerate the maturity of the indebtedness outstanding thereunder and (II) stating the aggregate principal amount of indebtedness issuable, and then proposed to be issued, under and secured by such Lien; and
 
(C)  an Opinion of Counsel (I) if the Securities of Series No. 7 then Outstanding are to be secured by such Lien, to the effect that all such Securities then Outstanding are entitled to the benefit of such Lien equally and ratably with all other indebtedness outstanding under such Lien or (II) if Secured Obligations are to be delivered to the Trustee, to the effect that such Secured Obligations have been duly issued under such Lien and constitute valid obligations, entitled to the benefit of such Lien equally and ratably with all other indebtedness then outstanding under such Lien.
 
Section 6.  The Company agrees that for so long as any Securities of Series No. 7 shall remain Outstanding, and except for the sale of the properties and assets of the Company substantially as an entirety pursuant to Article Eleven of the Original Indenture, and other than assets required to be sold to conform with governmental requirements, the Company shall not, and shall not permit any of its Subsidiaries to, consummate any Asset Sale, if the aggregate net book value of all such Asset Sales consummated during the four calendar quarters immediately preceding any date of determination would exceed 15% of the consolidated assets of the Company and its consolidated Subsidiaries as of the beginning of the Company’s most recently ended full fiscal quarter; provided, however, that any such Asset Sale will be disregarded for purposes of the 15% limitation specified above (i) if any such Asset Sale is in the ordinary course of business, (ii) to the extent that such assets are worn out or are no longer useful or necessary in connection with the operation of the business of the Company or its Subsidiaries, (iii) to the extent such assets are being transferred to a wholly-owned Subsidiary of the Company, (iv) to the extent any such assets subject to any such Asset Sale involve transfers of assets of or equity interests in connection with (a) the formation of any joint venture between the Company or any of its Subsidiaries and any other entity, or (b) any project development and acquisition activities, and (v) if the proceeds thereof (a) are, within 12 months of such Asset Sale, invested or reinvested by the Company or any Subsidiary in a Permitted Business, (b) are used by the Company or a Subsidiary to repay Debt of the Company or such Subsidiary, or (c) are retained by the Company or its Subsidiaries. Additionally, if prior to any Asset Sale that otherwise would cause the 15% limitation to be exceeded, Moody’s and S&P confirm the then current long term debt rating of such Securities of Series No. 7 after giving effect to such Asset Sale, such Asset Sale shall also be disregarded for purposes of the foregoing limitations.
 
Section 7.  So long as any Securities of Series No. 7 shall remain Outstanding, the following event shall be an Event of Default with respect to the Securities of Series No. 7: the occurrence of a matured event of default, as defined in any instrument of the Company under which there may be issued or evidenced any Debt of the Company, that has resulted in the acceleration of such Debt in excess of $25,000,000, or any default in payment of Debt in excess of $25,000,000 at final maturity, after the expiration of any applicable grace or cure periods; provided, however, that the waiver or cure of any such default under any such instrument or Debt shall constitute a waiver and cure of the corresponding Event of Default under the Indenture and the rescission and annulment of the consequences thereof shall constitute a rescission and annulment of the corresponding consequences under the Indenture.
 
Section 8.  So long as any Securities of Series No. 7 shall remain Outstanding, for purposes of Section 1101(a) of the Indenture, “corporation” shall be deemed to refer to a corporation or limited liability company. For all other purposes, the definition of “corporation” in Section 101 of the Original Indenture shall govern.
 
Section 9.  For the purposes of this Article One, except as otherwise expressly provided or unless the context otherwise requires:
 
(A)  “Asset Sale” shall mean any sale of any assets of the Company or its Subsidiaries including by way of the sale by the Company or any of its Subsidiaries of equity interests in such Subsidiaries.
 
(B)  “Debt”, with respect to any Person, means (A) indebtedness of such Person for borrowed money evidenced by a bond, debenture, note or other similar written instrument or agreement by which such Person is obligated to repay such borrowed money and (B) any guaranty by such Person of any such indebtedness of another Person. “Debt” does not include, among other things, (W) indebtedness of such Person under any installment sale or conditional sale agreement or any other agreement relating to indebtedness for the deferred purchase price of property or services, (X) any trade obligations (including obligations under agreements relating to the purchase and sale of any commodity, including power purchase or sale agreements, and any commodity hedges or derivatives regardless or whether such transaction is a “financial” or physical transaction) or other obligations of such Person in the ordinary course of business, (Y) obligations of such Person under any lease agreement (including any lease intended as security), whether or not such obligations are required to be capitalized on the balance sheet of such Person under generally accepted accounting principles, or (Z) liabilities secured by any Lien on any property owned by such Person if and to the extent that such Person has not assumed or otherwise become liable for the payment thereof.
 
(C)  “Lien” means any lien, mortgage, deed of trust, pledge or security interest, in each case, intended to secure the repayment of Debt, except for any Permitted Lien.
 
(D)  “Material Subsidiary” means PPL Global, LLC, a Delaware limited liability company, PPL EnergyPlus, LLC, a Delaware limited liability company, or PPL Generation, LLC, a Delaware limited liability company.
 
(E)  “Moody’s” means Moody’s Investors Service, Inc. and its successors and assigns, or absent a successor, or if such entity ceases to rate the Securities of Series No. 7, such other nationally recognized statistical rating organization as the Company may designate by notice to the Trustee.
 
(F)  “Permitted Business” means a business that is the same or similar to the business of the Company or any Subsidiary as of the date that Securities of Series No. 7 are first authenticated hereunder, or any business reasonably related thereto.
 
(G)  “Permitted Liens” means
 
(i)  any Liens existing at December 14, 2006;
 
(ii)  any vendors’ Liens, purchase money Liens and other Liens on property at the time of acquisition thereof by the Company and Liens to secure or provide for the construction or improvement of property provided that no such Lien shall extend to or cover any other property of the Company;
 
(iii)  any Liens on cash or securities (other than limited liability company interests issued by any Material Subsidiary), including any cash or securities on hand or in banks or other financial institutions, deposit accounts and interests in general or limited partnerships;
 
(iv)  any Liens on the equity interest of any Subsidiary that is not a Material Subsidiary;
 
(v)  any Liens on property or shares of capital stock, or arising out of any Debt of any corporation existing at the time the corporation becomes or is merged or consolidated into the Company;
 
(vi)  any Liens in connection with the issuance of tax-exempt industrial development or pollution control bonds or other similar bonds issued pursuant to Section 103(b) of the Internal Revenue Code of 1986, as amended (or any successor provision), to finance all or any part of the purchase price of or the cost of constructing, equipping or improving property, provided that such Liens are limited to the property acquired or constructed or improved and to substantially unimproved real property on which such construction or improvement is located; provided, further, that the Company may further secure all or any part of such purchase price or the cost of construction or improvement by an interest on additional property of the Company only to the extent necessary for the construction, maintenance and operation of, and access to, such property so acquired or constructed or such improvement;
 
(vii)  any Liens on contracts, leases and other agreements of whatsoever kind and nature; any Liens on contract rights, bills, notes and other instruments; any Liens on revenues, income and earnings, accounts, accounts receivable and unbilled revenues, claims, credits, demands and judgments; any Liens on governmental and other licenses, permits, franchises, consents and allowances; and any Liens on patents, patent licenses and other patent rights, patent applications, trade names, trademarks, copyrights, claims, credits, choses in action and other intangible property and general intangibles including, but not limited to, computer software;
 
(viii)  any Liens securing Debt which matures less than one year from the date of issuance or incurrence thereof and is not extendible at the option of the issuer, and any refundings, refinancings and/or replacements of any such Debt by or with similar secured Debt;
 
(ix)  any Liens on automobiles, buses, trucks and other similar vehicles and movable equipment; vessels, boats, barges and other marine equipment; airplanes, helicopters, aircraft engines and other flight equipment; parts, accessories and supplies used in connection with any of the foregoing;
 
(x)  any Liens on furniture and furnishings, and computers, data processing, data storage, data transmission, telecommunications and other equipment and facilities, equipment and apparatus, which, in any case, are used primarily for administrative or clerical purposes;
 
(xi)  any Liens on property which is the subject of a lease agreement designating the Company as lessee and all right, title and interest of the Company in and to such property and in, to and under such lease agreement, whether or not such lease agreement is intended as security;
 
(xii)  other Liens securing Debt the principal amount of which does not exceed 10% of the total assets of the Company and its consolidated Subsidiaries as shown on the Company’s most recent audited consolidated balance sheet; and
 
(xiii)  any Liens granted in connection with extending, renewing, replacing or refinancing, in whole or in part, the Debt secured by liens described in the foregoing clauses (i) through (xii), to the extent of such Debt so extended, renewed, replaced or refinanced.
 
(H)  “S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. and its successors and assigns, or absent a successor, or if such entity ceases to rate the Securities of Series No. 7, such other nationally recognized statistical rating organization as the Company may designate by notice to the Trustee.
 
(I)  “Subsidiary” means any corporation a majority of the outstanding Voting Stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries of the Company.
 
(J)  “Voting Stock” means stock (or other interests) of a corporation having voting power for the election of directors, managers or trustees thereof, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency.
 
ARTICLE TWO
 
Miscellaneous Provisions
 
Section 1.  This Supplemental Indenture No. 7 is a supplement to the Original Indenture. As supplemented by this Supplemental Indenture No. 7, the Indenture is in all respects ratified, approved and confirmed, and the Original Indenture and this Supplemental Indenture No. 7 shall together constitute one and the same instrument.
 
Section 2.  The recitals contained in this Supplemental Indenture No. 7 shall be taken as the statements of the Company and the Trustee assumes no responsibility for their correctness and makes no representations as to the validity or sufficiency of this Supplemental Indenture No. 7.
 
Section 3.  This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.
 
 
 
 


IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture No. 7 to be duly executed, and their respective seals to be hereunto affixed and attested, all as of the day and year first written above.
 
PPL ENERGY SUPPLY, LLC
 
By: ________________________
Name: James E. Abel
Title: Vice President and Treasurer
[SEAL]
 
ATTEST:
 
________________________
THE BANK OF NEW YORK
                                   as Trustee
 
By: ________________________
Name:
Title:
[SEAL]
 
ATTEST:
 
________________________
 

 
 EX-4.I 4 ppl10-k2006exhibit4i.htm EXHIBIT 4(I) Exhibit 4(i)

Exhibit 4(i)

 
 
 
WESTERN POWER
DISTRIBUTION (SOUTH WEST) PLC
 
and
 
HSBC TRUSTEE (C.I.) LIMITED
 
 
 
 
TRUST DEED
 
constituting
£105,000,000 1.541 per cent. Index-Linked Notes due 2053
 
 
 
This Trust Deed is made on 1 December 2006 between:
 
(1)  
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC (“WPD South West” or the “Issuer”) a company incorporated in England and Wales whose registered office is at Avonbank, Feeder Road, Bristol BS2 0TB and
 
(2)  
HSBC TRUSTEE (C.I.) LIMITED (the “Trustee”, which expression, where the context so admits, includes any other trustee for the time being of this Trust Deed) a company incorporated under the laws of Jersey whose registered office is at P.O. Box 88, 1 Grenville Street, St. Helier, Jersey, JE4 9PF.
 
Whereas:
 
(A)  
The Issuer has authorised the issue of £105,000,000 1.541 per cent. Index-Linked Notes due 2053 to be constituted by this Trust Deed.
 
(B)  
The Trustee has agreed to act as trustee of this Trust Deed on the following terms and conditions.
 
This Deed witnesses and it is declared as follows:
 
 
1  
Interpretation
 
1.1  
Definitions: Capitalised terms used, but not defined, herein shall bear the same respective meanings given to such terms in the Conditions and, in addition, the following expressions have the following meanings:
 
“Auditors” means the auditors for the time being of the Issuer or, if they are unable or unwilling to carry out any action requested of them under this Trust Deed, such other firm of accountants as may be nominated or approved in writing by the Trustee for the purpose
 
“Authorised Signatory” means any Director of the Issuer or any other person who is for the time being authorised by the relevant Issuer to sign documents for the purposes of these presents and who has been notified in writing to the Trustee as being so authorised
 
“Clearing System” means Clearstream, Luxembourg or Euroclear or both of them as applicable
 
“Clearstream, Luxembourg” means Clearstream Banking, société anonyme
 
“Conditions” means the terms and conditions set out in Schedule 1 as from time to time modified in accordance with this Trust Deed and, with respect to any Notes represented by the Global Note, as modified by the provisions of the Global Note. Any reference to a particularly numbered Condition shall be construed accordingly
 
“Couponholder” means the bearer of a Coupon
 
“Coupons” means the bearer coupons relating to the Notes or, as the context may require, a specific number of them and includes any replacement Coupons issued pursuant to the Conditions
 
“EEA Regulated Market” means a market as defined by Article 1(13) of the Investment Services Directive 93/22/EEC
 
“Euroclear” means Euroclear Bank S.A./N.V.
 
“Event of Default” means an event described in Condition 9 which, if so required by that Condition, has been certified by the Trustee to be, in its opinion, materially prejudicial to the interests of the Noteholders
 
“Excluded Subsidiary” has the meaning set out in Condition 9
 
“Extraordinary Resolution” has the meaning set out in Schedule 3
 
“FSMA” means the Financial Services and Markets Act 2000
 
“Global Note” means the permanent global note which will represent the Notes, or some of them, after exchange of the Temporary Global Note, or a portion of it, substantially in the form set out in Part 2 of Schedule 2
 
“Group” has the meaning set out in Condition 3.3
 
“Market” means the EEA Regulated Market of the London Stock Exchange
 
“Material Adverse Effect” means a material adverse effect that a removal, qualification or amendment as provided in Condition 6.4(d)(vi)(C) has on the financial condition of the Issuer or any Distribution Subsidiary, provided that the Trustee shall have no duty to enquire or satisfy itself as to the existence of a Material Adverse Effect and shall be entitled to rely conclusively upon the certificate of two directors of the Issuer regarding the same as provided in such Condition, and the Trustee shall bear no liability of any nature whatsoever to the Issuer, the Noteholders or any other person as a result thereof
 
“Notes” means bearer notes substantially in the form set out in Schedule 1 comprising the £105,000,000 1.541 per cent. Index-Linked Notes due 2053 constituted by this Trust Deed and for the time being outstanding or, as the context may require, a specific number of them and includes any replacement Notes issued pursuant to the Conditions and (except for the purposes of Clause 3.1) the Temporary Global Note and the Global Note
 
“Noteholder” means the bearer of a Note
 
“outstanding” means, in relation to the Notes, all the Notes issued except (a) those which have been redeemed in accordance with the Conditions, (b) those in respect of which the date for redemption has occurred and the redemption moneys (including all interest accrued on such Notes to the date for such redemption and any interest payable under the Conditions after such date) have been duly paid to the Trustee or to the Principal Paying Agent as provided in Clause 2 and remain available for payment against presentation and surrender of Notes and/or Coupons, as the case may be, (c) those which have become void, (d) those which have been purchased and cancelled as provided in the Conditions, (e) those mutilated or defaced Notes which have been surrendered in exchange for replacement Notes, (f) (for the purpose only of determining how many Notes are outstanding and without prejudice to their status for any other purpose) those Notes alleged to have been lost, stolen or destroyed and in respect of which replacement Notes have been issued, and (g) the Temporary Global Note to the extent that it shall have been exchanged for the Global Note pursuant to its provisions and the Global Note to the extent that it shall have been exchanged for definitive Notes pursuant to its provisions provided that for the purposes of (1) ascertaining the right to attend and vote at any meeting of the Noteholders, (2) the determination of how many Notes are outstanding for the purposes of Conditions 9, 10 and 14 and Schedule 3, (3) the exercise of any discretion, power or authority which the Trustee is required, expressly or impliedly, to exercise in or by reference to the interests of the Noteholders and (4) the certification (where relevant) by the Trustee as to whether a Potential Event of Default is in its opinion materially prejudicial to the interests of the Noteholders, those Notes which are beneficially held by or on behalf of the Issuer or any of its affiliates and not cancelled shall (unless no longer so held) be deemed not to remain outstanding
 
“Paying Agency Agreement” means the agreement referred to as such in the Conditions, as altered from time to time, and includes any other agreements approved in writing by the Trustee appointing Successor Paying Agents or altering any such agreements
 
“Paying Agents” means the banks (including the Principal Paying Agent) referred to as such in the Conditions or any Successor Paying Agents in each case at their respective specified offices
 
“Potential Event of Default” means an event or circumstance which could with the giving of notice, lapse of time, issue of a certificate and/or fulfilment of any other requirement provided for in Condition 9 become an Event of Default
 
“Principal Paying Agent” means the bank named as such in the Conditions or any Successor Principal Paying Agent
 
“Principal Subsidiary” has the meaning set out in Condition 9
 
“specified office” means, in relation to a Paying Agent, the office identified with its name at the end of the Conditions or any other office approved by the Trustee and notified to Noteholders pursuant to Clause 6.11
 
“Subsidiary” has the meaning ascribed to it in the Conditions
 
“Successor” means, in relation to the Paying Agents, such other or further person as may from time to time be appointed by the Issuer as a Paying Agent with the written approval of, and on terms approved in writing by, the Trustee and notice of whose appointment is given to Noteholders pursuant to Clause 6.11
 
“Temporary Global Note” means the temporary global note which will represent the Notes on issue substantially in the form set out in Part 1 of Schedule 2
 
“this Trust Deed” means this Trust Deed (as from time to time altered in accordance with this Trust Deed) and any other document executed in accordance with this Trust Deed (as from time to time so altered) and expressed to be supplemental to this Trust Deed
 
“trust corporation” means a trust corporation (as defined in the Law of Property Act 1925) or a corporation entitled to act as a trustee pursuant to applicable foreign legislation relating to trustees
 
1.2  
Construction of Certain References: References to:
 
1.2.1  
costs, charges, remuneration or expenses include any value added, turnover or similar tax charged in respect thereof;
 
1.2.2  
“pounds” “sterling” or “pounds sterling” or the signs “£” or “GBP” shall be construed as references to the lawful currency for the time being of the United Kingdom; and
 
1.2.3  
any provision of any statute shall be deemed also to refer to any statutory modification or re-enactment thereof or any statutory instrument, order or regulation made thereunder or under such re-enactment;
 
1.2.4  
Schedules, Clauses and paragraphs shall be construed as references to, respectively, the Schedules to and the Clauses and paragraphs of this Trust Deed;
 
1.2.5  
any action, remedy or method of judicial proceedings for the enforcement of rights of creditors shall be deemed to include, in respect of any jurisdiction other than England, references to such action, remedy or method of judicial proceedings for the enforcement of rights of creditors available or appropriate in such jurisdiction as shall most nearly approximate thereto;
 
1.2.6  
principal and/or premium and/or interest in respect of the Notes or to any moneys payable by the Issuer under this Trust Deed shall be deemed to include, in the case of principal and/or premium, a reference to any specific redemption price (as specified in the Conditions) and, in any case, a reference to any additional amounts which may be payable under the Conditions; and
 
1.2.7  
references in this Trust Deed to “reasonable” or “reasonably” and similar expressions relating to the Trustee and any exercise of power, opinion, determination or other similar matter shall be construed as meaning reasonable or reasonably (as the case may be) having regard to, and taking into account the interests of, the Noteholders only.
 
1.3  
Headings: Headings shall be ignored in construing this Trust Deed.
 
1.4  
Contracts: References in this Trust Deed to any document are to such document as amended, supplemented or replaced from time to time and include any document that amends, supplements or replaces them.
 
1.5  
Schedules: The Schedules are part of this Trust Deed and have effect accordingly.
 
1.6  
Contracts (Rights of Third Parties) Act 1999: A person who is not a party to this Trust Deed has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Trust Deed except and to the extent that Clause 7.4 expressly provides for such Act to apply.
 
 
2  
Amount of the Notes and Covenant to Pay
 
2.1  
Amount of the Notes: The aggregate nominal amount of the Notes is limited to £105,000,000.
 
2.2  
Covenant to pay: The Issuer will on any date when any Notes become due to be redeemed unconditionally pay to or to the order of the Trustee in pounds sterling in same day funds the amount specified in the Conditions as being payable in respect of the Notes becoming due for redemption on that date and will (subject to the Conditions) until such payment (both before and after judgment) unconditionally so pay to or to the order of the Trustee interest on the outstanding nominal amount of the Notes outstanding as set out in the Conditions provided that (1) payment of any sum due in respect of the Notes made to the Principal Paying Agent as provided in the Paying Agency Agreement shall, to that extent, satisfy such obligation except to the extent that there is failure in its subsequent payment to the relevant Noteholders or Couponholders under the Conditions and (2) a payment made after the due date or pursuant to Condition 9 will be deemed to have been made when the full amount due has been received by the Principal Paying Agent or the Trustee and notice to that effect has been given to the Noteholders (if required under Clause 6.9), except to the extent that there is failure in its subsequent payment to the relevant Noteholders or Couponholders under the Conditions. The Trustee will hold the benefit of this covenant on trust for the Noteholders and Couponholders.
 
2.3  
Discharge: Subject to Clause 2.4, any payment to be made in respect of the Notes or the Coupons by the Issuer or the Trustee may be made as provided in the Conditions and any payment so made will (subject to Clause 2.4) to that extent be a good discharge to the Issuer or the Trustee, as the case may be.
 
2.4  
Payment after a Default: At any time after an Event of Default or a Potential Event of Default has occurred the Trustee may:
 
2.4.1  
by notice in writing to the Issuer and the Paying Agents, require the Paying Agents, until notified by the Trustee to the contrary, so far as permitted by applicable law:
 
(i)  
to act as Paying Agents of the Trustee under this Trust Deed and the Notes on the terms of the Paying Agency Agreement (with consequential amendments as necessary and except that the Trustee’s liability for the indemnification, remuneration and expenses of the Paying Agents will be limited to the amounts for the time being held by the Trustee in respect of the Notes on the terms of this Trust Deed) and thereafter to hold all Notes and Coupons and all moneys, documents and records held by them in respect of Notes and Coupons to the order of the Trustee or
 
(ii)  
to deliver all Notes and Coupons and all moneys, documents and records held by them in respect of the Notes and Coupons to the Trustee or as the Trustee directs in such notice and
 
2.4.2  
by notice in writing to the Issuer and until such notice is withdrawn require it to make all subsequent payments in respect of the Notes and Coupons to or to the order of the Trustee and not to the Principal Paying Agent.
 
 
3  
Form of the Notes
 
3.1  
The Global Notes: The Notes will initially be represented by the Temporary Global Note in the nominal amount of £105,000,000. Interests in the Temporary Global Note will be exchangeable for the Global Note as set out in the Temporary Global Note. The Global Note will be exchangeable for definitive Notes as set out in the Global Note.
 
3.2  
The Definitive Notes: The definitive Notes, the Coupons and Talons will be security printed in accordance with applicable legal and stock exchange requirements substantially in the forms set out in Schedule 1. The Notes will be endorsed with the Conditions.
 
3.3  
Signature: The Notes and the Coupons will be signed manually or in facsimile by an Authorised Signatory of the Issuer and the Notes will be authenticated by or on behalf of the Principal Paying Agent. The Issuer may use the facsimile signature of a person who at the date of this Trust Deed is such an Authorised Signatory even if at the time of issue of any Notes or Coupons he no longer holds that office. Notes and Coupons so executed and authenticated will be binding and valid obligations of the Issuer.
 
 
4  
Stamp Duties and Taxes
 
4.1  
Stamp Duties: The Issuer will pay any stamp, issue, documentary or other taxes and duties, including interest and penalties, payable in Belgium, Luxembourg and the United Kingdom in respect of the creation, issue and offering of the Notes and the Coupons and the execution or delivery of this Trust Deed. The Issuer will also indemnify the Trustee, the Noteholders and the Couponholders from and against all stamp, issue, documentary or other taxes paid by any of them in any jurisdiction in connection with any action taken by or on behalf of the Trustee or, as the case may be, (and where permitted under these presents so to do) the Noteholders or the Couponholders to enforce the Issuer’s obligations under this Trust Deed, the Notes or the Coupons.
 
4.2  
Change of Taxing Jurisdiction: If the Issuer becomes subject generally to the taxing jurisdiction of a territory or a taxing authority of or in that territory with power to tax other than or in addition to the United Kingdom or any such authority of or in such territory then the Issuer will (unless the Trustee otherwise agrees) give the Trustee an undertaking satisfactory to the Trustee in terms corresponding to the terms of Condition 7 with the substitution for, or (as the case may require) the addition to, the references in that Condition to the United Kingdom of references to that other or additional territory or authority to whose taxing jurisdiction the Issuer has become so subject. In such event this Trust Deed, the Notes and the Coupons will be read accordingly.
 
 
5  
Application of Moneys Received by the Trustee
 
5.1  
Declaration of Trust: All moneys received by the Trustee in respect of the Notes or amounts payable under this Trust Deed will, despite any appropriation of all or part of them by the Issuer, be held by the Trustee on trust to apply them (subject to Clause 5.2):
 
5.1.1  
first, in payment of all costs, charges, expenses and liabilities properly incurred by the Trustee (including remuneration payable to it) in carrying out its functions under this Trust Deed
 
5.1.2  
secondly, in payment of any amounts owing in respect of the Notes or Coupons pari passu and rateably and
 
5.1.3  
thirdly, in payment of any balance to the Issuer for itself.
 
If the Trustee holds any moneys in respect of Notes or Coupons which have become void, the Trustee will hold them on these trusts.
 
5.2  
Accumulation: If the amount of the moneys at any time available for payment in respect of the Notes under Clause 5.1 is less than 10 per cent. of the nominal amount of the Notes then outstanding, the Trustee may, at its discretion, invest such moneys. The Trustee may retain such investments and accumulate the resulting income until the investments and the accumulations, together with any other funds for the time being under its control and available for such payment, amount to at least 10 per cent. of the nominal amount of the Notes then outstanding and then such investments, accumulations and funds (after deduction of, or provision for, any applicable taxes) will be applied as specified in Clause 5.1.
 
5.3  
Investment: Moneys held by the Trustee may be invested in its name or under its control in any investments or other assets anywhere whether or not they produce income or deposited in its name or under its control at such bank or other financial institution in such currency as the Trustee may, in its absolute discretion, think fit. If that bank or institution is the Trustee or a subsidiary, holding or associated company of the Trustee, it need only account for an amount of interest equal to the standard amount of interest payable by it on such a deposit to an independent customer. The Trustee may at any time vary or transpose any such investments or assets or convert any moneys so deposited into any other currency, and will not be responsible for any resulting loss, whether by depreciation in value, change in exchange rates or otherwise.
 
 
6  
Covenants
 
So long as any Note is outstanding, the Issuer will:
 
6.1  
Books of Account: keep, and procure that each of its Subsidiaries keeps, proper books of account and, at any time after an Event of Default or Potential Event of Default has occurred or if the Trustee reasonably believes that such an event has occurred, so far as permitted by applicable law, allow, and procure that each such Subsidiary will allow, the Trustee and anyone appointed by it to whom the Issuer and/or the relevant Subsidiary has no reasonable objection, access to its books of account at all reasonable times during normal business hours
 
6.2  
Notice of Events of Default: notify the Trustee in writing immediately on becoming aware of the occurrence of any Event of Default or Potential Event of Default
 
6.3  
Information: so far as permitted by applicable law, give the Trustee such information, opinions and certificates as it reasonably requires to perform its functions
 
6.4  
Financial Statements etc.: send to the Trustee at the time of their issue and in the case of annual financial statements in any event within 180 days of the end of each financial year one copy in English of every balance sheet, profit and loss account, report or other notice, statement or circular issued, or which legally or contractually should be issued, to the members or creditors (or any class of them) of the Issuer or any holding company thereof generally in their capacity as such
 
6.5  
Certificate of Authorised Signatories: send to the Trustee, within 14 days of its annual audited financial statements being made available to its members, and also within 14 days of any request by the Trustee a certificate of the Issuer signed by any two of its Authorised Signatories that, having made all reasonable enquiries, to the best of the knowledge, information and belief of the Issuer as at a date (the “Certification Date”) not more than five days before the date of the certificate no Event of Default, Potential Event of Default, Restructuring Event or Potential Restructuring Event (as defined below) or other breach of this Trust Deed had occurred since the Certification Date of the last such certificate or (if none) the date of this Trust Deed or, if such an event had occurred, giving details of it
 
6.6  
Certificate of two directors of the Issuer: send to the Trustee, within 28 days of a request by the Trustee, a certificate signed by two directors of the Issuer as to the amount of the Capital and Reserves of the Issuer as at the date specified in such request
 
6.7  
Notices to Noteholders: send to the Trustee not less than three days prior to being sent to the Noteholders the form of each notice to be given to Noteholders and, once given, two copies of each such notice, such notice to be in a form approved by the Trustee (such approval, unless so expressed, not to constitute approval for the purposes of Section 21 of the FSMA of any such notice which is a communication within the meaning of Section 21 of the FSMA)
 
6.8  
Further Acts: so far as permitted by applicable law, do such further things as may be necessary in the opinion of the Trustee to give effect to this Trust Deed
 
6.9  
Notice of late payment: forthwith upon request by the Trustee give notice to the Noteholders of any unconditional payment to the Principal Paying Agent or the Trustee of any sum due in respect of the Notes or Coupons made after the due date for such payment
 
6.10  
Listing: use all reasonable endeavours to maintain the listing of the Notes on the official list of the Financial Services Authority in its capacity as competent authority under the FSMA and the trading of such Notes on the Market but, if it is unable to do so, having used such endeavours, or if the maintenance of such listing or trading is agreed by the Trustee to be unduly onerous and the Trustee is satisfied that the interests of the Noteholders would not be thereby materially prejudiced, instead use all reasonable endeavours to obtain and maintain a listing of the Notes on another stock exchange and for admission to trading on another market in each case approved in writing by the Trustee
 
6.11  
Change in Agents: give at least 14 days’ prior notice to the Noteholders of any future appointment, resignation or removal of a Paying Agent or of any change by a Paying Agent of its specified office and not make any such appointment or removal without the Trustee’s written approval
 
6.12  
Notes held by Issuer etc.: send to the Trustee as soon as practicable after being so requested by the Trustee a certificate of the Issuer signed by any two of its Authorised Signatories stating the number of Notes held at the date of such certificate by or on behalf of the Issuer or its affiliates
 
6.13  
Subsidiaries: give to the Trustee at the same time as sending the certificate referred to in Clause 6.5 or within 28 days of a request by the Trustee, a certificate signed by two directors of the Issuer listing those Subsidiaries of the Issuer which as at the last day of the last financial year of the Issuer or as at the date specified in such request were Relevant Subsidiaries, Principal Subsidiaries and Excluded Subsidiaries and confirming that there are no Subsidiaries of the type referred to in Clauses 6.14.1 or 6.14.2
 
6.14  
Restriction on Principal Subsidiaries: not permit to exist and will not create any Subsidiary (not being an Excluded Subsidiary or any other Subsidiary whose only indebtedness for borrowed money is Non-recourse Indebtedness):
 
6.14.1  
whose (a) profits on ordinary activities before tax or (b) gross assets, in each case attributable to the Issuer, represent 20 per cent. or more of the consolidated profits on ordinary activities before tax of the Group or, as the case may be, consolidated gross assets of the Group, in each case as calculated by reference to the then latest audited financial statements of such Subsidiary (consolidated in the case of a company which itself has Subsidiaries) and the then latest audited consolidated financial statements of the Group provided that in the case of a Subsidiary acquired after the end of the financial period to which the then latest audited consolidated financial statements of the Group relate, the reference to the then latest audited consolidated financial statements of the Group for the purposes of the calculation above shall, until consolidated financial statements for the financial period in which the acquisition is made have been prepared and audited as aforesaid, be deemed to be a reference to such first-mentioned financial statements as if such Subsidiary had been shown in such financial statements by reference to its then latest relevant audited financial statements, adjusted as deemed appropriate by the Auditors; or
 
6.14.2  
to which is transferred all or substantially all of the business, undertaking and assets of a Subsidiary of the Issuer which immediately prior to such transfer is a Subsidiary, with such profits and/or gross assets as are described in 6.14.1 above,
 
unless such Subsidiary carries on a “distribution business” as defined in Condition 1 of the Standard Conditions of the Utilities Act 2000 Determination of Standard Licence Conditions for Electricity Distribution Licences (as amended from time to time); and
 
6.15  
forthwith give notice in writing to the Trustee of:
 
6.15.1  
the occurrence of any Restructuring Event or of any event (a “Potential Restructuring Event”) which, depending on any certification as provided in the definition of “Restructuring Event”, may be a Restructuring Event;
 
6.15.2  
(if at the time any Restructuring Event occurs there are Rated Securities) the occurrence of any Rating Downgrade in respect of that Restructuring Event within the Restructuring Period; and
 
6.15.3  
(if at the time any Restructuring Event occurs there are no Rated Securities) the obtaining of a rating in accordance with the definition of “Negative Rating Event” or the occurrence of a Negative Rating Event
 
6.16  
Covenant of Compliance: The Issuer shall comply with and perform and observe all the provisions of the Trust Deed and the Notes which are expressed to be binding on it and shall take such steps as are reasonable to enforce all its rights under the Trust Deed and the Notes. The Conditions shall be binding on the Issuer and the Noteholders. The Trustee shall be entitled to enforce the obligations of the Issuer under the Notes as if the same were set out and contained in this Trust Deed, which shall be read and construed as one document with the Notes.
 
 
7  
Remuneration and Indemnification of the Trustee
 
7.1  
Normal Remuneration: So long as any Note is outstanding the Issuer will pay the Trustee as remuneration for its services as Trustee such sum on such dates in each case as they may from time to time agree. Such remuneration will accrue from day to day from the date of this Trust Deed. However, if any payment to a Noteholder or Couponholder of moneys due in respect of any Note or Coupon is improperly withheld or refused, such remuneration will again accrue as from the date of such withholding or refusal until payment to such Noteholder or Couponholder is duly made.
 
7.2  
Extra Remuneration: If an Event of Default or Potential Event of Default shall have occurred or if the Trustee finds it expedient or necessary or is requested by the Issuer to undertake duties which they both agree to be of an exceptional nature or otherwise outside the scope of the Trustee’s normal duties under this Trust Deed, the Issuer will pay such additional remuneration as they may agree or, failing agreement as to any of the matters in this sub-Clause (or as to such sums referred to in Clause 7.1), as determined by an investment bank (acting as an expert) selected by the Trustee and approved by the Issuer or, failing such approval, nominated by the President for the time being of The Law Society of England and Wales. The expenses involved in such nomination and such investment bank’s fee will be borne by the Issuer. The determination of such investment bank will be conclusive and binding on the Issuer, the Trustee, the Noteholders and the Couponholders save in the case of a manifest error.
 
7.3  
Expenses: The Issuer will also on demand by the Trustee pay or discharge all costs, charges, liabilities and expenses properly incurred by the Trustee in the preparation and execution of this Trust Deed and the performance of its functions under this Trust Deed including, but not limited to, legal and travelling expenses and any stamp, documentary or other taxes or duties paid by the Trustee in connection with any legal proceedings reasonably brought or contemplated by the Trustee against the Issuer to enforce any provision of this Trust Deed, the Notes or the Coupons. Such costs, charges, liabilities and expenses will:
 
7.3.1  
in the case of payments made by the Trustee before such demand carry interest from the date of the demand at the rate of 2 per cent. per annum over the base rate of HSBC Bank plc on the date on which the Trustee made such payments and
 
7.3.2  
in other cases carry interest at such rate from 30 days after the date of the demand or (where the demand specifies that payment is to be made on an earlier date) from such earlier date.
 
7.4  
Indemnity: The Issuer will on demand by the Trustee indemnify it in respect of Amounts or Claims paid or incurred by it in acting as trustee under this Trust Deed (including (1) any Agent/Delegate Liabilities and (2) in respect of disputing or defending any Amounts or Claims made against the Trustee or any Agent/Delegate Liabilities). The Issuer will on demand by such agent or delegate indemnify it against such Agent/Delegate Liabilities. “Amounts or Claims” are losses, liabilities, costs, claims, actions, demands or expenses and “Agent/Delegate Liabilities” are Amounts or Claims which the Trustee is or would be obliged to pay or reimburse to any of its agents or delegates appointed pursuant to this Trust Deed. The Contracts (Rights of Third Parties) Act 1999 applies to this Clause 7.4.
 
7.5  
Continuing Effect: Clauses 7.3 and 7.4 will continue in full force and effect as regards the Trustee even if it no longer is Trustee.
 
 
8  
Provisions Supplemental to the Trustee Act 1925 and the Trustee Act 2000
 
By way of supplement to the Trustee Act 1925 it is expressly declared as follows:
 
8.1  
Advice: The Trustee may act on the opinion or advice of, or information obtained from, any expert and will not be responsible to anyone for any loss occasioned by so acting whether such advice is obtained or addressed to the Issuer, the Trustee or any other person. Any such opinion, advice or information may be sent or obtained by letter, telex or fax and the Trustee will not be liable to anyone for acting in good faith on any opinion, advice or information purporting to be conveyed by such means even if it contains some error or is not authentic and notwithstanding any limitation on liability contained therein, monetary or otherwise.
 
8.2  
Trustee to Assume Performance: The Trustee need not notify anyone of the execution of this Trust Deed nor shall it be bound to take any steps to ascertain whether any Event of Default, Potential Event of Default, Restructuring Event, Potential Restructuring Event or Negative Rating Event has happened and, until it shall have actual knowledge or express notice to the contrary, the Trustee shall be entitled to assume that no Event of Default, Potential Event of Default, Restructuring Event, Potential Restructuring Event or Negative Rating Event has happened and that the Issuer is observing and performing all its obligations under this Trust Deed, the Notes and the Coupons.
 
8.3  
Resolutions of Noteholders: The Trustee will not be responsible for having acted in good faith on a resolution purporting to have been passed at a meeting of Noteholders in respect of which minutes have been made and signed even if it is later found that there was a defect in the constitution of the meeting or the passing of the resolution or that the resolution was not valid or binding on the Noteholders or Couponholders.
 
8.4  
Certificate signed by Authorised Signatories: If the Trustee, in the exercise of its functions, requires to be satisfied or to have information as to any fact or the expediency of any act, it may call for and accept as sufficient evidence of that fact or the expediency of that act a certificate signed by any two Authorised Signatories of the Issuer as to that fact or to the effect that, in their opinion, that act is expedient and the Trustee need not call for further evidence and will not be responsible for any loss occasioned by acting on such a certificate. The Trustee shall be entitled to rely on any certificate of two Authorised Signatories of the Issuer where the Issuer procures the delivery of the same pursuant to its obligations to do so under the Conditions or this Trust Deed and such certificate shall be binding on the Issuer, the Trustee and the Noteholders.
 
8.5  
Report of the Auditors: The Trustee shall be entitled to rely on any certificate or report of the Auditors whether or not such report is addressed to the Trustee and notwithstanding that such report and/or any engagement letter or other document entered into by the Trustee contains a monetary or other limit on the liability of the Auditors. Such report shall, in the absence of manifest error, be conclusive and binding on all parties, and the Trustee shall not be responsible for any loss occasioned by acting on any such report.
 
8.6  
Deposit of Documents: The Trustee may appoint as custodian, on any terms, any bank or entity whose business includes the safe custody of documents or any lawyer or firm of lawyers believed by it to be of good repute and may deposit this Trust Deed and any other documents with such custodian and pay all sums due in respect thereof. The Trustee is not obliged to appoint a custodian of securities payable to bearer.
 
8.7  
Discretion: The Trustee will have absolute and uncontrolled discretion as to the exercise of its powers, trusts and discretions and will not be responsible for any loss, liability, cost, claim, action, demand, expense or inconvenience which may result from their exercise or non-exercise.
 
8.8  
Agents: Whenever it considers it expedient in the interests of the Noteholders, the Trustee may, in the conduct of its trust business, instead of acting personally, employ and pay an agent selected by it, whether or not a lawyer or other professional person, to transact or conduct, or concur in transacting or conducting, any business and to do or concur in doing all acts required to be done by the Trustee (including the receipt and payment of money).
 
8.9  
Delegation: Whenever it considers it expedient in the interests of the Noteholders, the Trustee may delegate to any person on any terms (including power to sub-delegate) all or any of its functions.
 
8.10  
Nominees: In relation to any asset held by it under this Trust Deed, the Trustee may appoint any person to act as its nominee on any terms.
 
8.11  
Forged Notes: The Trustee will not be liable to the Issuer or any Noteholder or Couponholder by reason of having accepted as valid or not having rejected any Note or Coupon purporting to be such and later found to be forged or not authentic.
 
8.12  
Confidentiality: Unless ordered to do so by a court of competent jurisdiction the Trustee shall not be required to disclose to any Noteholder or Couponholder any confidential financial or other information made available to the Trustee by the Issuer and no Noteholder or Couponholder shall be entitled to take any action to obtain such information from the Trustee.
 
8.13  
Determinations Conclusive: As between itself and the Noteholders and Couponholders the Trustee may in its absolute discretion determine all questions and doubts arising in relation to any of the provisions of this Trust Deed including (without limitation) determination of whether or not a default in performance by the Issuer of any obligation under the Notes or Trust Deed is materially prejudicial to the interests of Noteholders and Couponholders. Such determinations, whether made upon such a question actually raised or implied in the acts or proceedings of the Trustee, will be conclusive and shall bind the Trustee, the Noteholders and the Couponholders.
 
8.14  
Currency Conversion: Where it is necessary or desirable to convert any sum from one currency to another, it will (unless otherwise provided hereby or required by law) be converted at such rate or rates, in accordance with such method and as at such date as may reasonably be specified by the Trustee but having regard to current rates of exchange, if available. Any rate, method and date so specified will be binding on the Issuer, the Noteholders and the Couponholders.
 
8.15  
Events of Default: The Trustee may determine whether or not an Event of Default or Potential Event of Default is in its opinion capable of remedy and/or materially prejudicial to the interests of the Noteholders. Any such determination will be conclusive and binding on the Issuer, the Noteholders and the Couponholders.
 
8.16  
Payment for and Delivery of Notes: The Trustee will not be responsible for the receipt or application by the Issuer of the proceeds of the issue of the Notes, any exchange of Notes or the delivery of Notes to the persons entitled to them.
 
8.17  
Notes held by the Issuer etc.: In the absence of knowledge or express notice to the contrary, the Trustee may assume without enquiry (other than requesting a certificate under Clause 6.12) that no Notes are for the time being held by or on behalf of the Issuer or its affiliates.
 
8.18  
Responsibility for agents etc.: If the Trustee exercises reasonable care in selecting any custodian, agent, delegate or nominee appointed under this clause (an “Appointee”), it will not have any obligation to supervise the Appointee or be responsible for any loss, liability, cost, claim, action, demand or expense incurred by reason of the Appointee’s misconduct or default or the misconduct or default of any substitute appointed by the Appointee.
 
8.19  
Responsibility for Rating: The Trustee shall (a) have no responsibility for the maintenance of any rating of the Notes by any Rating Agency and (b) shall not be liable to Noteholders if any exercise by it of its trusts, powers and discretions results in a change to the rating assigned by any Rating Agency to any class of Notes.
 
8.20  
No Liability for error of judgement: The Trustee shall not be liable for any error of judgement made in good faith by any officer and/or employee of the Trustee in the administration of its corporate matters.
 
8.21  
Clearing Systems: The Trustee may call for any certificate or other document to be issued by Euroclear, Clearstream, Luxembourg or any other clearing system through which the Notes are cleared as to the principal amount of Notes represented by a Global Note standing to the account of any person and may have regard to any information provided to it by Euroclear, Clearstream, Luxembourg or such other clearing system as to the identity (either individually or by category) of any of their accountholders with entitlements to such Global Note, and the Trustee may consider such interests as if such accountholders were the holders of any such Global Note. Any such certificate, document or information may be accepted and fully relied upon by the Trustee. The Trustee shall not be liable to any person by reason of having accepted as valid or accurate or not having rejected any certificate, document or information to such effect purporting to be issued by Euroclear, Clearstream, Luxembourg or such other clearing system and subsequently found to be forged, not authentic or inaccurate.
 
8.22  
Legal Opinions: The Trustee shall not be responsible to any person for failing to request, require or receive any legal opinion relating to the Notes or for checking or commenting upon the content of any such legal opinion and shall not be responsible for any loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever incurred thereby.
 
8.23  
No Action:
 
(i)  
The Trustee shall not be bound to take any action in connection with this Trust Deed or any obligations arising pursuant thereto, including, without prejudice to the generality of the foregoing, forming any opinion or employing any financial adviser, where it is not satisfied that the Issuer will be able to indemnify it against all loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever incurred thereby which may be incurred in connection with such action and may demand prior to taking any such action that there be paid to it in advance such sums as it reasonably considers (without prejudice to any further demand) shall be sufficient so to indemnify it and on such demand being made the Issuer shall be obliged to make payment of all such sums in full.
 
(ii)  
No provision of this Trust Deed shall require the Trustee to do anything which may (i) be illegal or contrary to applicable law or regulation; or (ii) cause it to expend or risk its own funds or otherwise incur any loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever incurred thereby in the performance of any of its duties or in the exercise of any of its rights, powers or discretions, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever is not assured to it.
 
8.24  
Professional and other charges: Any trustee of the trust presents being a lawyer, accountant, broker or other person engaged in any profession or business shall be entitled to charge and be paid all usual and proper professional and other charges for business transacted and acts done by him or his firm in connection with the trusts of this Trust Deed or the Paying Agency Agreement and also his reasonable charges in addition to disbursements for all other work and business done and all time spent by him or his firm in connection with matters arising in connection with this Trust Deed including matters which might or should have been attended to in person by a trustee not being a banker, accountant or other professional person.
 
8.25  
Holder Absolute Owner: The Issuer, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for all purposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Note or Coupon or any notice of previous loss or theft of the Note or Coupon or of any trust or interest therein) and shall not be required to obtain any proof thereof or as to the identity of such bearer.
 
8.26  
Enforcement: The Trustee may at any time, at its discretion and without notice, take such proceedings against the Issuer as it may think fit to enforce the provisions of the Trust Deed, the Notes and the Coupons, but it shall not be bound to take any such proceedings or any other action in relation to the Trust Deed, the Notes or the Coupons unless (a) it has been so directed by an Extraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one-quarter in outstanding nominal amount of the Notes then outstanding and (b) it has been indemnified and/or secured to its satisfaction. No Noteholder or Couponholder shall be entitled to proceed directly against the Issuer unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and the failure shall be continuing.
 
 
9  
Trustee Liable for Negligence
 
Section 1 of the Trustee Act 2000 shall not apply to any function of the Trustee, provided that if the Trustee fails to show the degree of care and diligence required of it as trustee, nothing in this Trust Deed shall relieve or indemnify it from or against any liability which would otherwise attach to it in respect of any negligence, default, breach of duty or breach of trust of which it may be guilty.
 
 
10  
Waiver and Proof of Default
 
10.1  
Waiver: The Trustee may, without the consent of the Noteholders or Couponholders and without prejudice to its rights in respect of any subsequent breach, from time to time and at any time, if in its opinion the interests of the Noteholders will not be materially prejudiced thereby, waive or authorise, on such terms as seem expedient to it, any breach or proposed breach by the Issuer of this Trust Deed or the Conditions or determine that an Event of Default, Potential Event of Default, Restructuring Event or Potential Restructuring Event will not be treated as such provided that the Trustee will not do so in contravention of an express direction given by an Extraordinary Resolution or a request made pursuant to Condition 9. No such direction or request will affect a previous waiver, authorisation or determination. Any such waiver, authorisation or determination will be binding on the Noteholders and the Couponholders and, if the Trustee so requires, will be notified to the Noteholders as soon as practicable.
 
10.2  
Proof of Default: Proof that the Issuer has failed to pay a sum due to the holder of any one Note or Coupon will (unless the contrary be proved) be sufficient evidence that it has made the same default as regards all other Notes or Coupons which are then payable.
 
 
11  
Trustee not Precluded from Entering into Contracts
 
The Trustee and any other person, whether or not acting for itself, may acquire, hold or dispose of any Note, Coupon or other security (or any interest therein) of the Issuer or any other person, may enter into or be interested in any contract or transaction with any such person and may act on, or as depositary or agent for, any committee or body of holders of any securities of any such person in each case with the same rights as it would have had if the Trustee were not acting as Trustee and need not account for any profit.
 
 
12  
Modification and Substitution
 
12.1  
Modification: The Trustee may agree without the consent of the Noteholders or Couponholders to any modification to this Trust Deed which is, in its opinion, of a formal, minor or technical nature or to correct a manifest error. The Trustee may also so agree to any modification to this Trust Deed which is in its opinion not materially prejudicial to the interests of the Noteholders, but such power does not extend to any such modification as is mentioned in the proviso to paragraph 2 of Schedule 3.
 
12.2  
Substitution:
 
12.2.1  
The Trustee may, without the consent of the Noteholders or Couponholders, agree to the substitution of the Issuer’s successor in business or any Subsidiary of the Issuer (other than an Excluded Subsidiary) (the “Substituted Obligor”) in place of the Issuer (or of any previous substitute under this sub-Clause) as the principal debtor under this Trust Deed, the Notes and the Coupons provided that:
 
(iii)  
a deed is executed or undertaking given by the Substituted Obligor to the Trustee, in form and manner satisfactory to the Trustee, agreeing to be bound by this Trust Deed, the Notes and the Coupons (with consequential amendments as the Trustee may deem appropriate) as if the Substituted Obligor had been named in this Trust Deed, the Notes and the Coupons as the principal debtor in place of the Issuer
 
(iv)  
if the Substituted Obligor is subject generally to the taxing jurisdiction of a territory or any authority of or in that territory with power to tax (the “Substituted Territory”) other than the territory to the taxing jurisdiction of which (or to any such authority of or in which) the Issuer is subject generally (the “Issuer’s Territory”), the Substituted Obligor will (unless the Trustee otherwise agrees) give to the Trustee an undertaking satisfactory to the Trustee in terms corresponding to Condition 7 with the substitution for the references in that Condition to the Issuer’s Territory of references to the Substituted Territory whereupon the Trust Deed, the Notes and the Coupons will be read accordingly
 
(v)  
if any two Authorised Signatories of the Substituted Obligor certify that it will be solvent immediately after such substitution, the Trustee need not have regard to the Substituted Obligor’s financial condition, profits or prospects or compare them with those of the Issuer
 
(vi)  
the Trustee is satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution
 
(vii)  
the Issuer and the Substituted Obligor comply with such other requirements as the Trustee may direct in the interests of the Noteholders and
 
(viii)  
(unless the Issuer’s successor in business is the Substituted Obligor as the principal debtor under this Trust Deed, the Notes and the Coupons) the obligations of the Substituted Obligor as the principal debtor under this Trust Deed, the Notes and the Coupons are guaranteed by the Issuer (with consequential amendments as necessary) to the Trustee’s satisfaction.
 
12.2.2  
Release of Substituted Issuer: An agreement by the Trustee pursuant to Clause 12.2 will, if so expressed, release the Issuer (or a previous substitute) from any or all of its obligations under this Trust Deed, the Notes and the Coupons. Notice of the substitution will be given to the Noteholders within 14 days of the execution of such documents and compliance with such requirements.
 
12.2.3  
Completion of Substitution: On completion of the formalities set out in Clause 12.2, the Substituted Obligor will be deemed to be named in this Trust Deed, the Notes and the Coupons as the principal debtor in place of the Issuer (or of any previous substitute) and this Trust Deed, the Notes and the Coupons will be deemed to be amended as necessary to give effect to the substitution.
 
 
13  
Appointment, Retirement and Removal of the Trustee
 
13.1  
Appointment: Subject as provided in clause 13.2 below, the Issuer has the power of appointing new trustees but no-one may be so appointed unless previously approved by an Extraordinary Resolution. A trust corporation will at all times be a Trustee and may be the sole Trustee. Any appointment of a new Trustee will be notified by the Issuer to the Noteholders as soon as practicable.
 
13.2  
Retirement and Removal: Any Trustee may retire at any time on giving at least three months’ written notice to the Issuer without giving any reason or being responsible for any costs occasioned by such retirement and the Noteholders may by Extraordinary Resolution remove any Trustee provided that the retirement or removal of a sole trust corporation will not be effective until a trust corporation is appointed as successor Trustee. If a sole trust corporation gives notice of retirement or an Extraordinary Resolution is passed for its removal, the Issuer will use all reasonable endeavours to procure that another trust corporation be appointed as Trustee and if it does not procure the appointment of a new trustee within 30 days of the expiry of the Trustee’s notice referred to in this Clause, the Trustee shall be entitled to procure forthwith a new trustee.
 
13.3  
Co-Trustees: The Trustee may, despite Clause 13.1, by written notice to the Issuer appoint anyone to act as an additional Trustee jointly with the Trustee:
 
13.3.1  
if the Trustee considers the appointment to be in the interests of the Noteholders and/or the Couponholders
 
13.3.2  
to conform with a legal requirement, restriction or condition in a jurisdiction in which a particular act is to be performed or
 
13.3.3  
to obtain a judgment or to enforce a judgment or any provision of this Trust Deed in any jurisdiction.
 
Subject to the provisions of this Trust Deed the Trustee may confer on any person so appointed such functions as it thinks fit. The Trustee may by written notice to the Issuer and that person remove that person. At the Trustee’s request, the Issuer will forthwith do all things as may be required to perfect such appointment or removal and it irrevocably appoints the Trustee as its attorney in its name and on its behalf to do so.
 
13.4  
Competence of a Majority of Trustees: If there are more than two Trustees the majority of them will be competent to perform the Trustee’s functions provided the majority includes a trust corporation.
 
13.5  
Merger: Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Clause, without the execution or filing of any paper or any further act on the part of the parties hereto.
 
 
14  
Couponholders
 
No notices need be given to Couponholders. They will be deemed to have notice of the contents of any notice given to Noteholders. Even if it has express notice to the contrary, in exercising any of its functions by reference to the interests of the Noteholders, the Trustee will assume that the holder of each Note is the holder of all Coupons relating to it.
 
 
15  
Currency Indemnity
 
15.1  
Currency of Account and Payment: Pounds sterling (the “Contractual Currency”) is the sole currency of account and payment for all sums payable by the Issuer under or in connection with this Trust Deed, the Notes and the Coupons, including damages.
 
15.2  
Extent of discharge: An amount received or recovered in a currency other than the Contractual Currency (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the insolvency, winding-up or dissolution of the Issuer or otherwise), by the Trustee or any Noteholder or Couponholder in respect of any sum expressed to be due to it from the Issuer will only discharge the Issuer to the extent of the Contractual Currency amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so).
 
15.3  
Indemnity: If that Contractual Currency amount is less than the Contractual Currency amount expressed to be due to the recipient under this Trust Deed, the Notes or the Coupons, the Issuer will indemnify it against any loss sustained by it as a result. In any event, the Issuer will indemnify the recipient against the cost of making any such purchase.
 
15.4  
Indemnity separate: The indemnities in this Clause 15 and in Clause 7.4 constitute separate and independent obligations from the other obligations in this Trust Deed, will give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted by the Trustee and/or any Noteholder or Couponholder and will continue in full force and effect despite any judgment, order, claim or proof for a liquidated amount in respect of any sum due under this Trust Deed, the Notes and/or the Coupons or any other judgment or order.
 
 
16  
Communications
 
Any communication shall be by letter or fax:
 
in the case of the Issuer, to it at:
 
Avonbank
Feeder Road
Bristol BS2 0TB
Telephone no.:   +44(0) 117 933 2020
Fax no.:    +44(0) 117 933 2108
Attention:   The Treasurer
 
and in the case of the Trustee, to it at:
 

 
P.O. Box 88
1 Grenville Street
St. Helier
Jersey JE4 9PF
Telephone no.:  +44 1534 606 150
Fax no.:   +44 1534 606 159 
Attention:   Manager, Corporate Services
 
Communications will take effect, in the case of delivery, when delivered or, in the case of fax, when despatched. Communications not by letter shall be confirmed by letter but failure to send or receive that letter shall not invalidate the original communication.
 
 
17  
Further Issues
 
17.1  
Supplemental Trust Deed: If the Issuer issues further securities as provided in the Conditions, the Issuer shall, before their issue, execute and deliver to the Trustee a deed supplemental to this Trust Deed containing such provisions (corresponding to any of the provisions of this Trust Deed) as the Trustee may require.
 
17.2  
Meetings of Noteholders: If the Trustee so directs, Schedule 3 shall apply equally to Noteholders and to holders of any securities issued pursuant to the Conditions as if references in it to “Notes” and “Noteholders” were also to such securities and their holders respectively.
 
 
18  
Governing Law and Submission to Jurisdiction
 
18.1  
Governing Law: This Trust Deed shall be governed by and construed in accordance with English law.
 
18.2  
Jurisdiction: The courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and accordingly any legal action or proceedings arising out of or in connection with this Agreement (“Proceedings”) may be brought in such courts. The Trustee irrevocably submits to the jurisdiction of such courts and waives any objection to Proceedings in such courts whether on the ground of venue or on the ground that the Proceedings have been brought in an inconvenient forum. These submissions are for the benefit of the Issuer and shall not limit the right of any of it to take Proceedings in any other court of competent jurisdiction nor shall the taking of Proceedings in any one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction (whether concurrently or not).
 
18.3  
Service of Process: The Trustee irrevocably appoints HSBC Bank plc of 8 Canada Square, London E14 5HQ as its authorised agent for service of process in England. If for any reason such agent shall cease to be such agent for the service of process, the Trustee shall forthwith appoint a new agent for service of process in England and deliver to the Issuer a copy of the new agent’s acceptance of that appointment within 30 days. Nothing shall affect the right to serve process in any other manner permitted by law.
 
 
19  
Counterparts
 
This Trust Deed may be executed and delivered in any number of counterparts each of which will be deemed an original.
 


Schedule 1

Form of Definitive Note
 
On the front:
 
Denomination
 
ISIN
 
Series
 
Certif. No.
 
£50,000
 
XS0276994059
 
    

 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
(Incorporated with limited liability in England and Wales)
£105,000,000
1.541 per cent. Index-Linked Notes due 2053
 
 
This Note forms part of a series designated as specified in the title (the “Notes”) of Western Power Distribution (South West) plc (the “Issuer”) constituted by the Trust Deed referred to on the reverse hereof. The Notes are subject to, and have the benefit of, that Trust Deed and the terms and conditions (the “Conditions”) set out on the reverse hereof.
 
This is to certify that the bearer of this Note is entitled on 1 December 2053, or on such earlier date as the Note may be redeemed or repaid to such sum as is determined in accordance with the Conditions to be payable on such redemption or repayment together with interest on the outstanding nominal amount of such Note from 1 December 2006 at the rate of 1.541 per cent. per annum payable semi-annually in arrear on 1 June and 1 December in each year, adjusted for indexation as provided in, and otherwise subject to and in accordance with, the Conditions.
 
This Note shall not be valid or become obligatory for any purpose until authenticated by or on behalf of the Principal Paying Agent.
 
In witness whereof the Issuer has caused this Note to be signed in facsimile on its behalf.
 
Dated as of [·]
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 

 
[Director]
 
This Note is authenticated by or on behalf of the Principal Paying Agent.
 
By:
 

 

 
Authorised Signatory
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 


On the back:
 
Terms and Conditions
 
 The £105,000,000 1.541 per cent. Index-Linked Notes due 2053 (the “Notes”, which expression shall in these Conditions, unless the context otherwise requires, include any further notes issued pursuant to Condition 16 and forming a single series with the Notes) of Western Power Distribution (South West) plc (the “Issuer”) are constituted by a Trust Deed (the “Trust Deed”) dated 1 December 2006 (the “Issue Date”) made between the Issuer and HSBC Trustee (C.I.) Limited (the “Trustee”, which expression shall include its successor(s)) as trustee for the holders of the Notes (the “Noteholders”) and the holders of the interest coupons appertaining to the Notes (the “Couponholders” and the “Coupons” respectively, which expressions shall, unless the context otherwise requires, include the talons for further interest coupons (the “Talons”) and the holders of the Talons).
 
The statements in these Conditions include summaries of, and are subject to, the detailed provisions of and definitions in the Trust Deed. Copies of the Trust Deed and the Agency Agreement dated 1 December 2006 (the “Agency Agreement”) made between the Issuer, the initial Paying Agents and the Trustee are available for inspection during normal business hours by the Noteholders and the Couponholders at the principal office for the time being of the Trustee, being at the date of issue of the Notes at 1 Grenville Street, St. Helier, Jersey JE4 9PF and at the specified office of each of the Paying Agents. The Noteholders and the Couponholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Trust Deed and the Agency Agreement applicable to them.
 
 
1  
FORM, DENOMINATION AND TITLE
 
1.1  
Form and Denomination
 
The Notes are in bearer form, serially numbered, in the denomination of £50,000 with Coupons and one Talon attached on issue.
 
1.2  
Title
 
Title to the Notes and to the Coupons will pass by delivery.
 
1.3  
Holder Absolute Owner
 
The Issuer, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for all purposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Note or Coupon or any notice of previous loss or theft of the Note or Coupon or of any trust or interest therein) and shall not be required to obtain any proof thereof or as to the identity of such bearer.
 
 
2  
STATUS
 
The Notes and the Coupons are direct, unconditional, unsubordinated and (subject to the provisions of Condition 3) unsecured obligations of the Issuer and (subject as provided above) rank pari passu, among themselves and (save for certain obligations required to be preferred by law) equally with all other outstanding unsecured obligations (other than subordinated obligations, if any) of the Issuer from time to time outstanding.
 
 
3  
NEGATIVE PLEDGE
 
3.1  
Negative Pledge
 
So long as any Note remains outstanding (as defined in the Trust Deed) the Issuer will, and will procure that each of its Distribution Subsidiaries (as defined below) will, ensure that no Relevant Indebtedness (as defined below) of the Issuer or any Distribution Subsidiary or of any other person and no guarantee by the Issuer or any Distribution Subsidiary of any Relevant Indebtedness of any person will be secured by a mortgage, charge, lien, pledge or other security interest (each a “Security Interest”) upon, or with respect to, any of the present or future business, undertaking, assets or revenues (including any uncalled capital) of the Issuer or any Distribution Subsidiary unless the Issuer, before or at the same time as the creation of the Security Interest, take any and all action necessary to ensure that:
 
(a)  
all amounts payable by the Issuer under the Notes, the Coupons and the Trust Deed are secured equally and rateably with the Relevant Indebtedness or guarantee, as the case may be, by the same Security Interest, in each case to the satisfaction of the Trustee; or
 
(b)  
such other Security Interest or guarantee or other arrangement (whether or not including the giving of a Security Interest) is provided in respect of all amounts payable by the Issuer under the Notes, the Coupons and the Trust Deed either (i) as the Trustee shall in its absolute discretion deem not materially less beneficial to the interests of the Noteholders or (ii) as shall be approved by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders,
 
save that the above restriction shall not apply to any Security Interest (1) provided by or in respect of a company becoming a Distribution Subsidiary after the issue date of the Notes and where such Security Interest existed at the time that company becomes a Distribution Subsidiary (provided that such Security Interest was not created in contemplation of that company becoming a Distribution Subsidiary and the principal amount secured at the time of that company becoming a Distribution Subsidiary is not subsequently increased) or (2) created or outstanding in respect of any Non-recourse Indebtedness (as defined in Condition 9) or any leasing or hire purchase agreement of the Issuer or any Distribution Subsidiary provided that the aggregate outstanding principal amount secured by all such Security Interests created or outstanding under this exception (2) shall not at any time exceed the greater of £75,000,000 or 10 per cent. of the Regulatory Asset Base (as defined below) at such time (or the equivalent thereof in any other currency or currencies).
 
3.2  
Restriction on distribution of dividends
 
So long as any Note or Coupon remains outstanding, the Issuer shall not at any time declare or make a distribution (as defined in Section 209 of the Income and Corporation Taxes Act 1988) or grant a loan or any other credit facility to any of its shareholders unless (1) immediately following the occurrence of any such event, the Net Debt (as defined below) at such time would not exceed 85 per cent. of the Regulatory Asset Base relating to the year in which the relevant distribution or grant was first declared or made; and (2) written certification thereof, signed by two directors of the Issuer, has been provided to the Trustee on or prior to such distribution or grant. Such certification may be relied upon by the Trustee without further enquiry or evidence and, if relied upon by the Trustee, shall, in the absence of manifest error, be conclusive and binding on all parties whether or not addressed to each such party.
 
3.3  
Definitions
 
For the purposes of these Conditions:
 
“Capital and Reserves” means the aggregate of:
 
(a)  
the amount paid up or credited as paid up on the share capital of the Issuer; and
 
(b)  
the total of the capital, revaluation and revenue reserves of the Group (as defined below), including any share premium account, capital redemption reserve and credit balance on the profit and loss account, but excluding sums set aside for taxation and amounts attributable to outside shareholders in Subsidiary Undertakings (as defined below) and deducting any debit balance on the profit and loss account,
 
all as shown in the then latest audited consolidated balance sheet and profit and loss account of the Group prepared in accordance with the historical cost convention (as modified by the revaluation of certain fixed assets) for the purposes of the Companies Act 1985, but adjusted as may be necessary in respect of any variation in the paid up share capital or share premium account of the Issuer since the date of that balance sheet and further adjusted as may be necessary to reflect any change since the date of that balance sheet in the Subsidiary Undertakings comprising the Group and/or as the Auditors (as defined in the Trust Deed) may consider appropriate.
 
A certificate by two directors of the Issuer as to the amount of the Capital and Reserves at any given time may be relied upon by the Trustee without further enquiry or evidence and, if relied upon by the Trustee, shall, in the absence of manifest error, be conclusive and binding on all parties whether or not addressed to each such party;
 
“consolidated” means, in relation to the financial statements and accounts of the Issuer and/or the Group, those statements and accounts as consolidated under International Financial Reporting Standards, provided that if such consolidated accounts are not prepared, it shall mean the non-consolidated financial statements and accounts of the Issuer prepared in accordance with generally accepted accounting principles in the United Kingdom;
 
“Distribution Licence” means an electricity distribution licence granted under section 6(1)(c) of the Electricity Act 1989, as amended from time to time);
 
“Distribution Subsidiary” means any Subsidiary of the Issuer which holds a Distribution Licence from time to time;
 
“Group” means the Issuer and, if and to the extent it has any, its Subsidiary Undertakings and “member of the Group” shall be construed accordingly;
 
“Net Debt”, at any time, means the aggregate amount of all indebtedness for borrowed money (as defined in Condition 9) of the Issuer at such time less the aggregate of:
 
(a)  
amounts credited to current accounts or deposits and certificates of deposit (with a term not exceeding three months) at, or issued by, any bank, building society or other financial institution;
 
(b)  
cash in hand; and
 
(c)  
the lower of book and market value (calculated, where relevant, by reference to their bid price) of gilts issued by the United Kingdom Government,
 
in each case beneficially owned by the Issuer and in each case so that no amount shall be included or excluded more than once;
 
“Regulatory Asset Base”, in respect of any year, means the regulatory asset base of the Issuer most recently published in respect of such year by the Office of Gas and Electricity Markets (“OFGEM”) or any successor of OFGEM;
 
“Relevant Indebtedness” means (i) any present or future indebtedness (whether being principal, premium, interest or other amounts) in the form of or represented by bonds, notes, debentures, debenture stock, loan stock or other securities, whether issued for cash or in whole or in part for a consideration other than cash, and which, with the agreement of the person issuing the same, are or are capable of being quoted, listed or ordinarily dealt in on any stock exchange or recognised over-the-counter or other securities market; or (ii) monies borrowed or raised from, or any acceptance credit opened by, a bank, building society or other financial institution; or (iii) any leasing or hire purchase agreement which would be treated as a finance lease in the accounts of the relevant person;
 
“Subsidiary” means a subsidiary within the meaning of section 736 of the Companies Act 1985;
 
“Subsidiary Undertaking” shall have the meaning given to it by section 258 of the Companies Act 1985 (but, in relation to the Issuer, shall exclude any undertaking (as defined in the Companies Act 1985) whose accounts are not included in the then latest published audited consolidated accounts of the Issuer, or (in the case of an undertaking which has first become a subsidiary undertaking of a member of the Group since the date as at which any such audited accounts were prepared) would not have been so included or consolidated if it had become so on or before that date); and
 
any reference to an obligation being “guaranteed” shall include a reference to an indemnity being given in respect of that obligation.
 
 
4  
INTEREST
 
4.1  
Interest Rate and Interest Payment Dates
 
The Notes bear interest on their outstanding nominal amount from and including 1 December 2006 at the rate of 1.541 per cent. per annum, payable semi-annually in arrear on 1 June and 1 December in each year (each an “Interest Payment Date”) until 1 December 2053. The interest amount will be adjusted for indexation in accordance with Condition 8.
 
4.2  
Interest Accrual
 
Each Note will cease to bear interest from and including its due date for redemption unless, upon due presentation, payment of the principal in respect of the Note is improperly withheld or refused or unless default is otherwise made in respect of payment, in which event interest shall continue to accrue as provided in the Trust Deed.
 
4.3  
Calculation of Broken Interest
 
When interest is required to be calculated in respect of a period of less than a full period of six months, it shall be calculated on the basis of (a) the actual number of days in the period from and including the date from which interest begins to accrue (the “Accrual Date”) to but excluding the date on which it falls due divided by (b) the actual number of days from and including the Accrual Date to but excluding the next following Interest Payment Date multiplied by two.
 
 
5  
PAYMENTS AND EXCHANGES OF TALONS
 
5.1  
Payments in respect of Notes
 
Payments of principal and interest in respect of each Note will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the Note, except that payments of interest due on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Coupon, in each case at the specified office outside the United States of any of the Paying Agents.
 
5.2  
Method of Payment
 
Payments will be made by credit or transfer to a pounds sterling account maintained by the payee with or, at the option of the payee, by a pounds sterling cheque drawn on, a bank in London.
 
5.3  
Missing Unmatured Coupons
 
Each Note should be presented for payment together with all relative unmatured Coupons (which expression shall, for the avoidance of doubt, include Coupons falling to be issued on exchange of matured Talons). Upon the date on which any Note becomes due and repayable, all unmatured Coupons appertaining to the Note (whether or not attached) shall become void and no payment shall be made in respect of such Coupons.
 
5.4  
Payments subject to Applicable Laws
 
Payments in respect of principal and interest on the Notes are subject in all cases to any fiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions of Condition 7.
 
5.5  
Payment only on a Presentation Date
 
A holder shall be entitled to present a Note or Coupon for payment only on a Presentation Date and shall not, except as provided in Condition 4, be entitled to any further interest or other payment if a Presentation Date is after the due date.
 
“Presentation Date” means a day which (subject to Condition 17):
 
(a)  
is or falls after the relevant due date;
 
(b)  
is a Business Day in the place of the specified office of the Paying Agent at which the Note or Coupon is presented for payment; and
 
(c)  
in the case of payment by credit or transfer to a pounds sterling account in London as referred to above), is a Business Day in London.
 
In this Condition, “Business Day” means, in relation to any place, a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in that place.
 
5.6  
Exchange of Talons
 
On and after the Interest Payment Date on which the final Coupon comprised in any Coupon sheet matures, the Talon comprised in the Coupon sheet may be surrendered at the specified office of any Paying Agent in exchange for a further Coupon sheet (including any appropriate further Talon), subject to the provisions of Condition 17. Each Talon shall, for the purposes of these Conditions, be deemed to mature on the Interest Payment Date on which the final Coupon comprised in the relative Coupon sheet matures.
 
5.7  
Initial Paying Agents
 
The names of the initial Paying Agents and their initial specified offices are set out at the end of these Conditions. The Issuer reserves the right, subject to the prior written approval of the Trustee, at any time to vary or terminate the appointment of any Paying Agent and to appoint additional or other Paying Agents provided that:
 
(a)  
there will at all times be a Principal Paying Agent;
 
(b)  
there will at all times be at least one Paying Agent (which may be the Principal Paying Agent) having its specified office in a European city which so long as the Notes are admitted to official listing on the London Stock Exchange plc shall be London or such other place as the UK Listing Authority may approve; and
 
(c)  
there will at all times be a Paying Agent in a Member State of the European Union that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive.
 
Notice of any termination or appointment and of any changes in specified offices will be given to the Noteholders promptly by the Issuer in accordance with Condition 12.
 
 
6  
REDEMPTION AND PURCHASE
 
6.1  
Redemption at Maturity
 
Unless previously redeemed or purchased and cancelled as provided below, the Issuer will redeem the Notes at their outstanding nominal amount (subject to adjustment for indexation in accordance with Condition 8) on 1 December 2053.
 
6.2  
Redemption at the option of the Issuer on 1 December 2026
 
The Issuer may at its option, having given not less than 30 nor more than 90 days’ notice to the Noteholders in accordance with Condition 12 (which shall be irrevocable), redeem all, but not some only, of the Notes on 1 December 2026 at a price (the “Redemption Price”) which shall be the higher of the amounts set out in (i) and (ii) below, together with interest (adjusted for indexation in accordance with Condition 8) accrued up to but excluding 1 December 2026:
 
(i)  
their outstanding nominal amount multiplied by the Index Ratio applicable to the date fixed for redemption; and
 
(ii)  
the price (multiplied by the Index Ratio applicable to the date fixed for redemption), as determined by an Independent Financial Adviser (as defined below) and expressed as a percentage rounded to three decimal places (0.0005 being rounded down) at which the Gross Real Yield on the Notes, if they were to be purchased at such price on the third dealing day prior to the due date of redemption and calculated on the basis that they remain outstanding to 1 December 2053, would be equal to the Gross Real Yield on such dealing day of the Reference Stock (as defined below) on the basis of the middle market price of the Reference Stock prevailing at 11:00 a.m. (London time) on such dealing day, as determined by an independent financial adviser, independent investment bank or other expert (or such other person as the Trustee may approve) (an “Independent Financial Adviser”).
 
At any time when under these Conditions it is necessary to have, or the Trustee requests, the appointment of an Independent Financial Adviser, the Issuer shall select and appoint an Independent Financial Adviser with the prior written approval of the Trustee and at the expense of the Issuer.
 
Any reference in these Conditions to principal or outstanding nominal amount shall be deemed to include any sum payable as the Redemption Price save in respect of any such references in Conditions 6.3 and 6.4.
 
In this Condition:
 
“Reference Stock” means the 1.25 per cent. Index-Linked Treasury Stock due 2055 or, if such Treasury Stock is no longer in issue, such other United Kingdom government stock as the Independent Financial Adviser may, with the advice of three brokers and/or market makers operating in the gilt edged market, agree with the Issuer, or failing such agreement, decide from time to time to be appropriate; and
 
The “Gross Real Yield” on the Notes and on the Reference Stock will be expressed as a percentage and will be calculated by the Independent Financial Adviser in accordance with generally accepted market practice at such time, as advised by the Independent Financial Adviser.
 
At any time when under these Conditions it is necessary to have, or the Trustee requests, the advice of brokers and/or market makers operating in the gilt edged market, the Issuer shall select and appoint them with the prior written approval of the Trustee and at the expense of the Issuer.
 
Notices of redemption will specify the date fixed for redemption and the applicable Redemption Price. Upon the expiry of any notice of redemption the Issuer shall be bound to redeem the Notes at the applicable Redemption Price.
 
6.3  
Redemption for Taxation Reasons
 
If the Issuer satisfies the Trustee immediately before the giving of the notice referred to below that:
 
(a)  
as a result of any change in, or amendment to, the laws or regulations of a Relevant Jurisdiction (as defined in Condition 7), or any change in the application or official interpretation of the laws or regulations of a Relevant Jurisdiction, which change or amendment becomes effective after 29 November 2006, on the next Interest Payment Date the Issuer would be required to pay additional amounts as provided or referred to in Condition 7; and
 
(b)  
the requirement cannot be avoided by the Issuer taking reasonable measures available to it,
 
the Issuer may at its option, having given not less than 30 nor more than 60 days’ notice to the Noteholders in accordance with Condition 12 (which notice shall be irrevocable), redeem all the Notes, but not some only, at any time at their outstanding nominal amount together with interest accrued to but excluding the date of redemption (each as adjusted for indexation in accordance with Condition 8), provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would be required to pay such additional amounts were a payment in respect of the Notes then due. Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver to the Trustee a certificate signed by two directors of the Issuer stating that the requirement referred to in (a) above will apply on the next Interest Payment Date and cannot be avoided by the Issuer taking reasonable measures available to it, and the Trustee shall be entitled to accept the certificate as sufficient evidence of the satisfaction of the conditions precedent set out above, in which event it shall be conclusive and binding on the Noteholders and the Couponholders.
 
6.4  
Redemption at the option of Noteholders on a Restructuring Event
 
(a)    
 
(i)  
If, at any time while any of the Notes remains outstanding, a Restructuring Event (as defined below) occurs and prior to the commencement of or during the Restructuring Period (as defined below):
 
(A)  
an independent financial adviser (as described below) shall have certified in writing to the Trustee that such Restructuring Event will not be or is not, in its opinion, materially prejudicial to the interests of the Noteholders; or
 
(B)  
if there are Rated Securities (as defined below), each Rating Agency (as defined below) that at such time has assigned a current rating to the Rated Securities confirms in writing to the Trustee that it will not be withdrawing or reducing the then current rating assigned to the Rated Securities by it from an investment grade rating (BBB-/Baa3, or their respective equivalents for the time being, or better) to a non-investment grade rating (BB+/Bal, or their respective equivalents for the time being, or worse) or, if the Rating Agency shall have already rated the Rated Securities below investment grade (as described above), the rating will not be lowered by one full rating category or more, in each case as a result, in whole or in part, of any event or circumstance comprised in or arising as a result of the applicable Restructuring Event,
 
the following provisions of this Condition 6.4 shall cease to have any further effect in relation to such Restructuring Event.
 
(ii)  
If, at any time while any of the Notes remains outstanding, a Restructuring Event occurs and (subject to Condition 6.4(a)(i)):
 
(A)  
within the Restructuring Period, either:
 
(x) if at the time such Restructuring Event occurs there are Rated Securities, a Rating Downgrade (as defined below) in respect of such Restructuring Event also occurs; or
 
(y) if at such time there are no Rated Securities, a Negative Rating Event (as defined below) in respect of such Restructuring Event also occurs; and
 
(B)  
an independent financial adviser shall have certified in writing to the Trustee that such Restructuring Event is, in its opinion, materially prejudicial to the interests of the Noteholders (a “Negative Certification”),
 
then, unless at any time the Issuer shall have given notice under Condition 6.2, 6.3 or 6.4, the holder of each Note will, upon the giving by the Issuer of a Put Event Notice (as defined below), have the option (the “Restructuring Put Option”) to require the Issuer to redeem or, at the option of the Issuer, purchase (or procure the purchase of) that Note on the Put Date (as defined below), at its outstanding nominal amount together with (or, where purchased, together with an amount equal to) interest (if any) accrued to (but excluding) the Put Date (in each case, as adjusted for indexation in accordance with Condition 8).
 
A Restructuring Event shall be deemed not to be materially prejudicial to the interests of the Noteholders if, notwithstanding the occurrence of a Rating Downgrade or a Negative Rating Event, the rating assigned to the Rated Securities by any Rating Agency (as defined below) is subsequently increased to, or, as the case may be, there is assigned to the Notes or other unsecured and unsubordinated debt of the Issuer (or of any Subsidiary of the Issuer and which is guaranteed on an unsecured and unsubordinated basis by the Issuer) having an initial maturity of five years or more by any Rating Agency, an investment grade rating (BBB-/Baa3) or their respective equivalents for the time being) or better prior to any Negative Certification being issued.
 
Any certification by an independent financial adviser as aforesaid as to whether or not, in its opinion, any Restructuring Event is materially prejudicial to the interests of the Noteholders shall, in the absence of manifest error, be conclusive and binding on the Trustee, the Issuer and the Noteholders. The Issuer may, at any time, with the prior written approval of the Trustee appoint an independent financial adviser for the purposes of this Condition 6.4. If, within 14 London business days following the occurrence of a Restructuring Event, the Issuer shall not have appointed an independent financial adviser for the purposes of Condition 6.4(a)(ii)(B) and (if so required by the Trustee) the Trustee is indemnified and/or secured to its satisfaction against the costs of such adviser, the Trustee may appoint an independent financial adviser for such purpose following consultation with the Issuer.
 
(b)  
Promptly upon the Issuer becoming aware of the occurrence of a Put Event (as defined below), and in any event not later than 14 days after the occurrence of a Put Event, the Issuer shall, and at any time upon the Trustee becoming similarly so aware the Trustee may, and if so requested by the holders of at least one-quarter in nominal amount of the Notes then outstanding shall (and subject to it being indemnified and/or secured to its satisfaction), give notice (a “Put Event Notice”) to the Noteholders in accordance with Condition 12 specifying the nature of the Put Event and the procedure for exercising the Restructuring Put Option.
 
(c)  
To exercise the Restructuring Put Option, the holder of a Note must deliver at the specified office of any Paying Agent on any Business Day (as defined in Condition 5.5) at the place of such specified office falling within the Put Period, a duly signed and completed notice of exercise in the form (for the time being current and which may, if this Note is held in a clearing system, be any form acceptable to the clearing system delivered in a manner acceptable to the clearing system) obtainable from any specified office of any Paying Agent (a “Put Notice”) and in which the holder must specify a bank account (or, if payment is to be made by cheque, an address) to which payment is to be made under this paragraph accompanied by such Notes or evidence satisfactory to the Paying Agent concerned that such Notes will, following the delivery of the Put Notice, be held to its order or under its control. A Put Notice given by a holder of any Note shall be irrevocable except where, prior to the due date of redemption, an Event of Default has occurred and is continuing, in which event such holder, at its option, may elect by notice to the Issuer to withdraw the Put Notice. For the purposes of this Condition, the “Put Period” shall mean the period of 45 days after that on which a Put Event Notice is given. Subject to the relevant Noteholder having complied with this Condition, the Issuer shall redeem or, at the option of the Issuer, purchase (or procure the purchase of) the relevant Note on the fifteenth day after the date of expiry of the Put Period (the “Put Date”) unless previously redeemed or purchased.
 
(d)  
For the purposes of these Conditions:
 
(i)  
A “Negative Rating Event” shall be deemed to have occurred if (A) the Issuer does not, either prior to or not later than 14 days after the date of a Negative Certification in respect of the relevant Restructuring Event, seek, and thereupon use all reasonable endeavours to obtain, a rating of the Notes or any other unsecured and unsubordinated debt of the Issuer (or of any Subsidiary of the Issuer and which is guaranteed on an unsecured and unsubordinated basis by the Issuer) having an initial maturity of five years or more from a Rating Agency or (B) if it does so seek and use such endeavours, it is unable, as a result of such Restructuring Event, to obtain such a rating of at least investment grade (BBB-/Baa3, or their respective equivalents for the time being).
 
(ii)  
A “Put Event” occurs on the date of the last to occur of (A) a Restructuring Event, (B) either a Rating Downgrade or, as the case may be, a Negative Rating Event and (C) the relevant Negative Certification.
 
(iii)  
“Rating Agency” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. or any of its subsidiaries and their successors, Moody’s Investors Service Limited or any of its subsidiaries and their successors, Fitch Ratings Limited or any of its subsidiaries and their successors or any rating agency substituted for any of them (or any permitted substitute of them) by the Issuer from time to time with the prior written approval of the Trustee.
 
(iv)  
A “Rating Downgrade” shall be deemed to have occurred in respect of a Restructuring Event if the then current rating assigned to the Rated Securities by any Rating Agency (whether provided by a Rating Agency at the invitation of the Issuer or by its own volition) is withdrawn or reduced from an investment grade rating (BBB-/Baa3) or their respective equivalents for the time being, or better) to a non-investment grade rating (BB+/Bal) or their respective equivalents for the time being, or worse) or, if the Rating Agency shall then have already rated the Rated Securities below investment grade (as described above), the rating is lowered one full rating category.
 
(v)  
“Rated Securities” means the Notes, if at any time and for so long as they have a rating from a Rating Agency, and otherwise any other unsecured and unsubordinated debt of the Issuer (or of any Subsidiary of the Issuer and which is guaranteed on an unsecured and unsubordinated basis by the Issuer) having an initial maturity of five years or more which is rated by a Rating Agency.
 
(vi)  
“Restructuring Event” means the occurrence of any one or more of the following events:
 
(A)  
(x) the Secretary of State for Trade and Industry (or any successor) giving any Distribution Subsidiary and/or the Issuer written notice of any revocation of its Distribution Licence or (y) any Distribution Subsidiary and/or the Issuer agreeing in writing with the Secretary of State for Trade and Industry (or any successor) to any revocation or surrender of its Distribution Licence or (z) any legislation (whether primary or subordinate) being enacted terminating or revoking the Distribution Licence of any Distribution Subsidiary and/or the Issuer, except in any such case in circumstances where a licence or licences on substantially no less favourable terms is or are granted to (1) the Issuer or a wholly-owned Subsidiary of the Issuer (the “Relevant Subsidiary”), and in the case of such Relevant Subsidiary at the time of such grant it either executes in favour of the Trustee an unconditional and irrevocable guarantee in respect of the Notes in such form as the Trustee may approve or becomes the primary obligor under the Notes in accordance with Condition 14; or
 
(B)  
any modification (other than a modification which is of a formal, minor or technical nature) being made to the terms and conditions of any Distribution Subsidiary’s or the Issuer’s Distribution Licence unless two directors of the Distribution Subsidiary or, as the case may be, of the Issuer, have certified to the Trustee that the modified terms and conditions are not materially less favourable to the business of the Distribution Subsidiary or, as the case may be, of the Issuer; or
 
(C)  
any legislation (whether primary or subordinate) is enacted which removes, qualifies or amends (other than an amendment which is of a formal, minor or technical nature) the functions and duties of the Secretary of State for Trade and Industry (or any successor) and/or the Gas and Electricity Markets Authority (or any successor) under section 3A of the Electricity Act 1989, as amended by the Utilities Act 2000 (as this may be amended from time to time), unless two directors of the Issuer have certified to the Trustee that such removal, qualification or amendment does not have a materially adverse effect (as defined in the Trust Deed) on the financial condition of the Issuer or any Distribution Subsidiary.
 
(vii)  
“Restructuring Period” means:
 
(A)  
if at the time a Restructuring Event occurs there are Rated Securities, the period of 90 days starting from and including the day on which that Restructuring Event occurs; or
 
(B)  
if at the time a Restructuring Event occurs there are no Rated Securities, the period starting from and including the day on which that Restructuring Event occurs and ending on the day 90 days following the later of (x) the date (if any) on which the Issuer shall seek to obtain a rating as contemplated by the definition of Negative Rating Event; (y) the expiry of the 14 days referred to in the definition of Negative Rating Event; and (z) the date on which a Negative Certification shall have been given to the Issuer in respect of that Restructuring Event.
 
(viii)  
A Rating Downgrade or a Negative Rating Event or a non-investment grade rating for the purpose of Condition 6.4(a)(i)(B) shall be deemed not to have occurred as a result or in respect of a Restructuring Event if the Rating Agency making the relevant reduction in rating or, where applicable, declining to assign a rating of at least investment grade as provided in this Condition 6.4 does not announce or publicly confirm or inform the Trustee in writing at its request that the reduction or, where applicable, declining to assign a rating of at least investment grade was the result, in whole or in part, of any event or circumstance comprised in or arising as a result of the applicable Restructuring Event.
 
The Trustee is under no obligation, responsibility or liability to ascertain whether a Restructuring Event, a Negative Rating Event or any event which could lead to the occurrence of or could constitute a Restructuring Event has occurred and, until it shall have express notice pursuant to the Trust Deed to the contrary, the Trustee may assume that no Restructuring Event, Negative Rating Event or other such event has occurred. In determining whether or not a Restructuring Event has occurred, the Trustee shall be entitled to rely solely and without liability on an opinion given in a certificate signed by two directors of the Issuer.
 
6.5  
Early Redemption for Index Reasons
 
In the event that Condition 8.3 applies and:
 
(i)  
a substitute Index (as defined in Condition 8) pursuant to Condition 8.3(ii)(A) fails to be determined for three consecutive months; and
 
(ii)  
the Indexation Adviser (as defined in Condition 8) has notified the Trustee pursuant to Condition 8.3(iii)(A)(x) that publication of the Index (as defined in Condition 8) has ceased; and
 
(iii)  
an Expert (as defined in Condition 8) has been appointed pursuant to Condition 8.3(iii)(B) but such Expert has failed to determine an amendment or substitution of the Index after at least 30 days of being required to do so pursuant to Condition 8.3(iii)(B),
 
then the Issuer may, on any Interest Payment Date after the circumstances described above have occurred and are continuing, having given not more than 60 nor less than 30 days’ notice to the Trustee and the Noteholders in accordance with Condition 12, redeem all, but not some only, of the Notes at the outstanding nominal amount thereof, together with interest accrued to but excluding the date fixed for redemption (each as adjusted for indexation in accordance with Condition 8), providing that the circumstances described above are continuing at the time that such notice is given.
 
6.6  
Purchases
 
The Issuer or any affiliate of the Issuer may at any time purchase Notes (provided that all unmatured Coupons appertaining to the Notes are purchased with the Notes) at any price in the open market or otherwise. Such Notes may be held, reissued, resold or, at the option of the Issuer, surrendered to any Paying Agent for cancellation.
 
6.7  
Cancellations
 
All Notes which are redeemed will forthwith be cancelled (together with all unmatured Coupons attached thereto or surrendered therewith at the time of redemption). All Notes so cancelled and any Notes purchased and cancelled pursuant to Condition 6.6 above (together with all unmatured Coupons cancelled therewith) shall be forwarded to the Principal Paying Agent and cannot be reissued or resold.
 
6.8  
Notices Final
 
Upon the expiry of any notice as is referred to in Condition 6.2, 6.3, 6.4 or 6.5 above the Issuer shall be bound to redeem the Notes to which the notice refers in accordance with the terms of such Condition (in the case of Condition 6.4 above, save as otherwise provided therein).
 
 
7  
TAXATION
 
7.1  
Payment without Withholding
 
All payments in respect of the Notes by or on behalf of the Issuer shall be made without withholding or reduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature (“Taxes”) imposed or levied by or on behalf of any Relevant Jurisdiction, unless the withholding or deduction of the Taxes is required by law. In that event, the Issuer will pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amounts shall be payable in relation to any payment in respect of any Note or Coupon:
 
(a)  
presented for payment by or on behalf of, a holder who is liable to the Taxes in respect of the Note or Coupon by reason of his having some connection with a Relevant Jurisdiction other than the mere holding of the Note or Coupon; or
 
(b)  
presented for payment by or on behalf of a holder who could lawfully avoid (but has not so avoided) such deduction or withholding by complying or procuring that any third party complies with any statutory requirements or by making or procuring that any third party makes a declaration of non-residence or other similar claim for exemption to any tax authority in the place where the relevant Note or Coupon is presented; or
 
(c)  
where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive; or
 
(d)  
presented for payment by or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the European Union; or
 
(e)  
presented for payment more than 30 days after the Relevant Date (as defined below) except to the extent that a holder would have been entitled to additional amounts on presenting the same for payment on the last day of the period of 30 days assuming, whether or not such is in fact the case, that day to have been a Presentation Date (as defined in Condition 5.5).
 
7.2  
Interpretation
 
In these Conditions:
 
“Relevant Date” means the date on which the payment first becomes due but, if the full amount of the money payable has not been received by the Principal Paying Agent or the Trustee on or before the due date, it means the date on which, the full amount of the money having been so received, notice to that effect has been duly given to the Noteholders by the Issuer in accordance with Condition 12; and
 
“Relevant Jurisdiction” means the United Kingdom or any political subdivision or any authority thereof or therein having power to tax.
 
7.3  
Additional Amounts
 
Any reference in these Conditions to any amounts in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable under this Condition or under any undertakings given in addition to, or in substitution for, this Condition pursuant to the Trust Deed.
 
 
8  
INDEXATION
 
8.1  
Definitions
 
In these Conditions:
 
“Base Index Figure” means, subject as provided in Condition 8.3 below, 200.100;
 
“business day” means, in this Condition 8, any day on which commercial banks and foreign exchange markets are open for business in London;
 
“Index” or “Index Figure” means, subject as provided in Condition 8.3 below, the United Kingdom Retail Prices Index (for all items) published by the United Kingdom Office for National Statistics (January 1987 = 100) (currently contained in the Monthly Digest of Statistics) or any subsequent index that, in the opinion of the Chancellor of the Exchequer after consultation with a body that the Chancellor of the Exchequer considers to be independent and to have a recognised expertise in the construction of price indices, continues the function of measuring changes in the level of UK retail prices. Further information regarding the United Kingdom Retail Prices Index (for all items) can be found at the following website: www.statistics.gov.uk/rpi.
 
Any reference to the “Index Figure applicable” to a particular date when a payment of interest or principal falls due shall, subject as provided in this Condition 8, be calculated in accordance with the following formula:
IFA = RPIm - 3 +         (Day of Calculation Date - 1)      x (RPIm - 2 - RPIm - 3)
                            (Days in month of Calculation Date)
 
and rounded to five decimal places (0.000005 being rounded upwards) and where:
 
“Calculation Date” means the date on which a payment of interest or principal falls due in accordance with these Conditions;
 
“IFA” means the Index Figure applicable;
 
“RPIm-3” means the Index Figure for the first day of the month that is three months prior to the month in which the payment falls due; and
 
“RPIm-2” means the Index Figure for the first day of the month that is two months prior to the month in which the payment falls due;
 
“Indexation Adviser” means a gilt edged market maker or other adviser selected and appointed by the Issuer and approved by the Trustee;
 
“Index Ratio” applicable to any date when a payment of interest or principal falls due means the Index Figure applicable to such date divided by the Base Index Figure and rounded to five decimal places (0.000005 being rounded upwards); and
 
“Reference Gilt” means the 1.25 per cent. Index-Linked Treasury Stock due 2055, or if such stock is not in existence, or in the opinion of the Expert (as defined below), it is no longer the most appropriate reference government stock for the Notes (by reason of illiquidity or otherwise), such other stock issued by or on behalf of HM Treasury as the Expert may consider to be the most appropriate reference government stock for the Notes.
 
At any time when under these Conditions it is necessary for an Indexation Adviser to perform any functions under these Conditions, the Issuer will appoint such Indexation Adviser on or before any such time.
 
8.2  
Application of the Index Ratio
 
Each payment of interest and principal of the Notes shall be the amount provided in or determined in accordance with these Conditions, multiplied by the Index Ratio applicable to the date on which such payment falls to be made and rounded to five decimal places (0.000005 being rounded upwards).
 
8.3  
Changes in circumstances affecting the Index
 
(i)  
If the Index is changed by the substitution of a new base therefor, then with effect from, and including, the calendar month in which such substitution takes effect:
 
(A)  
the definition of “Index” and “Index Figure” shall be deemed to refer to the new month in substitution for January 1987 (or, as the case may be, such other month as may have been substituted therefor under this sub-paragraph (i)); and
 
(B)  
the new Base Index Figure shall be the product of the then existing Base Index Figure and the Index Figure applicable immediately following such substitution, divided by the Index Figure applicable immediately prior to such substitution.
 
(ii)  
If in relation to a particular payment of interest or principal in respect of the Notes the Index relating to any month (the “relevant month”), which is required to be taken into account for the purposes of the determination of the Index Figure applicable to any such payment of interest or principal is not published on or before the tenth business day before the date (the “date for payment”) on which such payment is due otherwise than because the Index has ceased to be published, the Index relating to the relevant month shall be deemed to be:
 
(A)  
such substitute index figure (if any) as the Indexation Adviser shall agree to have been published by the Bank of England or the United Kingdom Debt Management Office for the purposes of indexation of payments on the Reference Gilt or, failing such publication, on any one or more issue of index-linked Treasury stock selected by the Indexation Adviser; or
 
(B)  
if no such determination is made by the Indexation Adviser within seven days, the Index last published (or, if later, the substitute index figure last determined pursuant to sub-paragraph (A) above before the date for payment).
 
Where the provisions of this sub-paragraph (ii) apply, the determination of the Indexation Adviser as to the Index Figure applicable to the relevant date for payment falls shall be conclusive and binding. If, an Index Figure having been applied pursuant to sub-paragraph (B) above, the Index Figure relating to the relevant month is subsequently published while a Note is still outstanding no subsequent adjustment to amounts paid will be made.
 
(iii)    
 
(A)  
If:
(x) the Index has ceased to be published; or
 
(y) any change is made to the coverage or the basic calculation of the Index,
 
the Issuer will appoint an Indexation Adviser (unless one has already been appointed pursuant to these Conditions) and the Issuer and the Indexation Adviser together shall (in the case of (y) above only if the change would, in the opinion of the Indexation Adviser, be materially prejudicial to the interests of the Issuer or the Noteholders) seek to agree for the purpose of the Notes one or more adjustments to the Index or a substitute index (with or without adjustments) with the intention that the same should leave the Issuer and the Noteholders in no better and no worse position than they would have been had the Index not ceased to be published or the relevant fundamental change not been made.
 
(B)  
If the Issuer and the Indexation Adviser fail to reach such agreement within 20 business days following the giving of such notice by the Indexation Adviser, a bank or other person in London shall be selected by the Issuer and approved by the Trustee and appointed by the Issuer, or, failing agreement on such selection within 20 business days following the expiry of the 20 business day period referred to above, selected by the Trustee only, in its sole discretion and without further liability to any person for making such selection, and appointed by the Issuer (in each case, such bank or other person so appointed being referred to as the “Expert”), to determine for the purpose of the Notes one or more adjustments to the Index or a substitute index (with or without adjustments) with the intention that the same would leave the Issuer and the Noteholders in no better and no worse position than they would have been had the Index not ceased to be published or the relevant fundamental change not been made. Any Expert so appointed shall act as an expert and not as an arbitrator and all fees, costs and expenses of the Expert, the Issuer and the Trustee in connection with such appointment shall be borne by the Issuer.
   
(C)  If the Index shall be adjusted or replaced by a substitute index as agreed by the Issuer and the Index Adviser or as determined by the Expert pursuant to the foregoing paragraphs, as the case may be, references in these Conditions to the Index and to any Index Figure shall be deemed amended in such manner as the Index Adviser and the Issuer may agree, or as the Expert may determine, to give effect to such adjustment or replacement. Such amendments shall be effective from the date of such agreement or determination and binding upon the Issuer, the Trustee and the Noteholders and the Issuer shall give notice to the Noteholders in accordance with Condition 12 of such amendments as promptly as practicable following such agreement or determination.
 
8.4  
Appointment of Indexation Adviser and Expert
 
At any time when under these Conditions it is necessary to have, or the Trustee requests, the appointment of an Indexation Adviser or Expert, the Issuer shall take such steps as are necessary to appoint an Indexation Adviser or, as the case may be, Expert, in either case approved by the Trustee and at the expense of the Issuer.
 
 
9  
EVENTS OF DEFAULT
 
9.1  
Events of Default
 
The Trustee at its discretion may, and if so requested in writing by the holders of at least one-quarter in nominal amount of the Notes then outstanding or if so directed by an Extraordinary Resolution shall (subject in each case to being indemnified and/or secured to its satisfaction), (but in the case of the happening of any of the events described in paragraphs (b), (c) and (e) to (g) inclusive below, only if the Trustee shall have certified in writing to the Issuer that such event is, in its opinion, materially prejudicial to the interests of the Noteholders), give notice in writing to the Issuer that each Note is, and each Note shall thereupon immediately become, due and repayable at its outstanding nominal amount together with accrued interest (each as adjusted for indexation in accordance with Condition 8) as provided in the Trust Deed if any of the following events (each an “Event of Default”) shall have occurred:
 
(a)  
Non-Payment
 
if default is made in the payment of any principal or interest due in respect of the Notes or any of them and the default continues for a period of 14 days in the case of principal and 21 days in the case of interest or, where relevant, the Issuer, having become obliged to redeem, purchase or procure the purchase of (as the case may be) any Notes pursuant to Condition 6.4 fails to do so within a period of 14 days of having become so obliged; or
 
(b)  
Breach of Other Obligations
 
if the Issuer fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Notes or the Trust Deed and (except where the Trustee shall have certified to the Issuer in writing that it considers such failure to be incapable of remedy in which case no such notice or continuation as is hereinafter mentioned will be required) the failure continues for the period of 60 days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Issuer of notice requiring the same to be remedied; or
 
(c)  
Cross-Default
 
if (i) any other indebtedness for borrowed money of the Issuer or any Principal Subsidiary becomes due and repayable prior to its stated maturity by reason of an event of default or (ii) any such indebtedness for borrowed money is not paid when due or, as the case may be, within any applicable grace period (as originally provided) or (iii) the Issuer or any Principal Subsidiary fails to pay when due (or, as the case may be, within any originally applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any indebtedness for borrowed money of any person or (iv) any security given by the Issuer or any Principal Subsidiary for any indebtedness for borrowed money of any person or any guarantee or indemnity of indebtedness for borrowed money of any person becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant indebtedness for borrowed money or any such guarantee or indemnity as aforesaid shall be due and payable, provided that the aggregate amount of the relevant indebtedness for borrowed money in respect of which any one or more of the events mentioned above in this sub-paragraph (c) has or have occurred equals or exceeds whichever is the greater of £20,000,000 or its equivalent in other currencies (on the basis of the middle spot rate for the relevant currency against the pound sterling as quoted by any leading bank on the day on which this paragraph applies) and two per cent. of the Capital and Reserves, and for the purposes of this sub-paragraph (c), “indebtedness for borrowed money” shall exclude Non-recourse Indebtedness; or
 
(d)  
Winding-up
 
if any order is made by any competent court or resolution passed for the winding up or dissolution of the Issuer, save for the purposes of and followed by amalgamation, merger, consolidation, reorganisation, reconstruction or other similar arrangement on terms previously approved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders; or
 
(e)  
Winding-up of Principal Subsidiary
 
if any order is made by any competent court or any resolution is passed for the winding up or dissolution of a Principal Subsidiary, save for the purposes of and followed by amalgamation, merger, consolidation, reorganisation, reconstruction or other similar arrangement (i) not involving or arising out of the insolvency of such Principal Subsidiary and under which all the surplus assets of such Principal Subsidiary are transferred to the Issuer or any of its Subsidiaries (other than an Excluded Subsidiary) or (ii) the terms of which have previously been approved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders; or
 
(f)  
Ceasing to Carry on the Business
 
if the Issuer or any Principal Subsidiary shall cease to carry on the whole or, in the opinion of the Trustee, substantially the whole of its business, save for the purposes of amalgamation, merger, consolidation, reorganisation, reconstruction or other similar arrangement (A) (x) not involving or arising out of the insolvency of the Issuer or such Principal Subsidiary and (y) under which all or, in the opinion of the Trustee, substantially all of its assets are transferred to another member of the Group (other than an Excluded Subsidiary) or to a transferee which is, or immediately upon such transfer becomes, a Principal Subsidiary or (B) under which all or, in the opinion of the Trustee, substantially all of its assets are transferred to a third party or parties (whether associates or not) for full consideration by the Issuer or a Principal Subsidiary on an arm’s length basis or (C) the terms of which have previously been approved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders, provided that (in the case of (A) or (B) above) if the Issuer transfers its Distribution Licence, the transferee has, at or around the time of transfer, either executed in favour of the Trustee an unconditional and irrevocable guarantee in respect of the Notes in such form as the Trustee may require or become a primary obligor under the Notes in accordance with Condition 13; or
 
(g)  
Insolvency
 
if the Issuer or any Principal Subsidiary shall suspend or shall threaten to suspend payment of its debts generally or shall be declared or adjudicated by a competent court to be unable, or shall admit in writing its inability, to pay its debts (within the meaning of section 123(1) or (2) of the Insolvency Act 1986) as they fall due, or shall be adjudicated or found insolvent by a competent court or shall enter into any composition or other similar arrangement with its creditors under section 1 of the Insolvency Act 1986, as amended; or
 
(h)  
Administration and Enforcement Proceedings
 
if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Issuer or any Principal Subsidiary or in relation to the whole or, in the opinion of the Trustee, a substantial part of the undertaking or assets of any of them or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or, in the opinion of the Trustee, a substantial part of the assets of any of them and in any of the foregoing cases it or he shall not be paid out or discharged within 90 days (or such longer period as the Trustee may in its absolute discretion permit); or
 
For the purposes of sub-paragraph (g) above, section 123(1)(a) of the Insolvency Act 1986 shall have effect as if for “£750” there was substituted “£250,000” or such higher figure as the Office of Gas and Electricity Markets (or any successor) may from time to time determine by notice in writing to the Secretary of State for Trade and Industry and the Issuer.
 
Neither the Issuer nor any Principal Subsidiary shall be deemed to be unable to pay its debts for the purposes of sub-paragraph (g) above if any such demand as is mentioned in section 123(1)(a) of the Insolvency Act 1986 is being contested in good faith by the Issuer or the relevant Principal Subsidiary with recourse to all appropriate measures and procedures or if any such demand is satisfied before the expiration of such period (if any) as may be stated in any notice given by the Trustee under this Condition 9.
 
Definitions
 
For the purposes of these Conditions:
 
“Excluded Subsidiary” means any Subsidiary of the Issuer (other than a Relevant Subsidiary):
 
(i)  
which is a single purpose company whose principal assets and business are constituted by the ownership, acquisition, development and/or operation of an asset;
 
(ii)  
none of whose indebtedness for borrowed money in respect of the financing of such ownership, acquisition, development and/or operation of an asset is subject to any recourse whatsoever to any member of the Group (other than another Excluded Subsidiary) in respect of the repayment thereof, except as expressly referred to in sub-paragraph (ii)(C) of the definition of Non-recourse Indebtedness below; and
 
(iii)  
which has been designated as such by the Issuer by written notice to the Trustee, provided that the Issuer may give written notice to the Trustee at any time that any Excluded Subsidiary is no longer an Excluded Subsidiary, whereupon it shall cease to be an Excluded Subsidiary;
 
“indebtedness for borrowed money” means any present or future indebtedness (whether being principal, premium, interest or other amounts) for or in respect of (i) money borrowed, (ii) liabilities under or in respect of any acceptance or acceptance credit, or (iii) any notes, bonds, debentures, debenture stock, loan stock or other securities offered, issued or distributed whether by way of public offer, private placing, acquisition consideration or otherwise and whether issued for cash or in whole or in part for a consideration other than cash;
 
“Non-recourse Indebtedness” means any indebtedness for borrowed money:
 
(i)  
which is incurred by an Excluded Subsidiary; or
 
(ii)  
in respect of which the person or persons to whom any such indebtedness for borrowed money is or may be owed by the relevant borrower (whether or not a member of the Group) has or have no recourse whatsoever to any member of the Group (other than an Excluded Subsidiary) for the repayment thereof other than:
 
(A)  recourse to such borrower for amounts limited to the cash flow or net cash flow (other than historic cash flow or historic net cash flow) from any specific asset or assets over or in respect of which security has been granted in respect of such indebtedness for borrowed money; and/or
 
(B)  recourse to such borrower for the purpose only of enabling amounts to be claimed in respect of such indebtedness for borrowed money in an enforcement of any encumbrance given by such borrower over any such asset or assets or the income, cash flow or other proceeds deriving therefrom (or given by any shareholder or the like in the borrower over its shares or the like in the capital of the borrower) to secure such indebtedness for borrowed money, provided that (aa) the extent of such recourse to such borrower is limited solely to the amount of any recoveries made on any such enforcement, and (bb) such person or persons is/are not entitled, by virtue of any right or claim arising out of or in connection with such indebtedness for borrowed money, to commence proceedings for the winding up or dissolution of the borrower or to appoint or procure the appointment of any receiver, trustee or similar person or officer in respect of the borrower or any of its assets (save for the assets the subject of such encumbrance); and/or
 
(C)  recourse to such borrower generally, or directly or indirectly to a member of the Group, under any form of assurance, undertaking or support, which recourse is limited to a claim for damages (other than liquidated damages and damages required to be calculated in a specified way) for breach of an obligation (not being a payment obligation or an obligation to procure payment by another or an indemnity in respect thereof or any obligation to comply or to procure compliance by another with any financial ratios or other tests of financial condition) by the person against whom such recourse is available.
 
“Principal Subsidiary” at any time shall mean each Subsidiary of the Issuer (in each case not being an Excluded Subsidiary or any other Subsidiary of the Issuer, as the case may be, whose only indebtedness for borrowed money is Non-recourse Indebtedness):
 
(i)  
whose (a) profits on ordinary activities before tax or (b) gross assets, in each case attributable to the Issuer represent 20 per cent. or more of the consolidated profits on ordinary activities before tax of the Group or, as the case may be, consolidated gross assets of the Group, in each case as calculated by reference to the then latest audited financial statements of such Subsidiary (consolidated in the case of a company which itself has Subsidiaries) and the then latest audited consolidated financial statements of the Group provided that in the case of a Subsidiary acquired after the end of the financial period to which the then latest audited consolidated financial statements of the Group relate, the reference to the then latest audited consolidated financial statements of the Group for the purposes of the calculation above shall, until consolidated financial statements for the financial period in which the acquisition is made have been prepared and audited as aforesaid, be deemed to be a reference to such first-mentioned financial statements as if such Subsidiary had been shown in such financial statements by reference to its then latest relevant audited financial statements, adjusted as deemed appropriate by the Auditors; or
 
(ii)  
to which is transferred all or substantially all of the business, undertaking and assets of a Subsidiary of the Issuer which immediately prior to such transfer is a Principal Subsidiary, whereupon the transferor Subsidiary shall immediately cease to be a Principal Subsidiary and the transferee Subsidiary shall cease to be a Principal Subsidiary under the provisions of this sub-paragraph (ii), upon publication of its next audited financial statements (but without prejudice to the provisions of sub-paragraph (i) above) but so that such transferor Subsidiary or such transferee Subsidiary may be a Principal Subsidiary of the Issuer on or at any time after the date on which such audited financial statements have been published by virtue of the provisions of sub-paragraph (i) above or before, on or at any time after such date by virtue of the provisions of this sub-paragraph (ii).
 
A certificate by two directors of the Issuer that, in their opinion, a Subsidiary of the Issuer is or is not or was or was not at any particular time or throughout any specified period a Principal Subsidiary may be relied upon by the Trustee without further enquiry or evidence and the Trustee will not be responsible or liable for any loss occasioned by acting on such a certificate and, if relied upon by the Trustee, shall, in the absence of manifest error, be conclusive and binding on all parties, whether or not addressed to each such party.
 
 
10  
ENFORCEMENT
 
10.1  
Enforcement by the Trustee
 
The Trustee may at any time, at its discretion and without notice, take such proceedings against the Issuer as it may think fit to enforce the provisions of the Trust Deed, the Notes and the Coupons, but it shall not be bound to take any such proceedings or any other action in relation to the Trust Deed, the Notes or the Coupons unless (a) it has been so directed by an Extraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one quarter in outstanding nominal amount of the Notes then outstanding and (b) it has been indemnified and/or secured to its satisfaction.
 
10.2  
Enforcement by the Noteholders
 
No Noteholder or Couponholder shall be entitled to proceed directly against the Issuer unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and the failure shall be continuing.
 
 
11  
REPLACEMENT OF NOTES AND COUPONS
 
Should any Note or Coupon be lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified office of the Principal Paying Agent upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacements will be issued.
 
 
12  
NOTICES
 
12.1  
Notices to the Noteholders
 
All notices to the Noteholders will be valid if published in a leading English language daily newspaper published in London or such other English language daily newspaper with general circulation in Europe as the Trustee may approve. It is expected that publication will normally be made in the Financial Times. The Issuer shall also ensure that notices are duly published in a manner which complies with the rules and regulations of any stock exchange or other relevant authority on which the Notes are for the time being listed or traded. Any such notice will be deemed to have been given on the date of the first publication or, where required to be published in more than one newspaper, on the date of the first publication in all required newspapers. If publication as provided above is not practicable, notice will be given in such other manner, and shall be deemed to have been given on such date, as the Trustee may approve. Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Noteholders in accordance with this paragraph.
 
12.2  
Notices from the Noteholders
 
Notices to be given by any Noteholder shall be in writing and given by lodging the same, together with the relative Note or Notes, with the Principal Paying Agent or, if the Notes are held in a clearing system, may be given through the clearing system in accordance with its standard rules and procedures.
 
 
13  
SUBSTITUTION
 
The Trustee may, without the consent of the Noteholders or Couponholders, agree with the Issuer to the substitution of certain other entities (other than an Excluded Subsidiary) in place of the Issuer (or of any previous substitute under this Condition) as the principal debtor under the Notes, the Coupons and the Trust Deed, subject to:
 
(a)  
the Notes being unconditionally and irrevocably guaranteed by the Issuer;
 
(b)  
the Trustee being satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution; and
 
(c)  
certain other conditions set out in the Trust Deed being complied with.
 
 
14  
MEETINGS OF NOTEHOLDERS, MODIFICATION, WAIVER, AUTHORISATION AND DETERMINATION
 
14.1  
Meetings of Noteholders
 
The Trust Deed contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the modification or abrogation by Extraordinary Resolution of any of these Conditions or any of the provisions of the Trust Deed. The quorum at any meeting for passing an Extraordinary Resolution will be one or more persons present holding or representing more than 50 per cent. in outstanding nominal amount of the Notes for the time being outstanding, or at any adjourned such meeting one or more persons present whatever the outstanding nominal amount of the Notes held or represented by him or them, except that, at any meeting the business of which includes the modification or abrogation of certain of the provisions of these Conditions and certain of the provisions of the Trust Deed, the necessary quorum for passing an Extraordinary Resolution will be one or more persons present holding or representing not less than three-quarters, or at any adjourned such meeting not less than one-quarter, of the outstanding nominal amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Noteholders will be binding on all Noteholders, whether or not they are present at the meeting, and on all Couponholders.
 
14.2  
Modification, Waiver, Authorisation and Determination
 
The Trustee may agree, without the consent of the Noteholders or Couponholders, to any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of these Conditions or any of the provisions of the Trust Deed, or determine, without any such consent as aforesaid, that any Event of Default or Potential Event of Default (as defined in the Trust Deed) shall not be treated as such (provided that, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of the Noteholders) or may agree, without any such consent as aforesaid, to any modification which, in its opinion, is of a formal, minor or technical nature or to correct a manifest error.
 
14.3  
Trustee to have Regard to Interests of Noteholders as a Class
 
In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including, without limitation, any modification, waiver, authorisation, determination or substitution), the Trustee shall have regard to the general interests of the Noteholders as a class but shall not have regard to any interests arising from circumstances particular to individual Noteholders or Couponholders (whatever their number) and, in particular but without limitation, shall not have regard to the consequences of any such exercise for individual Noteholders or Couponholders (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political sub-division thereof and the Trustee shall not be entitled to require, nor shall any Noteholder or Couponholder be entitled to claim, from the Issuer, the Trustee or any other person any indemnification or payment in respect of any tax consequence of any such exercise upon individual Noteholders or Couponholders except to the extent already provided for in Condition 7 and/or any undertaking given in addition to, or in substitution for, Condition 7 pursuant to the Trust Deed.
 
14.4  
Notification to the Noteholders
 
Any modification, abrogation, waiver, authorisation, determination or substitution shall be binding on the Noteholders and the Couponholders and, unless the Trustee agrees otherwise, any modification or substitution shall be notified by the Issuer to the Noteholders as soon as practicable thereafter in accordance with Condition 12.
 
 
15  
INDEMNIFICATION OF THE TRUSTEE AND ITS CONTRACTING WITH THE ISSUER
 
15.1  
Indemnification of the Trustee
 
The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking action unless indemnified and/or secured to its satisfaction.
 
15.2  
Trustee Contracting with the Issuer
 
The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (a) to enter into business transactions with the Issuer and/or any of its Subsidiaries and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Issuer and/or any of its Subsidiaries, (b) to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such transactions or, as case may be, any such trusteeship without regard to the interests of, or consequences for, the Noteholders or Couponholders, and (c) to retain and not be liable to account for any profit made or any other amount or benefit received thereby or in connection therewith.
 
 
16  
FURTHER ISSUES
 
The Issuer is at liberty from time to time without the consent of the Noteholders or Couponholders to create and issue further notes or bonds (whether in bearer or registered form) either (a) ranking pari passu in all respects (or in all respects save for the first payment of interest thereon) and so that the same shall be consolidated and form a single series with the outstanding notes or bonds of any series (including the Notes) constituted by the Trust Deed or any supplemental deed or (b) upon such terms as to ranking, interest, conversion, redemption and otherwise as the Issuer may determine at the time of the issue. Any further notes or bonds which are to form a single series with the outstanding notes or bonds of any series (including the Notes) constituted by the Trust Deed or any supplemental deed shall, and any other further notes or bonds may (with the consent of the Trustee), be constituted by a deed supplemental to the Trust Deed. The Trust Deed contains provisions for convening a single meeting of the Noteholders and the holders of notes or bonds of other series in certain circumstances where the Trustee so decides.
 
 
17  
PRESCRIPTION
 
Notes and Coupons (which for this purpose shall not include Talons) will become void unless presented for payment within periods of 10 years (in the case of principal) and five years (in the case of interest) from the Relevant Date in respect of the Notes or, as the case may be, the Coupons, subject to the provisions of Condition 5. There shall not be included in any Coupon sheet issued upon exchange of a Talon any Coupon which would be void upon issue under this paragraph or Condition 5.
 
 
18  
GOVERNING LAW
 
The Trust Deed, the Notes and the Coupons are governed by, and will be construed in accordance with, English law.
 
 
19  
RIGHTS OF THIRD PARTIES
 
No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Note, but this does not affect any right or remedy of any person which exists or is available apart from that Act.
 



 
PRINCIPAL PAYING AGENT
HSBC Bank plc
Level 24
8 Canada Square
London E14 5HQ
 

 

 

Form of Coupon
 
On the front:
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
£105,000,000 per cent. Index-Linked Notes due 2053
 
Coupon for the amount due in accordance with the Conditions of the Notes on the Interest Payment Date falling in [June]/
[December] due on 20[07/08/09/10/11/12/13/14/15/16/17/18/19/20/21/22/23/24/25/26/27/28/29/30/31/32/33/34/35/36
/37/38/39/40/41/42/43/44/45/46/47/48/49/50/51/52/53].
 
This Coupon is payable to bearer (subject to the Conditions endorsed on the Note to which this Coupon relates, which shall be binding upon the holder of this Coupon whether or not it is for the time being attached to such Note) at the specified offices of the Paying Agents set out on the reverse hereof (or any further or other Paying Agents or specified offices duly appointed or nominated and notified to the Noteholders).
 
If the Note to which this Coupon relates shall have become due and payable before the maturity date of this Coupon, this Coupon shall become void and no payment shall be made in respect of it.
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 
 

 
[Director]
 
Cp No.
 
Denomination
 
ISIN
 
Series
 
Certif. No.
 
 
£50,000
 
XS0276994059
 
    

 
On the back:
 
PRINCIPAL PAYING AGENT
HSBC Bank plc
Level 24
8 Canada Square
London E14 5HQ
 

Form of Talon
 

 
On the front:
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
£105,000,000 1.541 per cent. Index-Linked Notes due 2053
 
Note in the principal amount of £50,000
 
Talon for further Coupons.
 
After all the Coupons relating to the Note to which this Talon relates have matured, further Coupons (including if appropriate a Talon for further Coupons) shall be issued at the specified offices of the Paying Agents set out on the reverse hereof (or any further or other Paying Agents or specified offices duly appointed or nominated and notified to the Noteholders).
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 

 

 
[Director]
 
Cp No.
 
Denomination
 
ISIN
 
Series
 
Certif. No.
 
 
£50,000
 
XS0276994059
 
    

 
On the back:
 
PRINCIPAL PAYING AGENT
 
HSBC Bank plc
Level 24
8 Canada Square
London E14 5HQ

Schedule 2

Part 1
 
Form of Temporary Global Note
 
ISIN: XS0276994059
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
(Incorporated with limited liability in England and Wales)
£105,000,000
1.541 per cent. Index-Linked Notes due 2053
 
Temporary Global Note
 
This is to certify that the bearer is entitled on 1 December 2053, or on such earlier date as the Notes designated above (the “Notes”) may be redeemed or repaid to such sum as is determined to be payable on such redemption or repayment in accordance with the terms and conditions (the “Conditions”) of the Notes set out in Schedule 1 to the trust deed dated 1 December 2006 (the “Trust Deed”) between Western Power Distribution (South West) plc (the “Issuer”) and HSBC Trustee (C.I.) Limited as trustee (the “Trustee”)) upon presentation and surrender of this Temporary Global Note and to interest at the rate of 1.541 per cent. per annum on the outstanding nominal amount of the Notes in arrear on 1 June and 1 December in each year, adjusted for indexation as provided in, and otherwise subject to and in accordance with, the Conditions.
 
On or after 10 January 2007 (the “Exchange Date”) this Temporary Global Note may be exchanged in whole or part (free of charge to the holder) by its presentation and, on exchange in full, surrender to or to the order of the Principal Paying Agent for interests in a Global Note (the “Global Note”) in bearer form in an aggregate nominal amount equal to the nominal amount of this Temporary Global Note submitted for exchange with respect to which there shall be presented to the Principal Paying Agent a certificate dated no earlier than the Exchange Date from Euroclear Bank S.A./N.V. (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) substantially to the following effect:
 
“CERTIFICATE
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
£105,000,000
1.541 per cent. Index-Linked Notes due 2053
Common Code 027699405 ISIN XS0276994059 (the “Notes”)
 
This is to certify that, based solely on certificates we have received in writing, by tested telex or by electronic transmission from member organisations appearing in our records as persons being entitled to a portion of the nominal amount set out below (our“Member Organisations”) substantially to the effect set out in the temporary global Note in respect of the Notes, as of the date hereof, £[•] nominal amount of the Notes (1) is owned by persons that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States federal income taxation regardless of its source (“United States persons”), (2) is owned by United States persons that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(iv) (“financial institutions”)) purchasing for their own account or for resale, or (b) acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution has agreed, on its own behalf or through its agent, that we may advise the Issuer or the Issuer’s agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (3) is owned by United States or foreign financial institutions for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7), and to the further effect that United States or foreign financial institutions described in clause (3) above (whether or not also described in clause (1) or (2)) have certified that they have not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.
 
We further certify (1) that we are not making available herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) any portion of such temporary global Note excepted in such certificates and (2) that as of the date hereof we have not received any notification from any of our Member Organisations to the effect that the statements made by such Member Organisation with respect to any portion of the part submitted herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) are no longer true and cannot be relied upon as of the date hereof.
 
We understand that this certificate is required in connection with certain tax laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorise you to produce this certificate to any interested party in such proceedings.
 
Yours faithfully
 
[EUROCLEAR BANK S.A./N.V.] or [CLEARSTREAM BANKING, SOCIÉTÉ ANONYME]
 
By:
 
Dated:
 
  

 
Any person appearing in the records of Euroclear or Clearstream, Luxembourg as entitled to an interest in this Temporary Global Note may require the exchange of an appropriate part of this Temporary Global Note for an equivalent interest in the Global Note by delivering or causing to be delivered to Euroclear or Clearstream, Luxembourg a certificate dated not more than 15 days before the Exchange Date in substantially the following form (copies of which will be available at the office of Euroclear in Brussels and Clearstream, Luxembourg in Luxembourg):
 
“CERTIFICATE
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
£105,000,000
1.541 per cent. Index-Linked Notes due 2053
Common Code 027699405 ISIN XS0276994059 (the “Notes”)
 
To:
 
Euroclear Bank S.A./N.V. or Clearstream Banking, société anonyme
 
This is to certify that as of the date hereof, and except as set out below, the Notes held by you for our account (1) are owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States federal income taxation regardless of its source (“United States person(s)”), (2) are owned by United States person(s) that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(iv) (“financial institutions”)) purchasing for their own account or for resale, or (b) acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution hereby agrees, on its own behalf or through its agent, that you may advise the Issuer or the Issuer’s agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (3) are owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and in addition if the owner of the Notes is a United States or foreign financial institution described in clause (3) above (whether or not also described in clause (1) or (2)) this is to further certify that such financial institution has not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.
 
As used herein, “United States” means the United States of America (including the States and the District of Columbia) and its “possessions” include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands.
 
We undertake to advise you promptly by tested telex on or prior to that date on which you intend to submit your certificate relating to the Notes held by you for our account in accordance with your documented procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certificate applies as of such date.
 
This certificate excepts and does not relate to £[•] nominal amount of such interest in the Notes in respect of which we are not able to certify and as to which we understand exchange for an equivalent interest in the Global Note (or, if relevant, exercise of any rights or collection of any interest) cannot be made until we do so certify.
 
We understand that this certificate is required in connection with certain tax laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorise you to produce this certificate to any interested party in such proceeding.
 
Dated:
 
By:
 

 
[Name of person giving certificate]
 
As, or as agent for the beneficial owner(s) of the above Notes to which this certificate relates.”
 

 
Upon any exchange of a part of this Temporary Global Note for an equivalent interest in the Global Note, the portion of the nominal amount hereof so exchanged shall be endorsed by or on behalf of the Principal Paying Agent in the Schedule hereto, whereupon the nominal amount hereof shall be reduced for all purposes by the amount so exchanged and endorsed.
 
The Global Note will be exchangeable in accordance with its terms for definitive Notes (the “Definitive Notes”) in bearer form with Coupons attached.
 
This Temporary Global Note is subject to the Conditions and the Trust Deed and until the whole of this Temporary Global Note shall have been exchanged for equivalent interests in the Global Note its holder shall be entitled to the same benefits as if he were the holder of the Global Note for interests in which it may be exchanged (or the relevant part of it as the case may be) except that (unless exchange of this Temporary Global Note for the relevant interest in the Global Note shall be improperly withheld or refused by or on behalf of the Issuer) no person shall be entitled to receive any payment on this Temporary Global Note.
 
This Temporary Global Note shall not be valid or become obligatory for any purpose until authenticated by or on behalf of the Principal Paying Agent.
 
This Temporary Global Note shall be governed by and construed in accordance with English law.
 
In witness whereof the Issuer has caused this Temporary Global Note to be signed on its behalf.
 
Dated 1 December 2006
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 

 

 
This Temporary Global Note is authenticated by or on behalf of the Principal Paying Agent.
 
By:
 

 

 
Authorised Signatory
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 


Schedule of Exchanges for Interests in the Global Note
 
The following exchanges of an interest in this Temporary Global Note for an interest in the Global Note have been made:

 
Date of Exchange
Amount of decrease in nominal amount of this Temporary Global Note
Nominal amount of this Temporary Global Note following such decrease
Notation made by or on behalf of the Principal Paying Agent

 


Schedule 2

Part 2
 
Form of Global Note
 
ISIN: xs0276994059
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
(Incorporated with limited liability in England and Wales)
£105,000,000
1.541 per cent. Index-Linked Notes due 2053
 
Global Note
 
This is to certify that the bearer is entitled on 1 December 2053, or on such earlier date as the Notes designated above (the “Notes”) may be redeemed or repaid to such sum as is determined to be payable on such redemption or repayment in accordance with the terms and conditions (the “Conditions”) of the Notes set out in Schedule 1 to the trust deed dated 1 December 2006 (the “Trust Deed”) between Western Power Distribution (South West) plc (the “Issuer”) and HSBC Trustee (C.I.) Limited as trustee (the “Trustee”)) upon presentation and surrender of this Global Note and to interest at the rate of 1.541 per cent. per annum on the outstanding nominal amount of the Notes in arrear on 1 June and 1 December in each year, adjusted for indexation as provided in, and otherwise subject to and in accordance with, the Conditions.
 
The aggregate nominal amount from time to time of this Global Note shall be that amount not exceeding £105,000,000 as shall be shown by the latest entry in the fourth column of Schedule A hereto, which shall be completed by or on behalf of the Principal Paying Agent upon exchange of the whole or a part of the Temporary Global Note initially representing the Notes for a corresponding interest herein or upon the redemption or purchase and cancellation of Notes represented hereby or exchanged for Definitive Notes as described below.
 
This Global Note is exchangeable in whole but not in part (free of charge to the holder) for the Definitive Notes described below (1) upon the happening of an Event of Default (as defined in Condition 9) by such holder giving notice to the Trustee or the Principal Paying Agent, or (2) if this Global Note is held on behalf of Euroclear or Clearstream, Luxembourg or the Alternative Clearing System (each as defined under “Notices” below) and any such clearing system is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so by such holder giving notice to the Trustee or the Principal Paying Agent or (3) if the Issuer would suffer a material disadvantage in respect of the Notes as a result of a change in the laws or regulations (taxation or otherwise) of any jurisdiction referred to in Condition 7 which would not be suffered were the Notes in definitive form and a certificate to such effect signed by two directors of the Issuer is delivered to the Trustee, by the Issuer giving notice to the Trustee, Principal Paying Agent and the Noteholders, of its intention to exchange this Global Note for Definitive Notes on or after the Exchange Date specified in the notice.
 
On or after the Exchange Date the holder of this Global Note may surrender this Global Note to or to the order of the Principal Paying Agent. In exchange for this Global Note, the Issuer shall deliver, or procure the delivery of, an equal aggregate nominal amount of duly executed and authenticated Definitive Notes having attached to them all Coupons in respect of interest which has not already been paid on this Global Note.
 
“Exchange Date” means a day falling not less than 60 days after that on which the notice requiring exchange is given and on which banks are open for business in the city in which the specified office of the Principal Paying Agent is located and except in the case of exchange pursuant to (2) above in the cities in which Euroclear and Clearstream, Luxembourg or, if relevant, the Alternative Clearing System (each as defined under “Notices” below) are located.
 
Except as otherwise described herein, this Global Note is subject to the Conditions and the Trust Deed and, until it is exchanged for Definitive Notes, its holder shall be entitled to the same benefits as if it were the holder of the Definitive Notes for which it may be exchanged and as if such Definitive Notes had been issued on the date of this Global Note.
 
The Conditions shall be modified with respect to Notes represented by this Global Note by the following provisions:
 
Payments
 
Principal, any premium and interest in respect of this Global Note shall be paid to its holder against presentation and (if no further payment falls to be made on it) surrender of it to or to the order of the Principal Paying Agent in respect of the Notes (or to or to the order of such other Paying Agent as shall have been notified to the Noteholders for this purpose) which shall endorse such payment or cause such payment to be endorsed in the appropriate Schedule hereto (such endorsement being prima facie evidence that the payment in question has been made). References in the Conditions to Coupons and Couponholders shall be construed accordingly. No person shall however be entitled to receive any payment on this Global Note falling due after the Exchange Date, unless exchange of this Global Note for Definitive Notes is improperly withheld or refused by or on behalf of the Issuer. Condition 5.7(c) and Condition 7.1(d) will apply to the Definitive Notes only.
 
Notices
 
So long as this Global Note is held on behalf of Euroclear Bank S.A./N.V. (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) or such other clearing system as shall have been approved by the Trustee (the “Alternative Clearing System”), notices required to be given to Noteholders may be given by their being delivered to Euroclear and Clearstream, Luxembourg or, as the case may be, the Alternative Clearing System, rather than by publication as required by the Conditions and any such notice shall be deemed to have been given to the Noteholders on the day after the day on which such notice is delivered to Euroclear and Clearstream, Luxembourg, or, as the case may be, the Alternative Clearing System.
 
Prescription
 
Claims in respect of principal, any premium and interest in respect of this Global Note will become void unless it is presented for payment within a period of 10 years (in the case of principal and premium) and five years (in the case of interest) from the appropriate Relevant Date (as defined in Condition 7).
 
Meetings
 
For the purposes of any meeting of Noteholders, the holder hereof shall (unless this Global Note represents only one Note) be treated as two persons for the purposes of any quorum requirements of a meeting of Noteholders and, at any such meeting, as having one vote in respect of each £50,000 nominal amount of Notes for which this Global Note may be exchanged.
 
Purchase and Cancellation
 
Cancellation of any Note represented by this Global Note which is required by the Conditions to be cancelled will be effected by reduction in the nominal amount of this Global Note on its presentation to or to the order of the Principal Paying Agent for notation in Schedule A. Notes may only be purchased by the Issuer or any of its respective Subsidiaries if (where they should be cancelled in accordance with the Conditions) they are purchased together with the right to receive interest therein.
 
Trustee’s Powers
 
In considering the interests of Noteholders in circumstances where this Global Note is held on behalf of any one or more of Euroclear, Clearstream, Luxembourg and an Alternative Clearing System, the Trustee may, to the extent it considers it appropriate to do so in the circumstances, (a) have regard to such information as may have been made available to it by or on behalf of the relevant clearing system or its operator as to the identity of its accountholders (either individually or by way of category) with entitlements in respect of this Global Note and (b) consider such interests on the basis that such accountholders were the holder of this Global Note.
 
Redemption at the option of Noteholders on a Restructuring Event
 
The option of the Noteholders provided for in Condition 6.4 may be exercised by the holder of this Global Note giving notice to the Principal Paying Agent within the time limits relating to the deposit of Notes with a Paying Agent set out in that Condition substantially in the form of the redemption notice available from any Paying Agent and stating the nominal amount of Notes in respect of which the option is exercised and at the same time presenting this Global Note to the Principal Paying Agent for notation accordingly in Schedule C hereto.
 
This Global Note shall not be valid or become obligatory for any purpose until authenticated by or on behalf of the Principal Paying Agent.
 


This Global Note is governed by and shall be construed in accordance with English law.
 
In witness whereof the Issuer has caused this Global Note to be signed on its behalf.
 
Dated 1 December 2006
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 

 

 

 
This Global Note is authenticated by or on behalf of the Principal Paying Agent.
 
By:
 

 

 
Authorised Signatory
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 

 


Schedule A

Nominal Amount of this Global Note
 
The aggregate nominal amount of this Global Note is as shown by the latest entry made by or on behalf of the nominal Paying Agent in the fourth column below. Increases in the nominal amount of this Global Note following exchanges of a part of the Temporary Global Note for interests in this Global Note and reductions in the nominal amount of this Global Note following redemption or the purchase and cancellation of Notes are entered in the second and third columns below.
 
Date
 
Reason for change in the nominal amount of this Global Note1 
 
Amount of such change
 
Initial nominal amount and nominal amount of this Global Note following such change
 
Notation made by or on behalf of the nominal Paying Agent (other than in respect of the initial nominal amount)
1 December 2006
 
Not applicable
 
Not applicable
 
£ zero
 
Not applicable
 
 

 


________________________
¹
State whether increase/reduction following (1) exchange of part of Temporary global Note (2) redemption of Notes or (3) purchase and cancellation of Notes.


Schedule B

Interest Payments in respect of this Global Note
 
The following payments of interest in respect of this Global Note and the Notes represented by this Global Note have been made:
 
Date made
Amount of interest due and payable
Amount of interest paid
Notation made by or on behalf of the Principal Paying Agent

 


Schedule C

Exercise of Noteholders’ Option on Restructuring Event
 
The following exercises of the option of the Noteholders provided for in Condition 6.4 have been made in respect of the stated nominal amount of this Global Note:
 
Date of Exercise
Nominal amount of this Global Note in respect of which exercise is made
Date on which redemption of such nominal amount is due
Notation made by or on behalf of the Principal Paying Agent

 


Schedule 3

Provisions for Meetings of Noteholders
 
 
Interpretation
 
1  
In this Schedule:
 
1.1  
references to a meeting are to a meeting of Noteholders and include, unless the context otherwise requires, any adjournment
 
1.2  
“agent” means a holder of a voting certificate or a proxy for a Noteholder
 
1.3  
“block voting instruction” means an instruction issued in accordance with paragraphs 8 to 14
 
1.4  
“Extraordinary Resolution” means a resolution passed at a meeting duly convened and held in accordance with this Trust Deed by a majority of at least 75 per cent. of the votes cast
 
1.5  
“voting certificate” means a certificate issued in accordance with paragraphs 5, 6, 7 and 14 and
 
1.6  
references to persons representing a proportion of the Notes are to Noteholders or agents holding or representing in the aggregate at least that proportion in nominal amount of the Notes for the time being outstanding.
 
 
Powers of meetings
 
2  
A meeting shall, subject to the Conditions and without prejudice to any powers conferred on other persons by this Trust Deed, have power by Extraordinary Resolution:
 
2.1  
to sanction any proposal by the Issuer or the Trustee for any modification, abrogation, variation or compromise of, or arrangement in respect of, the rights of the Noteholders and/or the Couponholders against the Issuer, whether or not those rights arise under this Trust Deed
 
2.2  
to sanction the exchange or substitution for the Notes of, or the conversion of the Notes into, shares, notes or other obligations or securities of the Issuer or any other entity
 
2.3  
to assent to any modification of this Trust Deed, the Notes or the Coupons proposed by the Issuer or the Trustee
 
2.4  
to authorise anyone to concur in and do anything necessary to carry out and give effect to an Extraordinary Resolution
 
2.5  
to give any authority, direction or sanction required to be given by Extraordinary Resolution
 
2.6  
to appoint any persons (whether Noteholders or not) as a committee or committees to represent the Noteholders’ interests and to confer on them any powers or discretions which the Noteholders could themselves exercise by Extraordinary Resolution
 
2.7  
to approve a proposed new Trustee and to remove a Trustee
 
2.8  
to approve the substitution of any entity for the Issuer (or any previous substitute) as principal debtor under this Trust Deed and
 
2.9  
to discharge or exonerate the Trustee from any liability in respect of any act or omission for which it may become responsible under this Trust Deed, the Notes or the Coupons
 
provided that the special quorum provisions in paragraph 19 shall apply to any Extraordinary Resolution (a “special quorum resolution”) for the purpose of sub-paragraph 2.2 or 2.8 or for the purpose of making a modification to this Trust Deed, the Notes or the Coupons which would have the effect of:
 
(i)  
modifying the maturity of the Notes or the dates on which interest is payable on them or
 
(ii)  
modifying the outstanding nominal amount of, or interest on, or other amounts in respect of or reducing or altering the method of calculating the rate of interest on, or any redemption amount of, the Notes or
 
(iii)  
changing the currency of payment of the Notes or the Coupons or
 
(iv)  
modifying the provisions in this Schedule concerning the quorum required at a meeting or the majority required to pass an Extraordinary Resolution or
 
(v)  
amending this proviso.
 
 
Convening a meeting
 
3  
The Issuer or the Trustee may at any time convene a meeting. If it receives a written request by Noteholders holding at least 10 per cent. in nominal amount of the Notes for the time being outstanding and is indemnified to its satisfaction against all costs and expenses, the Trustee shall convene a meeting. Every meeting shall be held at a time and place approved by the Trustee.
 
4  
At least 21 days’ notice (exclusive of the day on which the notice is given and of the day of the meeting) shall be given to the Noteholders. A copy of the notice shall be given by the party convening the meeting to the other parties. The notice shall specify the day, time and place of meeting and, unless the Trustee otherwise agrees, the nature of the resolutions to be proposed and shall explain how Noteholders may appoint proxies or representatives, obtain voting certificates and use block voting instructions and the details of the time limits applicable.
 
 
Arrangements for voting
 
5  
If a holder of a Note wishes to obtain a voting certificate in respect of it for a meeting, he must deposit it for that purpose at least 48 hours before the time fixed for the meeting with a Paying Agent or to the order of a Paying Agent with a bank or other depositary nominated by the Paying Agent for the purpose. The Paying Agent shall then issue a voting certificate in respect of it.
 
6  
A voting certificate shall:
 
6.1  
be a document in the English language
 
6.2  
be dated
 
6.3  
specify the meeting concerned and the serial numbers of the Notes deposited and
 
6.4  
entitle, and state that it entitles, its bearer to attend and vote at that meeting in respect of those Notes.
 
7  
Once a Paying Agent has issued a voting certificate for a meeting in respect of a Note, it shall not release the Note until either:
 
7.1  
the meeting has been concluded or
 
7.2  
the voting certificate has been surrendered to the Paying Agent.
 
8  
If a holder of a Note wishes the votes attributable to it to be included in a block voting instruction for a meeting, then, at least 48 hours before the time fixed for the meeting, (i) he must deposit the Note for that purpose with a Paying Agent or to the order of a Paying Agent with a bank or other depositary nominated by the Paying Agent for the purpose and (ii) he or a duly authorised person on his behalf must direct the Paying Agent how those votes are to be cast. The Paying Agent shall issue a block voting instruction in respect of the votes attributable to all Notes so deposited.
 
9  
A block voting instruction shall:
 
9.1  
be a document in the English language
 
9.2  
be dated
 
9.3  
specify the meeting concerned
 
9.4  
list the total number and serial numbers of the Notes deposited, distinguishing with regard to each resolution between those voting for and those voting against it
 
9.5  
certify that such list is in accordance with Notes deposited and directions received as provided in paragraphs 8, 11 and 14 and
 
9.6  
appoint a named person (a “proxy”) to vote at that meeting in respect of those Notes and in accordance with that list.
 
A proxy need not be a Noteholder.
 
10  
Once a Paying Agent has issued a block voting instruction for a meeting in respect of the votes attributable to any Notes:
 
10.1  
it shall not release the Notes, except as provided in paragraph 11, until the meeting has been concluded and
 
10.2  
the directions to which it gives effect may not be revoked or altered during the 48 hours before the time fixed for the meeting.
 
11  
If the receipt for a Note deposited with a Paying Agent in accordance with paragraph 8 is surrendered to the Paying Agent at least 48 hours before the time fixed for the meeting, the Paying Agent shall release the Note and exclude the votes attributable to it from the block voting instruction.
 
12  
Each block voting instruction shall be deposited at least 24 hours before the time fixed for the meeting at such place as the Trustee shall designate or approve, and in default it shall not be valid unless the chairman of the meeting decides otherwise before the meeting proceeds to business. If the Trustee requires, a notarially certified copy of each block voting instruction shall be produced by the proxy at the meeting but the Trustee need not investigate or be concerned with the validity of the proxy’s appointment.
 
13  
A vote cast in accordance with a block voting instruction shall be valid even if it or any of the Noteholders’ instructions pursuant to which it was executed has previously been revoked or amended, unless written intimation of such revocation or amendment is received from the relevant Paying Agent by the Issuer or the Trustee at its registered office or by the chairman of the meeting in each case at least 24 hours before the time fixed for the meeting.
 
14  
No Note may be deposited with or to the order of a Paying Agent at the same time for the purposes of both paragraph 5 and paragraph 8 for the same meeting.
 
 
Chairman
 
15  
The chairman of a meeting shall be such person as the Trustee may nominate in writing, but if no such nomination is made or if the person nominated is not present within 15 minutes after the time fixed for the meeting the Noteholders or agents present shall choose one of their number to be chairman, failing which the Issuer may appoint a chairman.
 
16  
The chairman may, but need not, be a Noteholder or agent. The chairman of an adjourned meeting need not be the same person as the chairman of the original meeting.
 
 
Attendance
 
17  
The following may attend and speak at a meeting:
 
17.1  
Noteholders and agents
 
17.2  
the chairman
 
17.3  
the Issuer and the Trustee (through their respective representatives) and their respective financial and legal advisers.
 
No-one else may attend or speak.
 
 
Quorum and Adjournment
 
18  
No business (except choosing a chairman) shall be transacted at a meeting unless a quorum is present at the commencement of business. If a quorum is not present within 15 minutes from the time initially fixed for the meeting, it shall, if convened on the requisition of Noteholders or if the Issuer and the Trustee agree, be dissolved. In any other case it shall be adjourned until such date, not less than 14 nor more than 42 days later, and time and place as the chairman may decide. If a quorum is not present within 15 minutes from the time fixed for a meeting so adjourned, the meeting shall be dissolved.
 
19  
Two or more Noteholders or agents present in person shall be a quorum:
 
19.1  
in the cases marked “No minimum proportion” in the table below, whatever the proportion of the Notes which they represent
 
19.2  
in any other case, only if they represent the proportion of the Notes shown by the table below.
 
 
Column 1
 
 
Column 2
 
 
Column 3
 
 
Purpose of meeting
Any meeting except one referred to in column 3
Meeting previously adjourned through want of a quorum
Required proportion
 
Required proportion
 
To pass a special quorum resolution
 
75 per cent.
 
25 per cent.
 
To pass any other Extraordinary Resolution
A clear majority
 
No minimum proportion
 
Any other purpose
 
10 per cent.
 
No minimum proportion
 

 
20  
The chairman may with the consent of (and shall if directed by) a meeting adjourn the meeting from time to time and from place to place. Only business which could have been transacted at the original meeting may be transacted at a meeting adjourned in accordance with this paragraph or paragraph 18.
 
21  
At least 10 days’ notice of a meeting adjourned through want of a quorum shall be given in the same manner as for an original meeting and that notice shall state the quorum required at the adjourned meeting. No notice need, however, otherwise be given of an adjourned meeting.
 
 
Voting
 
22  
Each question submitted to a meeting shall be decided by a show of hands unless a poll is (before, or on the declaration of the result of, the show of hands) demanded by the chairman, the Issuer, the Trustee or one or more persons representing 2 per cent. of the Notes.
 
23  
Unless a poll is demanded a declaration by the chairman that a resolution has or has not been passed shall be conclusive evidence of the fact without proof of the number or proportion of the votes cast in favour of or against it.
 
24  
If a poll is demanded, it shall be taken in such manner and (subject as provided below) either at once or after such adjournment as the chairman directs. The result of the poll shall be deemed to be the resolution of the meeting at which it was demanded as at the date it was taken. A demand for a poll shall not prevent the meeting continuing for the transaction of business other than the question on which it has been demanded.
 
25  
A poll demanded on the election of a chairman or on a question of adjournment shall be taken at once.
 
26  
On a show of hands every person who is present in person and who produces a Note or a voting certificate or is a proxy has one vote. On a poll every such person has one vote for each £50,000 nominal amount of Notes so produced or represented by the voting certificate so produced or for which he is a proxy or representative. Without prejudice to the obligations of proxies, a person entitled to more than one vote need not use them all or cast them all in the same way.
 
27  
In case of equality of votes the chairman shall both on a show of hands and on a poll have a casting vote in addition to any other votes which he may have.
 
 
Effect and Publication of an Extraordinary Resolution
 
28  
An Extraordinary Resolution shall be binding on all the Noteholders, whether or not present at the meeting, and on all the Couponholders and each of them shall be bound to give effect to it accordingly. The passing of such a resolution shall be conclusive evidence that the circumstances justify its being passed. The Issuer shall give notice of the passing of an Extraordinary Resolution to Noteholders within 14 days but failure to do so shall not invalidate the resolution.
 
 
Minutes
 
29  
Minutes shall be made of all resolutions and proceedings at every meeting and, if purporting to be signed by the chairman of that meeting or of the next succeeding meeting, shall be conclusive evidence of the matters in them. Until the contrary is proved every meeting for which minutes have been so made and signed shall be deemed to have been duly convened and held and all resolutions passed or proceedings transacted at it to have been duly passed and transacted.
 
 
Trustee’s Power to Prescribe Regulations
 
30  
Subject to all other provisions in this Trust Deed the Trustee may without the consent of the Noteholders prescribe such further regulations regarding the holding of meetings and attendance and voting at them as it in its sole discretion determines including (without limitation) such requirements as the Trustee thinks reasonable to satisfy itself that the persons who purport to make any requisition in accordance with this Trust Deed are entitled to do so and as to the form of voting certificates or block voting instructions so as to satisfy itself that persons who purport to attend or vote at a meeting are entitled to do so.
 


This Trust Deed is delivered on the date stated at the beginning.
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 
D.C.S. OOSTHUISEN
 
  
By:
 
SALLY A. JONES
 
Title:
 
DIRECTOR
 
  
Title:
 
COMPANY SECRETARY
 

 

 

 
HSBC TRUSTEE (C.I.) LIMITED
 
By:  PAUL CATTERMOLE  
 

 

 
Title:  AUTHORISED SIGNATORY   
 
 EX-4.J 5 ppl10-k2006exhibit4j.htm EXHIBIT 4(J) Exhibit 4(j)
Exhibit 4(j)

 
 
 
WESTERN POWER
DISTRIBUTION (SOUTH WEST) PLC
 
and
 
HSBC TRUSTEE (C.I.) LIMITED
 
 
 
 
TRUST DEED
 
constituting
£120,000,000 1.541 per cent. Index-Linked Notes due 2056
 
 
 
This Trust Deed is made on 1 December 2006 between:
 
(1)  
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC (“WPD South West” or the “Issuer”) a company incorporated in England and Wales whose registered office is at Avonbank, Feeder Road, Bristol BS2 0TB and
 
(2)  
HSBC TRUSTEE (C.I.) LIMITED (the “Trustee”, which expression, where the context so admits, includes any other trustee for the time being of this Trust Deed) a company incorporated under the laws of Jersey whose registered office is at P.O. Box 88, 1 Grenville Street, St. Helier, Jersey, JE4 9PF.
 
Whereas:
 
(A)  
The Issuer has authorised the issue of £120,000,000 1.541 per cent. Index-Linked Notes due 2056 to be constituted by this Trust Deed.
 
(B)  
The Trustee has agreed to act as trustee of this Trust Deed on the following terms and conditions.
 
This Deed witnesses and it is declared as follows:
 
 
1  
Interpretation
 
1.1  
Definitions: Capitalised terms used, but not defined, herein shall bear the same respective meanings given to such terms in the Conditions and, in addition, the following expressions have the following meanings:
 
“Auditors” means the auditors for the time being of the Issuer or, if they are unable or unwilling to carry out any action requested of them under this Trust Deed, such other firm of accountants as may be nominated or approved in writing by the Trustee for the purpose
 
“Authorised Signatory” means any Director of the Issuer or any other person who is for the time being authorised by the relevant Issuer to sign documents for the purposes of these presents and who has been notified in writing to the Trustee as being so authorised
 
“Clearing System” means Clearstream, Luxembourg or Euroclear or both of them as applicable
 
“Clearstream, Luxembourg” means Clearstream Banking, société anonyme
 
“Conditions” means the terms and conditions set out in Schedule 1 as from time to time modified in accordance with this Trust Deed and, with respect to any Notes represented by the Global Note, as modified by the provisions of the Global Note. Any reference to a particularly numbered Condition shall be construed accordingly
 
“Couponholder” means the bearer of a Coupon
 
“Coupons” means the bearer coupons relating to the Notes or, as the context may require, a specific number of them and includes any replacement Coupons issued pursuant to the Conditions
 
“EEA Regulated Market” means a market as defined by Article 1(13) of the Investment Services Directive 93/22/EEC
 
“Euroclear” means Euroclear Bank S.A./N.V.
 
“Event of Default” means an event described in Condition 9 which, if so required by that Condition, has been certified by the Trustee to be, in its opinion, materially prejudicial to the interests of the Noteholders
 
“Excluded Subsidiary” has the meaning set out in Condition 9
 
“Extraordinary Resolution” has the meaning set out in Schedule 3
 
“FSMA” means the Financial Services and Markets Act 2000
 
“Global Note” means the permanent global note which will represent the Notes, or some of them, after exchange of the Temporary Global Note, or a portion of it, substantially in the form set out in Part 2 of Schedule 2
 
“Group” has the meaning set out in Condition 3.3
 
“Market” means the EEA Regulated Market of the London Stock Exchange
 
“Material Adverse Effect” means a material adverse effect that a removal, qualification or amendment as provided in Condition 6.4(d)(vi)(C) has on the financial condition of the Issuer or any Distribution Subsidiary, provided that the Trustee shall have no duty to enquire or satisfy itself as to the existence of a Material Adverse Effect and shall be entitled to rely conclusively upon the certificate of two directors of the Issuer regarding the same as provided in such Condition, and the Trustee shall bear no liability of any nature whatsoever to the Issuer, the Noteholders or any other person as a result thereof
 
“Notes” means bearer notes substantially in the form set out in Schedule 1 comprising the £120,000,000 1.541 per cent. Index-Linked Notes due 2056 constituted by this Trust Deed and for the time being outstanding or, as the context may require, a specific number of them and includes any replacement Notes issued pursuant to the Conditions and (except for the purposes of Clause 3.1) the Temporary Global Note and the Global Note
 
“Noteholder” means the bearer of a Note
 
“outstanding” means, in relation to the Notes, all the Notes issued except (a) those which have been redeemed in accordance with the Conditions, (b) those in respect of which the date for redemption has occurred and the redemption moneys (including all interest accrued on such Notes to the date for such redemption and any interest payable under the Conditions after such date) have been duly paid to the Trustee or to the Principal Paying Agent as provided in Clause 2 and remain available for payment against presentation and surrender of Notes and/or Coupons, as the case may be, (c) those which have become void, (d) those which have been purchased and cancelled as provided in the Conditions, (e) those mutilated or defaced Notes which have been surrendered in exchange for replacement Notes, (f) (for the purpose only of determining how many Notes are outstanding and without prejudice to their status for any other purpose) those Notes alleged to have been lost, stolen or destroyed and in respect of which replacement Notes have been issued, and (g) the Temporary Global Note to the extent that it shall have been exchanged for the Global Note pursuant to its provisions and the Global Note to the extent that it shall have been exchanged for definitive Notes pursuant to its provisions provided that for the purposes of (1) ascertaining the right to attend and vote at any meeting of the Noteholders, (2) the determination of how many Notes are outstanding for the purposes of Conditions 9, 10 and 14 and Schedule 3, (3) the exercise of any discretion, power or authority which the Trustee is required, expressly or impliedly, to exercise in or by reference to the interests of the Noteholders and (4) the certification (where relevant) by the Trustee as to whether a Potential Event of Default is in its opinion materially prejudicial to the interests of the Noteholders, those Notes which are beneficially held by or on behalf of the Issuer or any of its affiliates and not cancelled shall (unless no longer so held) be deemed not to remain outstanding
 
“Paying Agency Agreement” means the agreement referred to as such in the Conditions, as altered from time to time, and includes any other agreements approved in writing by the Trustee appointing Successor Paying Agents or altering any such agreements
 
“Paying Agents” means the banks (including the Principal Paying Agent) referred to as such in the Conditions or any Successor Paying Agents in each case at their respective specified offices
 
“Potential Event of Default” means an event or circumstance which could with the giving of notice, lapse of time, issue of a certificate and/or fulfilment of any other requirement provided for in Condition 9 become an Event of Default
 
“Principal Paying Agent” means the bank named as such in the Conditions or any Successor Principal Paying Agent
 
“Principal Subsidiary” has the meaning set out in Condition 9
 
“specified office” means, in relation to a Paying Agent, the office identified with its name at the end of the Conditions or any other office approved by the Trustee and notified to Noteholders pursuant to Clause 6.11
 
“Subsidiary” has the meaning ascribed to it in the Conditions
 
“Successor” means, in relation to the Paying Agents, such other or further person as may from time to time be appointed by the Issuer as a Paying Agent with the written approval of, and on terms approved in writing by, the Trustee and notice of whose appointment is given to Noteholders pursuant to Clause 6.11
 
“Temporary Global Note” means the temporary global note which will represent the Notes on issue substantially in the form set out in Part 1 of Schedule 2
 
“this Trust Deed” means this Trust Deed (as from time to time altered in accordance with this Trust Deed) and any other document executed in accordance with this Trust Deed (as from time to time so altered) and expressed to be supplemental to this Trust Deed
 
“trust corporation” means a trust corporation (as defined in the Law of Property Act 1925) or a corporation entitled to act as a trustee pursuant to applicable foreign legislation relating to trustees
 
1.2  
Construction of Certain References: References to:
 
1.2.1  
costs, charges, remuneration or expenses include any value added, turnover or similar tax charged in respect thereof;
 
1.2.2  
“pounds” “sterling” or “pounds sterling” or the signs “£” or “GBP” shall be construed as references to the lawful currency for the time being of the United Kingdom; and
 
1.2.3  
any provision of any statute shall be deemed also to refer to any statutory modification or re-enactment thereof or any statutory instrument, order or regulation made thereunder or under such re-enactment;
 
1.2.4  
Schedules, Clauses and paragraphs shall be construed as references to, respectively, the Schedules to and the Clauses and paragraphs of this Trust Deed;
 
1.2.5  
any action, remedy or method of judicial proceedings for the enforcement of rights of creditors shall be deemed to include, in respect of any jurisdiction other than England, references to such action, remedy or method of judicial proceedings for the enforcement of rights of creditors available or appropriate in such jurisdiction as shall most nearly approximate thereto;
 
1.2.6  
principal and/or premium and/or interest in respect of the Notes or to any moneys payable by the Issuer under this Trust Deed shall be deemed to include, in the case of principal and/or premium, a reference to any specific redemption price (as specified in the Conditions) and, in any case, a reference to any additional amounts which may be payable under the Conditions; and
 
1.2.7  
references in this Trust Deed to “reasonable” or “reasonably” and similar expressions relating to the Trustee and any exercise of power, opinion, determination or other similar matter shall be construed as meaning reasonable or reasonably (as the case may be) having regard to, and taking into account the interests of, the Noteholders only.
 
1.3  
Headings: Headings shall be ignored in construing this Trust Deed.
 
1.4  
Contracts: References in this Trust Deed to any document are to such document as amended, supplemented or replaced from time to time and include any document that amends, supplements or replaces them.
 
1.5  
Schedules: The Schedules are part of this Trust Deed and have effect accordingly.
 
1.6  
Contracts (Rights of Third Parties) Act 1999: A person who is not a party to this Trust Deed has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Trust Deed except and to the extent that Clause 7.4 expressly provides for such Act to apply.
 
 
2  
Amount of the Notes and Covenant to Pay
 
2.1  
Amount of the Notes: The aggregate nominal amount of the Notes is limited to £120,000,000.
 
2.2  
Covenant to pay: The Issuer will on any date when any Notes become due to be redeemed unconditionally pay to or to the order of the Trustee in pounds sterling in same day funds the amount specified in the Conditions as being payable in respect of the Notes becoming due for redemption on that date and will (subject to the Conditions) until such payment (both before and after judgment) unconditionally so pay to or to the order of the Trustee interest on the outstanding nominal amount of the Notes outstanding as set out in the Conditions provided that (1) payment of any sum due in respect of the Notes made to the Principal Paying Agent as provided in the Paying Agency Agreement shall, to that extent, satisfy such obligation except to the extent that there is failure in its subsequent payment to the relevant Noteholders or Couponholders under the Conditions and (2) a payment made after the due date or pursuant to Condition 9 will be deemed to have been made when the full amount due has been received by the Principal Paying Agent or the Trustee and notice to that effect has been given to the Noteholders (if required under Clause 6.9), except to the extent that there is failure in its subsequent payment to the relevant Noteholders or Couponholders under the Conditions. The Trustee will hold the benefit of this covenant on trust for the Noteholders and Couponholders.
 
2.3  
Discharge: Subject to Clause 2.4, any payment to be made in respect of the Notes or the Coupons by the Issuer or the Trustee may be made as provided in the Conditions and any payment so made will (subject to Clause 2.4) to that extent be a good discharge to the Issuer or the Trustee, as the case may be.
 
2.4  
Payment after a Default: At any time after an Event of Default or a Potential Event of Default has occurred the Trustee may:
 
2.4.1  
by notice in writing to the Issuer and the Paying Agents, require the Paying Agents, until notified by the Trustee to the contrary, so far as permitted by applicable law:
 
(i)  
to act as Paying Agents of the Trustee under this Trust Deed and the Notes on the terms of the Paying Agency Agreement (with consequential amendments as necessary and except that the Trustee’s liability for the indemnification, remuneration and expenses of the Paying Agents will be limited to the amounts for the time being held by the Trustee in respect of the Notes on the terms of this Trust Deed) and thereafter to hold all Notes and Coupons and all moneys, documents and records held by them in respect of Notes and Coupons to the order of the Trustee or
 
(ii)  
to deliver all Notes and Coupons and all moneys, documents and records held by them in respect of the Notes and Coupons to the Trustee or as the Trustee directs in such notice and
 
2.4.2  
by notice in writing to the Issuer and until such notice is withdrawn require it to make all subsequent payments in respect of the Notes and Coupons to or to the order of the Trustee and not to the Principal Paying Agent.
 
 
3  
Form of the Notes
 
3.1  
The Global Notes: The Notes will initially be represented by the Temporary Global Note in the nominal amount of £120,000,000. Interests in the Temporary Global Note will be exchangeable for the Global Note as set out in the Temporary Global Note. The Global Note will be exchangeable for definitive Notes as set out in the Global Note.
 
3.2  
The Definitive Notes: The definitive Notes, the Coupons and Talons will be security printed in accordance with applicable legal and stock exchange requirements substantially in the forms set out in Schedule 1. The Notes will be endorsed with the Conditions.
 
3.3  
Signature: The Notes and the Coupons will be signed manually or in facsimile by an Authorised Signatory of the Issuer and the Notes will be authenticated by or on behalf of the Principal Paying Agent. The Issuer may use the facsimile signature of a person who at the date of this Trust Deed is such an Authorised Signatory even if at the time of issue of any Notes or Coupons he no longer holds that office. Notes and Coupons so executed and authenticated will be binding and valid obligations of the Issuer.
 
 
4  
Stamp Duties and Taxes
 
4.1  
Stamp Duties: The Issuer will pay any stamp, issue, documentary or other taxes and duties, including interest and penalties, payable in Belgium, Luxembourg and the United Kingdom in respect of the creation, issue and offering of the Notes and the Coupons and the execution or delivery of this Trust Deed. The Issuer will also indemnify the Trustee, the Noteholders and the Couponholders from and against all stamp, issue, documentary or other taxes paid by any of them in any jurisdiction in connection with any action taken by or on behalf of the Trustee or, as the case may be, (and where permitted under these presents so to do) the Noteholders or the Couponholders to enforce the Issuer’s obligations under this Trust Deed, the Notes or the Coupons.
 
4.2  
Change of Taxing Jurisdiction: If the Issuer becomes subject generally to the taxing jurisdiction of a territory or a taxing authority of or in that territory with power to tax other than or in addition to the United Kingdom or any such authority of or in such territory then the Issuer will (unless the Trustee otherwise agrees) give the Trustee an undertaking satisfactory to the Trustee in terms corresponding to the terms of Condition 7 with the substitution for, or (as the case may require) the addition to, the references in that Condition to the United Kingdom of references to that other or additional territory or authority to whose taxing jurisdiction the Issuer has become so subject. In such event this Trust Deed, the Notes and the Coupons will be read accordingly.
 
 
5  
Application of Moneys Received by the Trustee
 
5.1  
Declaration of Trust: All moneys received by the Trustee in respect of the Notes or amounts payable under this Trust Deed will, despite any appropriation of all or part of them by the Issuer, be held by the Trustee on trust to apply them (subject to Clause 5.2):
 
5.1.1  
first, in payment of all costs, charges, expenses and liabilities properly incurred by the Trustee (including remuneration payable to it) in carrying out its functions under this Trust Deed
 
5.1.2  
secondly, in payment of any amounts owing in respect of the Notes or Coupons pari passu and rateably and
 
5.1.3  
thirdly, in payment of any balance to the Issuer for itself.
 
If the Trustee holds any moneys in respect of Notes or Coupons which have become void, the Trustee will hold them on these trusts.
 
5.2  
Accumulation: If the amount of the moneys at any time available for payment in respect of the Notes under Clause 5.1 is less than 10 per cent. of the nominal amount of the Notes then outstanding, the Trustee may, at its discretion, invest such moneys. The Trustee may retain such investments and accumulate the resulting income until the investments and the accumulations, together with any other funds for the time being under its control and available for such payment, amount to at least 10 per cent. of the nominal amount of the Notes then outstanding and then such investments, accumulations and funds (after deduction of, or provision for, any applicable taxes) will be applied as specified in Clause 5.1.
 
5.3  
Investment: Moneys held by the Trustee may be invested in its name or under its control in any investments or other assets anywhere whether or not they produce income or deposited in its name or under its control at such bank or other financial institution in such currency as the Trustee may, in its absolute discretion, think fit. If that bank or institution is the Trustee or a subsidiary, holding or associated company of the Trustee, it need only account for an amount of interest equal to the standard amount of interest payable by it on such a deposit to an independent customer. The Trustee may at any time vary or transpose any such investments or assets or convert any moneys so deposited into any other currency, and will not be responsible for any resulting loss, whether by depreciation in value, change in exchange rates or otherwise.
 
 
6  
Covenants
 
So long as any Note is outstanding, the Issuer will:
 
6.1  
Books of Account: keep, and procure that each of its Subsidiaries keeps, proper books of account and, at any time after an Event of Default or Potential Event of Default has occurred or if the Trustee reasonably believes that such an event has occurred, so far as permitted by applicable law, allow, and procure that each such Subsidiary will allow, the Trustee and anyone appointed by it to whom the Issuer and/or the relevant Subsidiary has no reasonable objection, access to its books of account at all reasonable times during normal business hours
 
6.2  
Notice of Events of Default: notify the Trustee in writing immediately on becoming aware of the occurrence of any Event of Default or Potential Event of Default
 
6.3  
Information: so far as permitted by applicable law, give the Trustee such information, opinions and certificates as it reasonably requires to perform its functions
 
6.4  
Financial Statements etc.: send to the Trustee at the time of their issue and in the case of annual financial statements in any event within 180 days of the end of each financial year one copy in English of every balance sheet, profit and loss account, report or other notice, statement or circular issued, or which legally or contractually should be issued, to the members or creditors (or any class of them) of the Issuer or any holding company thereof generally in their capacity as such
 
6.5  
Certificate of Authorised Signatories: send to the Trustee, within 14 days of its annual audited financial statements being made available to its members, and also within 14 days of any request by the Trustee a certificate of the Issuer signed by any two of its Authorised Signatories that, having made all reasonable enquiries, to the best of the knowledge, information and belief of the Issuer as at a date (the “Certification Date”) not more than five days before the date of the certificate no Event of Default, Potential Event of Default, Restructuring Event or Potential Restructuring Event (as defined below) or other breach of this Trust Deed had occurred since the Certification Date of the last such certificate or (if none) the date of this Trust Deed or, if such an event had occurred, giving details of it
 
6.6  
Certificate of two directors of the Issuer: send to the Trustee, within 28 days of a request by the Trustee, a certificate signed by two directors of the Issuer as to the amount of the Capital and Reserves of the Issuer as at the date specified in such request
 
6.7  
Notices to Noteholders: send to the Trustee not less than three days prior to being sent to the Noteholders the form of each notice to be given to Noteholders and, once given, two copies of each such notice, such notice to be in a form approved by the Trustee (such approval, unless so expressed, not to constitute approval for the purposes of Section 21 of the FSMA of any such notice which is a communication within the meaning of Section 21 of the FSMA)
 
6.8  
Further Acts: so far as permitted by applicable law, do such further things as may be necessary in the opinion of the Trustee to give effect to this Trust Deed
 
6.9  
Notice of late payment: forthwith upon request by the Trustee give notice to the Noteholders of any unconditional payment to the Principal Paying Agent or the Trustee of any sum due in respect of the Notes or Coupons made after the due date for such payment
 
6.10  
Listing: use all reasonable endeavours to maintain the listing of the Notes on the official list of the Financial Services Authority in its capacity as competent authority under the FSMA and the trading of such Notes on the Market but, if it is unable to do so, having used such endeavours, or if the maintenance of such listing or trading is agreed by the Trustee to be unduly onerous and the Trustee is satisfied that the interests of the Noteholders would not be thereby materially prejudiced, instead use all reasonable endeavours to obtain and maintain a listing of the Notes on another stock exchange and for admission to trading on another market in each case approved in writing by the Trustee
 
6.11  
Change in Agents: give at least 14 days’ prior notice to the Noteholders of any future appointment, resignation or removal of a Paying Agent or of any change by a Paying Agent of its specified office and not make any such appointment or removal without the Trustee’s written approval
 
6.12  
Notes held by Issuer etc.: send to the Trustee as soon as practicable after being so requested by the Trustee a certificate of the Issuer signed by any two of its Authorised Signatories stating the number of Notes held at the date of such certificate by or on behalf of the Issuer or its affiliates
 
6.13  
Subsidiaries: give to the Trustee at the same time as sending the certificate referred to in Clause 6.5 or within 28 days of a request by the Trustee, a certificate signed by two directors of the Issuer listing those Subsidiaries of the Issuer which as at the last day of the last financial year of the Issuer or as at the date specified in such request were Relevant Subsidiaries, Principal Subsidiaries and Excluded Subsidiaries and confirming that there are no Subsidiaries of the type referred to in Clauses 6.14.1 or 6.14.2
 
6.14  
Restriction on Principal Subsidiaries: not permit to exist and will not create any Subsidiary (not being an Excluded Subsidiary or any other Subsidiary whose only indebtedness for borrowed money is Non-recourse Indebtedness):
 
6.14.1  
whose (a) profits on ordinary activities before tax or (b) gross assets, in each case attributable to the Issuer, represent 20 per cent. or more of the consolidated profits on ordinary activities before tax of the Group or, as the case may be, consolidated gross assets of the Group, in each case as calculated by reference to the then latest audited financial statements of such Subsidiary (consolidated in the case of a company which itself has Subsidiaries) and the then latest audited consolidated financial statements of the Group provided that in the case of a Subsidiary acquired after the end of the financial period to which the then latest audited consolidated financial statements of the Group relate, the reference to the then latest audited consolidated financial statements of the Group for the purposes of the calculation above shall, until consolidated financial statements for the financial period in which the acquisition is made have been prepared and audited as aforesaid, be deemed to be a reference to such first-mentioned financial statements as if such Subsidiary had been shown in such financial statements by reference to its then latest relevant audited financial statements, adjusted as deemed appropriate by the Auditors; or
 
6.14.2  
to which is transferred all or substantially all of the business, undertaking and assets of a Subsidiary of the Issuer which immediately prior to such transfer is a Subsidiary, with such profits and/or gross assets as are described in 6.14.1 above,
 
unless such Subsidiary carries on a “distribution business” as defined in Condition 1 of the Standard Conditions of the Utilities Act 2000 Determination of Standard Licence Conditions for Electricity Distribution Licences (as amended from time to time); and
 
6.15  
forthwith give notice in writing to the Trustee of:
 
6.15.1  
the occurrence of any Restructuring Event or of any event (a “Potential Restructuring Event”) which, depending on any certification as provided in the definition of “Restructuring Event”, may be a Restructuring Event;
 
6.15.2  
(if at the time any Restructuring Event occurs there are Rated Securities) the occurrence of any Rating Downgrade in respect of that Restructuring Event within the Restructuring Period; and
 
6.15.3  
(if at the time any Restructuring Event occurs there are no Rated Securities) the obtaining of a rating in accordance with the definition of “Negative Rating Event” or the occurrence of a Negative Rating Event
 
6.16  
Covenant of Compliance: The Issuer shall comply with and perform and observe all the provisions of the Trust Deed and the Notes which are expressed to be binding on it and shall take such steps as are reasonable to enforce all its rights under the Trust Deed and the Notes. The Conditions shall be binding on the Issuer and the Noteholders. The Trustee shall be entitled to enforce the obligations of the Issuer under the Notes as if the same were set out and contained in this Trust Deed, which shall be read and construed as one document with the Notes.
 
 
7  
Remuneration and Indemnification of the Trustee
 
7.1  
Normal Remuneration: So long as any Note is outstanding the Issuer will pay the Trustee as remuneration for its services as Trustee such sum on such dates in each case as they may from time to time agree. Such remuneration will accrue from day to day from the date of this Trust Deed. However, if any payment to a Noteholder or Couponholder of moneys due in respect of any Note or Coupon is improperly withheld or refused, such remuneration will again accrue as from the date of such withholding or refusal until payment to such Noteholder or Couponholder is duly made.
 
7.2  
Extra Remuneration: If an Event of Default or Potential Event of Default shall have occurred or if the Trustee finds it expedient or necessary or is requested by the Issuer to undertake duties which they both agree to be of an exceptional nature or otherwise outside the scope of the Trustee’s normal duties under this Trust Deed, the Issuer will pay such additional remuneration as they may agree or, failing agreement as to any of the matters in this sub-Clause (or as to such sums referred to in Clause 7.1), as determined by an investment bank (acting as an expert) selected by the Trustee and approved by the Issuer or, failing such approval, nominated by the President for the time being of The Law Society of England and Wales. The expenses involved in such nomination and such investment bank’s fee will be borne by the Issuer. The determination of such investment bank will be conclusive and binding on the Issuer, the Trustee, the Noteholders and the Couponholders save in the case of a manifest error.
 
7.3  
Expenses: The Issuer will also on demand by the Trustee pay or discharge all costs, charges, liabilities and expenses properly incurred by the Trustee in the preparation and execution of this Trust Deed and the performance of its functions under this Trust Deed including, but not limited to, legal and travelling expenses and any stamp, documentary or other taxes or duties paid by the Trustee in connection with any legal proceedings reasonably brought or contemplated by the Trustee against the Issuer to enforce any provision of this Trust Deed, the Notes or the Coupons. Such costs, charges, liabilities and expenses will:
 
7.3.1  
in the case of payments made by the Trustee before such demand carry interest from the date of the demand at the rate of 2 per cent. per annum over the base rate of HSBC Bank plc on the date on which the Trustee made such payments and
 
7.3.2  
in other cases carry interest at such rate from 30 days after the date of the demand or (where the demand specifies that payment is to be made on an earlier date) from such earlier date.
 
7.4  
Indemnity: The Issuer will on demand by the Trustee indemnify it in respect of Amounts or Claims paid or incurred by it in acting as trustee under this Trust Deed (including (1) any Agent/Delegate Liabilities and (2) in respect of disputing or defending any Amounts or Claims made against the Trustee or any Agent/Delegate Liabilities). The Issuer will on demand by such agent or delegate indemnify it against such Agent/Delegate Liabilities. “Amounts or Claims” are losses, liabilities, costs, claims, actions, demands or expenses and “Agent/Delegate Liabilities” are Amounts or Claims which the Trustee is or would be obliged to pay or reimburse to any of its agents or delegates appointed pursuant to this Trust Deed. The Contracts (Rights of Third Parties) Act 1999 applies to this Clause 7.4.
 
7.5  
Continuing Effect: Clauses 7.3 and 7.4 will continue in full force and effect as regards the Trustee even if it no longer is Trustee.
 
 
8  
Provisions Supplemental to the Trustee Act 1925 and the Trustee Act 2000
 
By way of supplement to the Trustee Act 1925 it is expressly declared as follows:
 
8.1  
Advice: The Trustee may act on the opinion or advice of, or information obtained from, any expert and will not be responsible to anyone for any loss occasioned by so acting whether such advice is obtained or addressed to the Issuer, the Trustee or any other person. Any such opinion, advice or information may be sent or obtained by letter, telex or fax and the Trustee will not be liable to anyone for acting in good faith on any opinion, advice or information purporting to be conveyed by such means even if it contains some error or is not authentic and notwithstanding any limitation on liability contained therein, monetary or otherwise.
 
8.2  
Trustee to Assume Performance: The Trustee need not notify anyone of the execution of this Trust Deed nor shall it be bound to take any steps to ascertain whether any Event of Default, Potential Event of Default, Restructuring Event, Potential Restructuring Event or Negative Rating Event has happened and, until it shall have actual knowledge or express notice to the contrary, the Trustee shall be entitled to assume that no Event of Default, Potential Event of Default, Restructuring Event, Potential Restructuring Event or Negative Rating Event has happened and that the Issuer is observing and performing all its obligations under this Trust Deed, the Notes and the Coupons.
 
8.3  
Resolutions of Noteholders: The Trustee will not be responsible for having acted in good faith on a resolution purporting to have been passed at a meeting of Noteholders in respect of which minutes have been made and signed even if it is later found that there was a defect in the constitution of the meeting or the passing of the resolution or that the resolution was not valid or binding on the Noteholders or Couponholders.
 
8.4  
Certificate signed by Authorised Signatories: If the Trustee, in the exercise of its functions, requires to be satisfied or to have information as to any fact or the expediency of any act, it may call for and accept as sufficient evidence of that fact or the expediency of that act a certificate signed by any two Authorised Signatories of the Issuer as to that fact or to the effect that, in their opinion, that act is expedient and the Trustee need not call for further evidence and will not be responsible for any loss occasioned by acting on such a certificate. The Trustee shall be entitled to rely on any certificate of two Authorised Signatories of the Issuer where the Issuer procures the delivery of the same pursuant to its obligations to do so under the Conditions or this Trust Deed and such certificate shall be binding on the Issuer, the Trustee and the Noteholders.
 
8.5  
Report of the Auditors: The Trustee shall be entitled to rely on any certificate or report of the Auditors whether or not such report is addressed to the Trustee and notwithstanding that such report and/or any engagement letter or other document entered into by the Trustee contains a monetary or other limit on the liability of the Auditors. Such report shall, in the absence of manifest error, be conclusive and binding on all parties, and the Trustee shall not be responsible for any loss occasioned by acting on any such report.
 
8.6  
Deposit of Documents: The Trustee may appoint as custodian, on any terms, any bank or entity whose business includes the safe custody of documents or any lawyer or firm of lawyers believed by it to be of good repute and may deposit this Trust Deed and any other documents with such custodian and pay all sums due in respect thereof. The Trustee is not obliged to appoint a custodian of securities payable to bearer.
 
8.7  
Discretion: The Trustee will have absolute and uncontrolled discretion as to the exercise of its powers, trusts and discretions and will not be responsible for any loss, liability, cost, claim, action, demand, expense or inconvenience which may result from their exercise or non-exercise.
 
8.8  
Agents: Whenever it considers it expedient in the interests of the Noteholders, the Trustee may, in the conduct of its trust business, instead of acting personally, employ and pay an agent selected by it, whether or not a lawyer or other professional person, to transact or conduct, or concur in transacting or conducting, any business and to do or concur in doing all acts required to be done by the Trustee (including the receipt and payment of money).
 
8.9  
Delegation: Whenever it considers it expedient in the interests of the Noteholders, the Trustee may delegate to any person on any terms (including power to sub-delegate) all or any of its functions.
 
8.10  
Nominees: In relation to any asset held by it under this Trust Deed, the Trustee may appoint any person to act as its nominee on any terms.
 
8.11  
Forged Notes: The Trustee will not be liable to the Issuer or any Noteholder or Couponholder by reason of having accepted as valid or not having rejected any Note or Coupon purporting to be such and later found to be forged or not authentic.
 
8.12  
Confidentiality: Unless ordered to do so by a court of competent jurisdiction the Trustee shall not be required to disclose to any Noteholder or Couponholder any confidential financial or other information made available to the Trustee by the Issuer and no Noteholder or Couponholder shall be entitled to take any action to obtain such information from the Trustee.
 
8.13  
Determinations Conclusive: As between itself and the Noteholders and Couponholders the Trustee may in its absolute discretion determine all questions and doubts arising in relation to any of the provisions of this Trust Deed including (without limitation) determination of whether or not a default in performance by the Issuer of any obligation under the Notes or Trust Deed is materially prejudicial to the interests of Noteholders and Couponholders. Such determinations, whether made upon such a question actually raised or implied in the acts or proceedings of the Trustee, will be conclusive and shall bind the Trustee, the Noteholders and the Couponholders.
 
8.14  
Currency Conversion: Where it is necessary or desirable to convert any sum from one currency to another, it will (unless otherwise provided hereby or required by law) be converted at such rate or rates, in accordance with such method and as at such date as may reasonably be specified by the Trustee but having regard to current rates of exchange, if available. Any rate, method and date so specified will be binding on the Issuer, the Noteholders and the Couponholders.
 
8.15  
Events of Default: The Trustee may determine whether or not an Event of Default or Potential Event of Default is in its opinion capable of remedy and/or materially prejudicial to the interests of the Noteholders. Any such determination will be conclusive and binding on the Issuer, the Noteholders and the Couponholders.
 
8.16  
Payment for and Delivery of Notes: The Trustee will not be responsible for the receipt or application by the Issuer of the proceeds of the issue of the Notes, any exchange of Notes or the delivery of Notes to the persons entitled to them.
 
8.17  
Notes held by the Issuer etc.: In the absence of knowledge or express notice to the contrary, the Trustee may assume without enquiry (other than requesting a certificate under Clause 6.12) that no Notes are for the time being held by or on behalf of the Issuer or its affiliates.
 
8.18  
Responsibility for agents etc.: If the Trustee exercises reasonable care in selecting any custodian, agent, delegate or nominee appointed under this clause (an “Appointee”), it will not have any obligation to supervise the Appointee or be responsible for any loss, liability, cost, claim, action, demand or expense incurred by reason of the Appointee’s misconduct or default or the misconduct or default of any substitute appointed by the Appointee.
 
8.19  
Responsibility for Rating: The Trustee shall (a) have no responsibility for the maintenance of any rating of the Notes by any Rating Agency and (b) shall not be liable to Noteholders if any exercise by it of its trusts, powers and discretions results in a change to the rating assigned by any Rating Agency to any class of Notes.
 
8.20  
No Liability for error of judgement: The Trustee shall not be liable for any error of judgement made in good faith by any officer and/or employee of the Trustee in the administration of its corporate matters.
 
8.21  
Clearing Systems: The Trustee may call for any certificate or other document to be issued by Euroclear, Clearstream, Luxembourg or any other clearing system through which the Notes are cleared as to the principal amount of Notes represented by a Global Note standing to the account of any person and may have regard to any information provided to it by Euroclear, Clearstream, Luxembourg or such other clearing system as to the identity (either individually or by category) of any of their accountholders with entitlements to such Global Note, and the Trustee may consider such interests as if such accountholders were the holders of any such Global Note. Any such certificate, document or information may be accepted and fully relied upon by the Trustee. The Trustee shall not be liable to any person by reason of having accepted as valid or accurate or not having rejected any certificate, document or information to such effect purporting to be issued by Euroclear, Clearstream, Luxembourg or such other clearing system and subsequently found to be forged, not authentic or inaccurate.
 
8.22  
Legal Opinions: The Trustee shall not be responsible to any person for failing to request, require or receive any legal opinion relating to the Notes or for checking or commenting upon the content of any such legal opinion and shall not be responsible for any loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever incurred thereby.
 
8.23  
No Action:
 
(i)  
The Trustee shall not be bound to take any action in connection with this Trust Deed or any obligations arising pursuant thereto, including, without prejudice to the generality of the foregoing, forming any opinion or employing any financial adviser, where it is not satisfied that the Issuer will be able to indemnify it against all loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever incurred thereby which may be incurred in connection with such action and may demand prior to taking any such action that there be paid to it in advance such sums as it reasonably considers (without prejudice to any further demand) shall be sufficient so to indemnify it and on such demand being made the Issuer shall be obliged to make payment of all such sums in full.
 
(ii)  
No provision of this Trust Deed shall require the Trustee to do anything which may (i) be illegal or contrary to applicable law or regulation; or (ii) cause it to expend or risk its own funds or otherwise incur any loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever incurred thereby in the performance of any of its duties or in the exercise of any of its rights, powers or discretions, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever is not assured to it.
 
8.24  
Professional and other charges: Any trustee of the trust presents being a lawyer, accountant, broker or other person engaged in any profession or business shall be entitled to charge and be paid all usual and proper professional and other charges for business transacted and acts done by him or his firm in connection with the trusts of this Trust Deed or the Paying Agency Agreement and also his reasonable charges in addition to disbursements for all other work and business done and all time spent by him or his firm in connection with matters arising in connection with this Trust Deed including matters which might or should have been attended to in person by a trustee not being a banker, accountant or other professional person.
 
8.25  
Holder Absolute Owner: The Issuer, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for all purposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Note or Coupon or any notice of previous loss or theft of the Note or Coupon or of any trust or interest therein) and shall not be required to obtain any proof thereof or as to the identity of such bearer.
 
8.26  
Enforcement: The Trustee may at any time, at its discretion and without notice, take such proceedings against the Issuer as it may think fit to enforce the provisions of the Trust Deed, the Notes and the Coupons, but it shall not be bound to take any such proceedings or any other action in relation to the Trust Deed, the Notes or the Coupons unless (a) it has been so directed by an Extraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one-quarter in outstanding nominal amount of the Notes then outstanding and (b) it has been indemnified and/or secured to its satisfaction. No Noteholder or Couponholder shall be entitled to proceed directly against the Issuer unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and the failure shall be continuing.
 
 
9  
Trustee Liable for Negligence
 
Section 1 of the Trustee Act 2000 shall not apply to any function of the Trustee, provided that if the Trustee fails to show the degree of care and diligence required of it as trustee, nothing in this Trust Deed shall relieve or indemnify it from or against any liability which would otherwise attach to it in respect of any negligence, default, breach of duty or breach of trust of which it may be guilty.
 
 
10  
Waiver and Proof of Default
 
10.1  
Waiver: The Trustee may, without the consent of the Noteholders or Couponholders and without prejudice to its rights in respect of any subsequent breach, from time to time and at any time, if in its opinion the interests of the Noteholders will not be materially prejudiced thereby, waive or authorise, on such terms as seem expedient to it, any breach or proposed breach by the Issuer of this Trust Deed or the Conditions or determine that an Event of Default, Potential Event of Default, Restructuring Event or Potential Restructuring Event will not be treated as such provided that the Trustee will not do so in contravention of an express direction given by an Extraordinary Resolution or a request made pursuant to Condition 9. No such direction or request will affect a previous waiver, authorisation or determination. Any such waiver, authorisation or determination will be binding on the Noteholders and the Couponholders and, if the Trustee so requires, will be notified to the Noteholders as soon as practicable.
 
10.2  
Proof of Default: Proof that the Issuer has failed to pay a sum due to the holder of any one Note or Coupon will (unless the contrary be proved) be sufficient evidence that it has made the same default as regards all other Notes or Coupons which are then payable.
 
 
11  
Trustee not Precluded from Entering into Contracts
 
The Trustee and any other person, whether or not acting for itself, may acquire, hold or dispose of any Note, Coupon or other security (or any interest therein) of the Issuer or any other person, may enter into or be interested in any contract or transaction with any such person and may act on, or as depositary or agent for, any committee or body of holders of any securities of any such person in each case with the same rights as it would have had if the Trustee were not acting as Trustee and need not account for any profit.
 
 
12  
Modification and Substitution
 
12.1  
Modification: The Trustee may agree without the consent of the Noteholders or Couponholders to any modification to this Trust Deed which is, in its opinion, of a formal, minor or technical nature or to correct a manifest error. The Trustee may also so agree to any modification to this Trust Deed which is in its opinion not materially prejudicial to the interests of the Noteholders, but such power does not extend to any such modification as is mentioned in the proviso to paragraph 2 of Schedule 3.
 
12.2  
Substitution:
 
12.2.1  
The Trustee may, without the consent of the Noteholders or Couponholders, agree to the substitution of the Issuer’s successor in business or any Subsidiary of the Issuer (other than an Excluded Subsidiary) (the “Substituted Obligor”) in place of the Issuer (or of any previous substitute under this sub-Clause) as the principal debtor under this Trust Deed, the Notes and the Coupons provided that:
 
(i)  
a deed is executed or undertaking given by the Substituted Obligor to the Trustee, in form and manner satisfactory to the Trustee, agreeing to be bound by this Trust Deed, the Notes and the Coupons (with consequential amendments as the Trustee may deem appropriate) as if the Substituted Obligor had been named in this Trust Deed, the Notes and the Coupons as the principal debtor in place of the Issuer
 
(ii)  
if the Substituted Obligor is subject generally to the taxing jurisdiction of a territory or any authority of or in that territory with power to tax (the “Substituted Territory”) other than the territory to the taxing jurisdiction of which (or to any such authority of or in which) the Issuer is subject generally (the “Issuer’s Territory”), the Substituted Obligor will (unless the Trustee otherwise agrees) give to the Trustee an undertaking satisfactory to the Trustee in terms corresponding to Condition 7 with the substitution for the references in that Condition to the Issuer’s Territory of references to the Substituted Territory whereupon the Trust Deed, the Notes and the Coupons will be read accordingly
 
(iii)  
if any two Authorised Signatories of the Substituted Obligor certify that it will be solvent immediately after such substitution, the Trustee need not have regard to the Substituted Obligor’s financial condition, profits or prospects or compare them with those of the Issuer
 
(iv)  
the Trustee is satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution
 
(v)  
the Issuer and the Substituted Obligor comply with such other requirements as the Trustee may direct in the interests of the Noteholders and
 
(vi)  
(unless the Issuer’s successor in business is the Substituted Obligor as the principal debtor under this Trust Deed, the Notes and the Coupons) the obligations of the Substituted Obligor as the principal debtor under this Trust Deed, the Notes and the Coupons are guaranteed by the Issuer (with consequential amendments as necessary) to the Trustee’s satisfaction.
 
12.2.2  
Release of Substituted Issuer: An agreement by the Trustee pursuant to Clause 12.2 will, if so expressed, release the Issuer (or a previous substitute) from any or all of its obligations under this Trust Deed, the Notes and the Coupons. Notice of the substitution will be given to the Noteholders within 14 days of the execution of such documents and compliance with such requirements.
 
12.2.3  
Completion of Substitution: On completion of the formalities set out in Clause 12.2, the Substituted Obligor will be deemed to be named in this Trust Deed, the Notes and the Coupons as the principal debtor in place of the Issuer (or of any previous substitute) and this Trust Deed, the Notes and the Coupons will be deemed to be amended as necessary to give effect to the substitution.
 
 
13  
Appointment, Retirement and Removal of the Trustee
 
13.1  
Appointment: Subject as provided in clause 13.2 below, the Issuer has the power of appointing new trustees but no-one may be so appointed unless previously approved by an Extraordinary Resolution. A trust corporation will at all times be a Trustee and may be the sole Trustee. Any appointment of a new Trustee will be notified by the Issuer to the Noteholders as soon as practicable.
 
13.2  
Retirement and Removal: Any Trustee may retire at any time on giving at least three months’ written notice to the Issuer without giving any reason or being responsible for any costs occasioned by such retirement and the Noteholders may by Extraordinary Resolution remove any Trustee provided that the retirement or removal of a sole trust corporation will not be effective until a trust corporation is appointed as successor Trustee. If a sole trust corporation gives notice of retirement or an Extraordinary Resolution is passed for its removal, the Issuer will use all reasonable endeavours to procure that another trust corporation be appointed as Trustee and if it does not procure the appointment of a new trustee within 30 days of the expiry of the Trustee’s notice referred to in this Clause, the Trustee shall be entitled to procure forthwith a new trustee.
 
13.3  
Co-Trustees: The Trustee may, despite Clause 13.1, by written notice to the Issuer appoint anyone to act as an additional Trustee jointly with the Trustee:
 
13.3.1  
if the Trustee considers the appointment to be in the interests of the Noteholders and/or the Couponholders
 
13.3.2  
to conform with a legal requirement, restriction or condition in a jurisdiction in which a particular act is to be performed or
 
13.3.3  
to obtain a judgment or to enforce a judgment or any provision of this Trust Deed in any jurisdiction.
 
Subject to the provisions of this Trust Deed the Trustee may confer on any person so appointed such functions as it thinks fit. The Trustee may by written notice to the Issuer and that person remove that person. At the Trustee’s request, the Issuer will forthwith do all things as may be required to perfect such appointment or removal and it irrevocably appoints the Trustee as its attorney in its name and on its behalf to do so.
 
13.4  
Competence of a Majority of Trustees: If there are more than two Trustees the majority of them will be competent to perform the Trustee’s functions provided the majority includes a trust corporation.
 
13.5  
Merger: Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Clause, without the execution or filing of any paper or any further act on the part of the parties hereto.
 
 
14  
Couponholders
 
No notices need be given to Couponholders. They will be deemed to have notice of the contents of any notice given to Noteholders. Even if it has express notice to the contrary, in exercising any of its functions by reference to the interests of the Noteholders, the Trustee will assume that the holder of each Note is the holder of all Coupons relating to it.
 
 
15  
Currency Indemnity
 
15.1  
Currency of Account and Payment: Pounds sterling (the “Contractual Currency”) is the sole currency of account and payment for all sums payable by the Issuer under or in connection with this Trust Deed, the Notes and the Coupons, including damages.
 
15.2  
Extent of discharge: An amount received or recovered in a currency other than the Contractual Currency (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the insolvency, winding-up or dissolution of the Issuer or otherwise), by the Trustee or any Noteholder or Couponholder in respect of any sum expressed to be due to it from the Issuer will only discharge the Issuer to the extent of the Contractual Currency amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so).
 
15.3  
Indemnity: If that Contractual Currency amount is less than the Contractual Currency amount expressed to be due to the recipient under this Trust Deed, the Notes or the Coupons, the Issuer will indemnify it against any loss sustained by it as a result. In any event, the Issuer will indemnify the recipient against the cost of making any such purchase.
 
15.4  
Indemnity separate: The indemnities in this Clause 15 and in Clause 7.4 constitute separate and independent obligations from the other obligations in this Trust Deed, will give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted by the Trustee and/or any Noteholder or Couponholder and will continue in full force and effect despite any judgment, order, claim or proof for a liquidated amount in respect of any sum due under this Trust Deed, the Notes and/or the Coupons or any other judgment or order.
 
 
16  
Communications
 
Any communication shall be by letter or fax:
 
in the case of the Issuer, to it at:
 
Avonbank
Feeder Road
Bristol BS2 0TB
Telephone no.:   +44(0) 117 933 2020
Fax no.:    +44(0) 117 933 2108
Attention:   The Treasurer
 
and in the case of the Trustee, to it at:
 
P.O. Box 88
1 Grenville Street
St. Helier
Jersey JE4 9PF
Telephone no.:  +44 1534 606 150
Fax no.:   +44 1534 606 159 
Attention:   Manager, Corporate Services
 
Communications will take effect, in the case of delivery, when delivered or, in the case of fax, when despatched. Communications not by letter shall be confirmed by letter but failure to send or receive that letter shall not invalidate the original communication.
 
 
17  
Further Issues
 
17.1  
Supplemental Trust Deed: If the Issuer issues further securities as provided in the Conditions, the Issuer shall, before their issue, execute and deliver to the Trustee a deed supplemental to this Trust Deed containing such provisions (corresponding to any of the provisions of this Trust Deed) as the Trustee may require.
 
17.2  
Meetings of Noteholders: If the Trustee so directs, Schedule 3 shall apply equally to Noteholders and to holders of any securities issued pursuant to the Conditions as if references in it to “Notes” and “Noteholders” were also to such securities and their holders respectively.
 
 
18  
Governing Law and Submission to Jurisdiction
 
18.1  
Governing Law: This Trust Deed shall be governed by and construed in accordance with English law.
 
18.2  
Jurisdiction: The courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and accordingly any legal action or proceedings arising out of or in connection with this Agreement (“Proceedings”) may be brought in such courts. The Trustee irrevocably submits to the jurisdiction of such courts and waives any objection to Proceedings in such courts whether on the ground of venue or on the ground that the Proceedings have been brought in an inconvenient forum. These submissions are for the benefit of the Issuer and shall not limit the right of any of it to take Proceedings in any other court of competent jurisdiction nor shall the taking of Proceedings in any one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction (whether concurrently or not).
 
18.3  
Service of Process: The Trustee irrevocably appoints HSBC Bank plc of 8 Canada Square, London E14 5HQ as its authorised agent for service of process in England. If for any reason such agent shall cease to be such agent for the service of process, the Trustee shall forthwith appoint a new agent for service of process in England and deliver to the Issuer a copy of the new agent’s acceptance of that appointment within 30 days. Nothing shall affect the right to serve process in any other manner permitted by law.
 
 
19  
Counterparts
 
This Trust Deed may be executed and delivered in any number of counterparts each of which will be deemed an original.
 


Schedule 1
 
Form of Definitive Note
 
On the front:
 
Denomination
 
ISIN
 
Series
 
Certif. No.
 
£50,000
 
XS0276994216
 
    

 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
(Incorporated with limited liability in England and Wales)
£120,000,000
1.541 per cent. Index-Linked Notes due 2056
 
 
This Note forms part of a series designated as specified in the title (the “Notes”) of Western Power Distribution (South West) plc (the “Issuer”) constituted by the Trust Deed referred to on the reverse hereof. The Notes are subject to, and have the benefit of, that Trust Deed and the terms and conditions (the “Conditions”) set out on the reverse hereof.
 
This is to certify that the bearer of this Note is entitled on 1 December 2056, or on such earlier date as the Note may be redeemed or repaid to such sum as is determined in accordance with the Conditions to be payable on such redemption or repayment together with interest on the outstanding nominal amount of such Note from 1 December 2006 at the rate of 1.541 per cent. per annum payable semi-annually in arrear on 1 June and 1 December in each year, adjusted for indexation as provided in, and otherwise subject to and in accordance with, the Conditions.
 
This Note shall not be valid or become obligatory for any purpose until authenticated by or on behalf of the Principal Paying Agent.
 
In witness whereof the Issuer has caused this Note to be signed in facsimile on its behalf.
 
Dated as of [·]
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 

 
[Director]

This Note is authenticated by or on behalf of the Principal Paying Agent.
 
By:
 

 

 
Authorised Signatory
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 


On the back:
 
Terms and Conditions
 
The £120,000,000 1.541 per cent. Index-Linked Notes due 2056 (the “Notes”, which expression shall in these Conditions, unless the context otherwise requires, include any further notes issued pursuant to Condition 16 and forming a single series with the Notes) of Western Power Distribution (South West) plc (the “Issuer”) are constituted by a Trust Deed (the “Trust Deed”) dated 1 December 2006 (the “Issue Date”) made between the Issuer and HSBC Trustee (C.I.) Limited (the “Trustee”, which expression shall include its successor(s)) as trustee for the holders of the Notes (the “Noteholders”) and the holders of the interest coupons appertaining to the Notes (the “Couponholders” and the “Coupons” respectively, which expressions shall, unless the context otherwise requires, include the talons for further interest coupons (the “Talons”) and the holders of the Talons).
 
The statements in these Conditions include summaries of, and are subject to, the detailed provisions of and definitions in the Trust Deed. Copies of the Trust Deed and the Agency Agreement dated 1 December 2006 (the “Agency Agreement”) made between the Issuer, the initial Paying Agents and the Trustee are available for inspection during normal business hours by the Noteholders and the Couponholders at the principal office for the time being of the Trustee, being at the date of issue of the Notes at 1 Grenville Street, St. Helier, Jersey JE4 9PF and at the specified office of each of the Paying Agents. The Noteholders and the Couponholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Trust Deed and the Agency Agreement applicable to them.
 
 
1  
FORM, DENOMINATION AND TITLE
 
1.1  
Form and Denomination
 
The Notes are in bearer form, serially numbered, in the denomination of £50,000 with Coupons and one Talon attached on issue.
 
1.2  
Title
 
Title to the Notes and to the Coupons will pass by delivery.
 
1.3  
Holder Absolute Owner
 
The Issuer, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for all purposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Note or Coupon or any notice of previous loss or theft of the Note or Coupon or of any trust or interest therein) and shall not be required to obtain any proof thereof or as to the identity of such bearer.
 
 
2  
STATUS
 
The Notes and the Coupons are direct, unconditional, unsubordinated and (subject to the provisions of Condition 3) unsecured obligations of the Issuer and (subject as provided above) rank pari passu, among themselves and (save for certain obligations required to be preferred by law) equally with all other outstanding unsecured obligations (other than subordinated obligations, if any) of the Issuer from time to time outstanding.
 
 
3  
NEGATIVE PLEDGE
 
3.1  
Negative Pledge
 
So long as any Note remains outstanding (as defined in the Trust Deed) the Issuer will, and will procure that each of its Distribution Subsidiaries (as defined below) will, ensure that no Relevant Indebtedness (as defined below) of the Issuer or any Distribution Subsidiary or of any other person and no guarantee by the Issuer or any Distribution Subsidiary of any Relevant Indebtedness of any person will be secured by a mortgage, charge, lien, pledge or other security interest (each a “Security Interest”) upon, or with respect to, any of the present or future business, undertaking, assets or revenues (including any uncalled capital) of the Issuer or any Distribution Subsidiary unless the Issuer, before or at the same time as the creation of the Security Interest, take any and all action necessary to ensure that:
 
(a)  
all amounts payable by the Issuer under the Notes, the Coupons and the Trust Deed are secured equally and rateably with the Relevant Indebtedness or guarantee, as the case may be, by the same Security Interest, in each case to the satisfaction of the Trustee; or
 
(b)  
such other Security Interest or guarantee or other arrangement (whether or not including the giving of a Security Interest) is provided in respect of all amounts payable by the Issuer under the Notes, the Coupons and the Trust Deed either (i) as the Trustee shall in its absolute discretion deem not materially less beneficial to the interests of the Noteholders or (ii) as shall be approved by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders,
 
save that the above restriction shall not apply to any Security Interest (1) provided by or in respect of a company becoming a Distribution Subsidiary after the issue date of the Notes and where such Security Interest existed at the time that company becomes a Distribution Subsidiary (provided that such Security Interest was not created in contemplation of that company becoming a Distribution Subsidiary and the principal amount secured at the time of that company becoming a Distribution Subsidiary is not subsequently increased) or (2) created or outstanding in respect of any Non-recourse Indebtedness (as defined in Condition 9) or any leasing or hire purchase agreement of the Issuer or any Distribution Subsidiary provided that the aggregate outstanding principal amount secured by all such Security Interests created or outstanding under this exception (2) shall not at any time exceed the greater of £75,000,000 or 10 per cent. of the Regulatory Asset Base (as defined below) at such time (or the equivalent thereof in any other currency or currencies).
 
3.2  
Restriction on distribution of dividends
 
So long as any Note or Coupon remains outstanding, the Issuer shall not at any time declare or make a distribution (as defined in Section 209 of the Income and Corporation Taxes Act 1988) or grant a loan or any other credit facility to any of its shareholders unless (1) immediately following the occurrence of any such event, the Net Debt (as defined below) at such time would not exceed 85 per cent. of the Regulatory Asset Base relating to the year in which the relevant distribution or grant was first declared or made; and (2) written certification thereof, signed by two directors of the Issuer, has been provided to the Trustee on or prior to such distribution or grant. Such certification may be relied upon by the Trustee without further enquiry or evidence and, if relied upon by the Trustee, shall, in the absence of manifest error, be conclusive and binding on all parties whether or not addressed to each such party.
 
3.3  
Definitions
 
For the purposes of these Conditions:
 
“Capital and Reserves” means the aggregate of:
 
(a)  
the amount paid up or credited as paid up on the share capital of the Issuer; and
 
(b)  
the total of the capital, revaluation and revenue reserves of the Group (as defined below), including any share premium account, capital redemption reserve and credit balance on the profit and loss account, but excluding sums set aside for taxation and amounts attributable to outside shareholders in Subsidiary Undertakings (as defined below) and deducting any debit balance on the profit and loss account,
 
all as shown in the then latest audited consolidated balance sheet and profit and loss account of the Group prepared in accordance with the historical cost convention (as modified by the revaluation of certain fixed assets) for the purposes of the Companies Act 1985, but adjusted as may be necessary in respect of any variation in the paid up share capital or share premium account of the Issuer since the date of that balance sheet and further adjusted as may be necessary to reflect any change since the date of that balance sheet in the Subsidiary Undertakings comprising the Group and/or as the Auditors (as defined in the Trust Deed) may consider appropriate.
 
A certificate by two directors of the Issuer as to the amount of the Capital and Reserves at any given time may be relied upon by the Trustee without further enquiry or evidence and, if relied upon by the Trustee, shall, in the absence of manifest error, be conclusive and binding on all parties whether or not addressed to each such party;
 
“consolidated” means, in relation to the financial statements and accounts of the Issuer and/or the Group, those statements and accounts as consolidated under International Financial Reporting Standards, provided that if such consolidated accounts are not prepared, it shall mean the non-consolidated financial statements and accounts of the Issuer prepared in accordance with generally accepted accounting principles in the United Kingdom;
 
“Distribution Licence” means an electricity distribution licence granted under section 6(1)(c) of the Electricity Act 1989, as amended from time to time);
 
“Distribution Subsidiary” means any Subsidiary of the Issuer which holds a Distribution Licence from time to time;
 
“Group” means the Issuer and, if and to the extent it has any, its Subsidiary Undertakings and “member of the Group” shall be construed accordingly;
 
“Net Debt”, at any time, means the aggregate amount of all indebtedness for borrowed money (as defined in Condition 9) of the Issuer at such time less the aggregate of:
 
(a)  
amounts credited to current accounts or deposits and certificates of deposit (with a term not exceeding three months) at, or issued by, any bank, building society or other financial institution;
 
(b)  
cash in hand; and
 
(c)  
the lower of book and market value (calculated, where relevant, by reference to their bid price) of gilts issued by the United Kingdom Government,
 
in each case beneficially owned by the Issuer and in each case so that no amount shall be included or excluded more than once;
 
“Regulatory Asset Base”, in respect of any year, means the regulatory asset base of the Issuer most recently published in respect of such year by the Office of Gas and Electricity Markets (“OFGEM”) or any successor of OFGEM;
 
“Relevant Indebtedness” means (i) any present or future indebtedness (whether being principal, premium, interest or other amounts) in the form of or represented by bonds, notes, debentures, debenture stock, loan stock or other securities, whether issued for cash or in whole or in part for a consideration other than cash, and which, with the agreement of the person issuing the same, are or are capable of being quoted, listed or ordinarily dealt in on any stock exchange or recognised over-the-counter or other securities market; or (ii) monies borrowed or raised from, or any acceptance credit opened by, a bank, building society or other financial institution; or (iii) any leasing or hire purchase agreement which would be treated as a finance lease in the accounts of the relevant person;
 
“Subsidiary” means a subsidiary within the meaning of section 736 of the Companies Act 1985;
 
“Subsidiary Undertaking” shall have the meaning given to it by section 258 of the Companies Act 1985 (but, in relation to the Issuer, shall exclude any undertaking (as defined in the Companies Act 1985) whose accounts are not included in the then latest published audited consolidated accounts of the Issuer, or (in the case of an undertaking which has first become a subsidiary undertaking of a member of the Group since the date as at which any such audited accounts were prepared) would not have been so included or consolidated if it had become so on or before that date); and
 
any reference to an obligation being “guaranteed” shall include a reference to an indemnity being given in respect of that obligation.
 
 
4  
INTEREST
 
4.1  
Interest Rate and Interest Payment Dates
 
The Notes bear interest on their outstanding nominal amount from and including 1 December 2006 at the rate of 1.541 per cent. per annum, payable semi-annually in arrear on 1 June and 1 December in each year (each an “Interest Payment Date”) until 1 December 2056. The interest amount will be adjusted for indexation in accordance with Condition 8.
 
4.2  
Interest Accrual
 
Each Note will cease to bear interest from and including its due date for redemption unless, upon due presentation, payment of the principal in respect of the Note is improperly withheld or refused or unless default is otherwise made in respect of payment, in which event interest shall continue to accrue as provided in the Trust Deed.
 
4.3  
Calculation of Broken Interest
 
When interest is required to be calculated in respect of a period of less than a full period of six months, it shall be calculated on the basis of (a) the actual number of days in the period from and including the date from which interest begins to accrue (the “Accrual Date”) to but excluding the date on which it falls due divided by (b) the actual number of days from and including the Accrual Date to but excluding the next following Interest Payment Date multiplied by two.
 
 
5  
PAYMENTS AND EXCHANGES OF TALONS
 
5.1  
Payments in respect of Notes
 
Payments of principal and interest in respect of each Note will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the Note, except that payments of interest due on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Coupon, in each case at the specified office outside the United States of any of the Paying Agents.
 
5.2  
Method of Payment
 
Payments will be made by credit or transfer to a pounds sterling account maintained by the payee with or, at the option of the payee, by a pounds sterling cheque drawn on, a bank in London.
 
5.3  
Missing Unmatured Coupons
 
Each Note should be presented for payment together with all relative unmatured Coupons (which expression shall, for the avoidance of doubt, include Coupons falling to be issued on exchange of matured Talons). Upon the date on which any Note becomes due and repayable, all unmatured Coupons appertaining to the Note (whether or not attached) shall become void and no payment shall be made in respect of such Coupons.
 
5.4  
Payments subject to Applicable Laws
 
Payments in respect of principal and interest on the Notes are subject in all cases to any fiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions of Condition 7.
 
5.5  
Payment only on a Presentation Date
 
A holder shall be entitled to present a Note or Coupon for payment only on a Presentation Date and shall not, except as provided in Condition 4, be entitled to any further interest or other payment if a Presentation Date is after the due date.
 
“Presentation Date” means a day which (subject to Condition 17):
 
(a)  
is or falls after the relevant due date;
 
(b)  
is a Business Day in the place of the specified office of the Paying Agent at which the Note or Coupon is presented for payment; and
 
(c)  
in the case of payment by credit or transfer to a pounds sterling account in London as referred to above), is a Business Day in London.
 
In this Condition, “Business Day” means, in relation to any place, a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in that place.
 
5.6  
Exchange of Talons
 
On and after the Interest Payment Date on which the final Coupon comprised in any Coupon sheet matures, the Talon comprised in the Coupon sheet may be surrendered at the specified office of any Paying Agent in exchange for a further Coupon sheet (including any appropriate further Talon), subject to the provisions of Condition 17. Each Talon shall, for the purposes of these Conditions, be deemed to mature on the Interest Payment Date on which the final Coupon comprised in the relative Coupon sheet matures.
 
5.7  
Initial Paying Agents
 
The names of the initial Paying Agents and their initial specified offices are set out at the end of these Conditions. The Issuer reserves the right, subject to the prior written approval of the Trustee, at any time to vary or terminate the appointment of any Paying Agent and to appoint additional or other Paying Agents provided that:
 
(a)  
there will at all times be a Principal Paying Agent;
 
(b)  
there will at all times be at least one Paying Agent (which may be the Principal Paying Agent) having its specified office in a European city which so long as the Notes are admitted to official listing on the London Stock Exchange plc shall be London or such other place as the UK Listing Authority may approve; and
 
(c)  
there will at all times be a Paying Agent in a Member State of the European Union that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive.
 
Notice of any termination or appointment and of any changes in specified offices will be given to the Noteholders promptly by the Issuer in accordance with Condition 12.
 
 
6  
REDEMPTION AND PURCHASE
 
6.1  
Redemption at Maturity
 
Unless previously redeemed or purchased and cancelled as provided below, the Issuer will redeem the Notes at their outstanding nominal amount (subject to adjustment for indexation in accordance with Condition 8) on 1 December 2056.
 
6.2  
Redemption at the option of the Issuer on 1 December 2026
 
The Issuer may at its option, having given not less than 30 nor more than 90 days’ notice to the Noteholders in accordance with Condition 12 (which shall be irrevocable), redeem all, but not some only, of the Notes on 1 December 2026 at a price (the “Redemption Price”) which shall be the higher of the amounts set out in (i) and (ii) below, together with interest (adjusted for indexation in accordance with Condition 8) accrued up to but excluding 1 December 2026:
 
(i)  
their outstanding nominal amount multiplied by the Index Ratio applicable to the date fixed for redemption; and
 
(ii)  
the price (multiplied by the Index Ratio applicable to the date fixed for redemption), as determined by an Independent Financial Adviser (as defined below) and expressed as a percentage rounded to three decimal places (0.0005 being rounded down) at which the Gross Real Yield on the Notes, if they were to be purchased at such price on the third dealing day prior to the due date of redemption and calculated on the basis that they remain outstanding to 1 December 2056, would be equal to the Gross Real Yield on such dealing day of the Reference Stock (as defined below) on the basis of the middle market price of the Reference Stock prevailing at 11:00 a.m. (London time) on such dealing day, as determined by an independent financial adviser, independent investment bank or other expert (or such other person as the Trustee may approve) (an “Independent Financial Adviser”).
 
At any time when under these Conditions it is necessary to have, or the Trustee requests, the appointment of an Independent Financial Adviser, the Issuer shall select and appoint an Independent Financial Adviser with the prior written approval of the Trustee and at the expense of the Issuer.
 
Any reference in these Conditions to principal or outstanding nominal amount shall be deemed to include any sum payable as the Redemption Price save in respect of any such references in Conditions 6.3 and 6.4.
 
In this Condition:
 
“Reference Stock” means the 1.25 per cent. Index-Linked Treasury Stock due 2055 or, if such Treasury Stock is no longer in issue, such other United Kingdom government stock as the Independent Financial Adviser may, with the advice of three brokers and/or market makers operating in the gilt edged market, agree with the Issuer, or failing such agreement, decide from time to time to be appropriate; and
 
The “Gross Real Yield” on the Notes and on the Reference Stock will be expressed as a percentage and will be calculated by the Independent Financial Adviser in accordance with generally accepted market practice at such time, as advised by the Independent Financial Adviser.
 
At any time when under these Conditions it is necessary to have, or the Trustee requests, the advice of brokers and/or market makers operating in the gilt edged market, the Issuer shall select and appoint them with the prior written approval of the Trustee and at the expense of the Issuer.
 
Notices of redemption will specify the date fixed for redemption and the applicable Redemption Price. Upon the expiry of any notice of redemption the Issuer shall be bound to redeem the Notes at the applicable Redemption Price.
 
6.3  
Redemption for Taxation Reasons
 
If the Issuer satisfies the Trustee immediately before the giving of the notice referred to below that:
 
(a)  
as a result of any change in, or amendment to, the laws or regulations of a Relevant Jurisdiction (as defined in Condition 7), or any change in the application or official interpretation of the laws or regulations of a Relevant Jurisdiction, which change or amendment becomes effective after 29 November 2006, on the next Interest Payment Date the Issuer would be required to pay additional amounts as provided or referred to in Condition 7; and
 
(b)  
the requirement cannot be avoided by the Issuer taking reasonable measures available to it,
 
the Issuer may at its option, having given not less than 30 nor more than 60 days’ notice to the Noteholders in accordance with Condition 12 (which notice shall be irrevocable), redeem all the Notes, but not some only, at any time at their outstanding nominal amount together with interest accrued to but excluding the date of redemption (each as adjusted for indexation in accordance with Condition 8), provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would be required to pay such additional amounts were a payment in respect of the Notes then due. Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall deliver to the Trustee a certificate signed by two directors of the Issuer stating that the requirement referred to in (a) above will apply on the next Interest Payment Date and cannot be avoided by the Issuer taking reasonable measures available to it, and the Trustee shall be entitled to accept the certificate as sufficient evidence of the satisfaction of the conditions precedent set out above, in which event it shall be conclusive and binding on the Noteholders and the Couponholders.
 
6.4  
Redemption at the option of Noteholders on a Restructuring Event
 
(a)    
 
(i)  
If, at any time while any of the Notes remains outstanding, a Restructuring Event (as defined below) occurs and prior to the commencement of or during the Restructuring Period (as defined below):
 
(A)  
an independent financial adviser (as described below) shall have certified in writing to the Trustee that such Restructuring Event will not be or is not, in its opinion, materially prejudicial to the interests of the Noteholders; or
 
(B)  
if there are Rated Securities (as defined below), each Rating Agency (as defined below) that at such time has assigned a current rating to the Rated Securities confirms in writing to the Trustee that it will not be withdrawing or reducing the then current rating assigned to the Rated Securities by it from an investment grade rating (BBB-/Baa3, or their respective equivalents for the time being, or better) to a non-investment grade rating (BB+/Bal, or their respective equivalents for the time being, or worse) or, if the Rating Agency shall have already rated the Rated Securities below investment grade (as described above), the rating will not be lowered by one full rating category or more, in each case as a result, in whole or in part, of any event or circumstance comprised in or arising as a result of the applicable Restructuring Event,
 
the following provisions of this Condition 6.4 shall cease to have any further effect in relation to such Restructuring Event.
 
(ii)  
If, at any time while any of the Notes remains outstanding, a Restructuring Event occurs and (subject to Condition 6.4(a)(i)):
 
(A)  
within the Restructuring Period, either:
 
(x)  if at the time such Restructuring Event occurs there are Rated Securities, a Rating Downgrade (as defined below) in respect of such Restructuring Event also occurs; or
 
(y)  if at such time there are no Rated Securities, a Negative Rating Event (as defined below) in respect of such Restructuring Event also occurs; and
 
(B)  
an independent financial adviser shall have certified in writing to the Trustee that such Restructuring Event is, in its opinion, materially prejudicial to the interests of the Noteholders (a “Negative Certification”),
 
then, unless at any time the Issuer shall have given notice under Condition 6.2, 6.3 or 6.4, the holder of each Note will, upon the giving by the Issuer of a Put Event Notice (as defined below), have the option (the “Restructuring Put Option”) to require the Issuer to redeem or, at the option of the Issuer, purchase (or procure the purchase of) that Note on the Put Date (as defined below), at its outstanding nominal amount together with (or, where purchased, together with an amount equal to) interest (if any) accrued to (but excluding) the Put Date (in each case, as adjusted for indexation in accordance with Condition 8).
 
A Restructuring Event shall be deemed not to be materially prejudicial to the interests of the Noteholders if, notwithstanding the occurrence of a Rating Downgrade or a Negative Rating Event, the rating assigned to the Rated Securities by any Rating Agency (as defined below) is subsequently increased to, or, as the case may be, there is assigned to the Notes or other unsecured and unsubordinated debt of the Issuer (or of any Subsidiary of the Issuer and which is guaranteed on an unsecured and unsubordinated basis by the Issuer) having an initial maturity of five years or more by any Rating Agency, an investment grade rating (BBB-/Baa3) or their respective equivalents for the time being) or better prior to any Negative Certification being issued.
 
Any certification by an independent financial adviser as aforesaid as to whether or not, in its opinion, any Restructuring Event is materially prejudicial to the interests of the Noteholders shall, in the absence of manifest error, be conclusive and binding on the Trustee, the Issuer and the Noteholders. The Issuer may, at any time, with the prior written approval of the Trustee appoint an independent financial adviser for the purposes of this Condition 6.4. If, within 14 London business days following the occurrence of a Restructuring Event, the Issuer shall not have appointed an independent financial adviser for the purposes of Condition 6.4(a)(ii)(B) and (if so required by the Trustee) the Trustee is indemnified and/or secured to its satisfaction against the costs of such adviser, the Trustee may appoint an independent financial adviser for such purpose following consultation with the Issuer.
 
(b)  
Promptly upon the Issuer becoming aware of the occurrence of a Put Event (as defined below), and in any event not later than 14 days after the occurrence of a Put Event, the Issuer shall, and at any time upon the Trustee becoming similarly so aware the Trustee may, and if so requested by the holders of at least one-quarter in nominal amount of the Notes then outstanding shall (and subject to it being indemnified and/or secured to its satisfaction), give notice (a “Put Event Notice”) to the Noteholders in accordance with Condition 12 specifying the nature of the Put Event and the procedure for exercising the Restructuring Put Option.
 
(c)  
To exercise the Restructuring Put Option, the holder of a Note must deliver at the specified office of any Paying Agent on any Business Day (as defined in Condition 5.5) at the place of such specified office falling within the Put Period, a duly signed and completed notice of exercise in the form (for the time being current and which may, if this Note is held in a clearing system, be any form acceptable to the clearing system delivered in a manner acceptable to the clearing system) obtainable from any specified office of any Paying Agent (a “Put Notice”) and in which the holder must specify a bank account (or, if payment is to be made by cheque, an address) to which payment is to be made under this paragraph accompanied by such Notes or evidence satisfactory to the Paying Agent concerned that such Notes will, following the delivery of the Put Notice, be held to its order or under its control. A Put Notice given by a holder of any Note shall be irrevocable except where, prior to the due date of redemption, an Event of Default has occurred and is continuing, in which event such holder, at its option, may elect by notice to the Issuer to withdraw the Put Notice. For the purposes of this Condition, the “Put Period” shall mean the period of 45 days after that on which a Put Event Notice is given. Subject to the relevant Noteholder having complied with this Condition, the Issuer shall redeem or, at the option of the Issuer, purchase (or procure the purchase of) the relevant Note on the fifteenth day after the date of expiry of the Put Period (the “Put Date”) unless previously redeemed or purchased.
 
(d)  
For the purposes of these Conditions:
 
(i)  
A “Negative Rating Event” shall be deemed to have occurred if (A) the Issuer does not, either prior to or not later than 14 days after the date of a Negative Certification in respect of the relevant Restructuring Event, seek, and thereupon use all reasonable endeavours to obtain, a rating of the Notes or any other unsecured and unsubordinated debt of the Issuer (or of any Subsidiary of the Issuer and which is guaranteed on an unsecured and unsubordinated basis by the Issuer) having an initial maturity of five years or more from a Rating Agency or (B) if it does so seek and use such endeavours, it is unable, as a result of such Restructuring Event, to obtain such a rating of at least investment grade (BBB-/Baa3, or their respective equivalents for the time being).
 
(ii)  
A “Put Event” occurs on the date of the last to occur of (A) a Restructuring Event, (B) either a Rating Downgrade or, as the case may be, a Negative Rating Event and (C) the relevant Negative Certification.
 
(iii)  
“Rating Agency” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. or any of its subsidiaries and their successors, Moody’s Investors Service Limited or any of its subsidiaries and their successors, Fitch Ratings Limited or any of its subsidiaries and their successors or any rating agency substituted for any of them (or any permitted substitute of them) by the Issuer from time to time with the prior written approval of the Trustee.
 
(iv)  
A “Rating Downgrade” shall be deemed to have occurred in respect of a Restructuring Event if the then current rating assigned to the Rated Securities by any Rating Agency (whether provided by a Rating Agency at the invitation of the Issuer or by its own volition) is withdrawn or reduced from an investment grade rating (BBB-/Baa3) or their respective equivalents for the time being, or better) to a non-investment grade rating (BB+/Bal) or their respective equivalents for the time being, or worse) or, if the Rating Agency shall then have already rated the Rated Securities below investment grade (as described above), the rating is lowered one full rating category.
 
(v)  
“Rated Securities” means the Notes, if at any time and for so long as they have a rating from a Rating Agency, and otherwise any other unsecured and unsubordinated debt of the Issuer (or of any Subsidiary of the Issuer and which is guaranteed on an unsecured and unsubordinated basis by the Issuer) having an initial maturity of five years or more which is rated by a Rating Agency.
 
(vi)  
“Restructuring Event” means the occurrence of any one or more of the following events:
 
(A)  
(x) the Secretary of State for Trade and Industry (or any successor) giving any Distribution Subsidiary and/or the Issuer written notice of any revocation of its Distribution Licence or (y) any Distribution Subsidiary and/or the Issuer agreeing in writing with the Secretary of State for Trade and Industry (or any successor) to any revocation or surrender of its Distribution Licence or (z) any legislation (whether primary or subordinate) being enacted terminating or revoking the Distribution Licence of any Distribution Subsidiary and/or the Issuer, except in any such case in circumstances where a licence or licences on substantially no less favourable terms is or are granted to (1) the Issuer or a wholly-owned Subsidiary of the Issuer (the “Relevant Subsidiary”), and in the case of such Relevant Subsidiary at the time of such grant it either executes in favour of the Trustee an unconditional and irrevocable guarantee in respect of the Notes in such form as the Trustee may approve or becomes the primary obligor under the Notes in accordance with Condition 14; or
 
(B)  
any modification (other than a modification which is of a formal, minor or technical nature) being made to the terms and conditions of any Distribution Subsidiary’s or the Issuer’s Distribution Licence unless two directors of the Distribution Subsidiary or, as the case may be, of the Issuer, have certified to the Trustee that the modified terms and conditions are not materially less favourable to the business of the Distribution Subsidiary or, as the case may be, of the Issuer; or
 
(C)  
any legislation (whether primary or subordinate) is enacted which removes, qualifies or amends (other than an amendment which is of a formal, minor or technical nature) the functions and duties of the Secretary of State for Trade and Industry (or any successor) and/or the Gas and Electricity Markets Authority (or any successor) under section 3A of the Electricity Act 1989, as amended by the Utilities Act 2000 (as this may be amended from time to time), unless two directors of the Issuer have certified to the Trustee that such removal, qualification or amendment does not have a materially adverse effect (as defined in the Trust Deed) on the financial condition of the Issuer or any Distribution Subsidiary.
 
(vii)  
“Restructuring Period” means:
 
(A)  
if at the time a Restructuring Event occurs there are Rated Securities, the period of 90 days starting from and including the day on which that Restructuring Event occurs; or
 
(B)  
if at the time a Restructuring Event occurs there are no Rated Securities, the period starting from and including the day on which that Restructuring Event occurs and ending on the day 90 days following the later of (x) the date (if any) on which the Issuer shall seek to obtain a rating as contemplated by the definition of Negative Rating Event; (y) the expiry of the 14 days referred to in the definition of Negative Rating Event; and (z) the date on which a Negative Certification shall have been given to the Issuer in respect of that Restructuring Event.
 
(viii)  
A Rating Downgrade or a Negative Rating Event or a non-investment grade rating for the purpose of Condition 6.4(a)(i)(B) shall be deemed not to have occurred as a result or in respect of a Restructuring Event if the Rating Agency making the relevant reduction in rating or, where applicable, declining to assign a rating of at least investment grade as provided in this Condition 6.4 does not announce or publicly confirm or inform the Trustee in writing at its request that the reduction or, where applicable, declining to assign a rating of at least investment grade was the result, in whole or in part, of any event or circumstance comprised in or arising as a result of the applicable Restructuring Event.
 
The Trustee is under no obligation, responsibility or liability to ascertain whether a Restructuring Event, a Negative Rating Event or any event which could lead to the occurrence of or could constitute a Restructuring Event has occurred and, until it shall have express notice pursuant to the Trust Deed to the contrary, the Trustee may assume that no Restructuring Event, Negative Rating Event or other such event has occurred. In determining whether or not a Restructuring Event has occurred, the Trustee shall be entitled to rely solely and without liability on an opinion given in a certificate signed by two directors of the Issuer.
 
6.5  
Early Redemption for Index Reasons
 
In the event that Condition 8.3 applies and:
 
(i)  
a substitute Index (as defined in Condition 8) pursuant to Condition 8.3(ii)(A) fails to be determined for three consecutive months; and
 
(ii)  
the Indexation Adviser (as defined in Condition 8) has notified the Trustee pursuant to Condition 8.3(iii)(A)(x) that publication of the Index (as defined in Condition 8) has ceased; and
 
(iii)  
an Expert (as defined in Condition 8) has been appointed pursuant to Condition 8.3(iii)(B) but such Expert has failed to determine an amendment or substitution of the Index after at least 30 days of being required to do so pursuant to Condition 8.3(iii)(B),
 
then the Issuer may, on any Interest Payment Date after the circumstances described above have occurred and are continuing, having given not more than 60 nor less than 30 days’ notice to the Trustee and the Noteholders in accordance with Condition 12, redeem all, but not some only, of the Notes at the outstanding nominal amount thereof, together with interest accrued to but excluding the date fixed for redemption (each as adjusted for indexation in accordance with Condition 8), providing that the circumstances described above are continuing at the time that such notice is given.
 
6.6  
Purchases
 
The Issuer or any affiliate of the Issuer may at any time purchase Notes (provided that all unmatured Coupons appertaining to the Notes are purchased with the Notes) at any price in the open market or otherwise. Such Notes may be held, reissued, resold or, at the option of the Issuer, surrendered to any Paying Agent for cancellation.
 
6.7  
Cancellations
 
All Notes which are redeemed will forthwith be cancelled (together with all unmatured Coupons attached thereto or surrendered therewith at the time of redemption). All Notes so cancelled and any Notes purchased and cancelled pursuant to Condition 6.6 above (together with all unmatured Coupons cancelled therewith) shall be forwarded to the Principal Paying Agent and cannot be reissued or resold.
 
6.8  
Notices Final
 
Upon the expiry of any notice as is referred to in Condition 6.2, 6.3, 6.4 or 6.5 above the Issuer shall be bound to redeem the Notes to which the notice refers in accordance with the terms of such Condition (in the case of Condition 6.4 above, save as otherwise provided therein).
 
 
7  
TAXATION
 
7.1  
Payment without Withholding
 
All payments in respect of the Notes by or on behalf of the Issuer shall be made without withholding or reduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature (“Taxes”) imposed or levied by or on behalf of any Relevant Jurisdiction, unless the withholding or deduction of the Taxes is required by law. In that event, the Issuer will pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes or, as the case may be, Coupons in the absence of the withholding or deduction; except that no additional amounts shall be payable in relation to any payment in respect of any Note or Coupon:
 
(a)  
presented for payment by or on behalf of, a holder who is liable to the Taxes in respect of the Note or Coupon by reason of his having some connection with a Relevant Jurisdiction other than the mere holding of the Note or Coupon; or
 
(b)  
presented for payment by or on behalf of a holder who could lawfully avoid (but has not so avoided) such deduction or withholding by complying or procuring that any third party complies with any statutory requirements or by making or procuring that any third party makes a declaration of non-residence or other similar claim for exemption to any tax authority in the place where the relevant Note or Coupon is presented; or
 
(c)  
where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive; or
 
(d)  
presented for payment by or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the European Union; or
 
(e)  
presented for payment more than 30 days after the Relevant Date (as defined below) except to the extent that a holder would have been entitled to additional amounts on presenting the same for payment on the last day of the period of 30 days assuming, whether or not such is in fact the case, that day to have been a Presentation Date (as defined in Condition 5.5).
 
7.2  
Interpretation
 
In these Conditions:
 
“Relevant Date” means the date on which the payment first becomes due but, if the full amount of the money payable has not been received by the Principal Paying Agent or the Trustee on or before the due date, it means the date on which, the full amount of the money having been so received, notice to that effect has been duly given to the Noteholders by the Issuer in accordance with Condition 12; and
 
“Relevant Jurisdiction” means the United Kingdom or any political subdivision or any authority thereof or therein having power to tax.
 
7.3  
Additional Amounts
 
Any reference in these Conditions to any amounts in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable under this Condition or under any undertakings given in addition to, or in substitution for, this Condition pursuant to the Trust Deed.
 
 
8  
INDEXATION
 
8.1  
Definitions
 
In these Conditions:
 
“Base Index Figure” means, subject as provided in Condition 8.3 below, 200.100;
 
“business day” means, in this Condition 8, any day on which commercial banks and foreign exchange markets are open for business in London;
 
“Index” or “Index Figure” means, subject as provided in Condition 8.3 below, the United Kingdom Retail Prices Index (for all items) published by the United Kingdom Office for National Statistics (January 1987 = 100) (currently contained in the Monthly Digest of Statistics) or any subsequent index that, in the opinion of the Chancellor of the Exchequer after consultation with a body that the Chancellor of the Exchequer considers to be independent and to have a recognised expertise in the construction of price indices, continues the function of measuring changes in the level of UK retail prices. Further information regarding the United Kingdom Retail Prices Index (for all items) can be found at the following website: www.statistics.gov.uk/rpi.
 
Any reference to the “Index Figure applicable” to a particular date when a payment of interest or principal falls due shall, subject as provided in this Condition 8, be calculated in accordance with the following formula:
 
IFA = RPIm - 3 +         (Day of Calculation Date - 1)      x (RPIm - 2 - RPIm - 3)
                            (Days in month of Calculation Date)
 
and rounded to five decimal places (0.000005 being rounded upwards) and where:
 
“Calculation Date” means the date on which a payment of interest or principal falls due in accordance with these Conditions;
 
“IFA” means the Index Figure applicable;
 
“RPIm-3” means the Index Figure for the first day of the month that is three months prior to the month in which the payment falls due; and
 
“RPIm-2” means the Index Figure for the first day of the month that is two months prior to the month in which the payment falls due;
 
“Indexation Adviser” means a gilt edged market maker or other adviser selected and appointed by the Issuer and approved by the Trustee;
 
“Index Ratio” applicable to any date when a payment of interest or principal falls due means the Index Figure applicable to such date divided by the Base Index Figure and rounded to five decimal places (0.000005 being rounded upwards); and
 
“Reference Gilt” means the 1.25 per cent. Index-Linked Treasury Stock due 2055, or if such stock is not in existence, or in the opinion of the Expert (as defined below), it is no longer the most appropriate reference government stock for the Notes (by reason of illiquidity or otherwise), such other stock issued by or on behalf of HM Treasury as the Expert may consider to be the most appropriate reference government stock for the Notes.
 
At any time when under these Conditions it is necessary for an Indexation Adviser to perform any functions under these Conditions, the Issuer will appoint such Indexation Adviser on or before any such time.
 
8.2  
Application of the Index Ratio
 
Each payment of interest and principal of the Notes shall be the amount provided in or determined in accordance with these Conditions, multiplied by the Index Ratio applicable to the date on which such payment falls to be made and rounded to five decimal places (0.000005 being rounded upwards).
 
8.3  
Changes in circumstances affecting the Index
 
(i)  
If the Index is changed by the substitution of a new base therefor, then with effect from, and including, the calendar month in which such substitution takes effect:
 
(A)  
the definition of “Index” and “Index Figure” shall be deemed to refer to the new month in substitution for January 1987 (or, as the case may be, such other month as may have been substituted therefor under this sub-paragraph (i)); and
 
(B)  
the new Base Index Figure shall be the product of the then existing Base Index Figure and the Index Figure applicable immediately following such substitution, divided by the Index Figure applicable immediately prior to such substitution.
 
(ii)  
If in relation to a particular payment of interest or principal in respect of the Notes the Index relating to any month (the “relevant month”), which is required to be taken into account for the purposes of the determination of the Index Figure applicable to any such payment of interest or principal is not published on or before the tenth business day before the date (the “date for payment”) on which such payment is due otherwise than because the Index has ceased to be published, the Index relating to the relevant month shall be deemed to be:
 
(A)  
such substitute index figure (if any) as the Indexation Adviser shall agree to have been published by the Bank of England or the United Kingdom Debt Management Office for the purposes of indexation of payments on the Reference Gilt or, failing such publication, on any one or more issue of index-linked Treasury stock selected by the Indexation Adviser; or
 
(B)  
if no such determination is made by the Indexation Adviser within seven days, the Index last published (or, if later, the substitute index figure last determined pursuant to sub-paragraph (A) above before the date for payment).
 
Where the provisions of this sub-paragraph (ii) apply, the determination of the Indexation Adviser as to the Index Figure applicable to the relevant date for payment falls shall be conclusive and binding. If, an Index Figure having been applied pursuant to sub-paragraph (B) above, the Index Figure relating to the relevant month is subsequently published while a Note is still outstanding no subsequent adjustment to amounts paid will be made.
 
(iii)    
 
(A) If:
 
(x) the Index has ceased to be published; or
 
(y) any change is made to the coverage or the basic calculation of the Index,
 
the Issuer will appoint an Indexation Adviser (unless one has already been appointed pursuant to these Conditions) and the Issuer and the Indexation Adviser together shall (in the case of (y) above only if the change would, in the opinion of the Indexation Adviser, be materially prejudicial to the interests of the Issuer or the Noteholders) seek to agree for the purpose of the Notes one or more adjustments to the Index or a substitute index (with or without adjustments) with the intention that the same should leave the Issuer and the Noteholders in no better and no worse position than they would have been had the Index not ceased to be published or the relevant fundamental change not been made.
 
(B)  If the Issuer and the Indexation Adviser fail to reach such agreement within 20 business days following the giving of such notice by the Indexation Adviser, a bank or other person in London shall be selected by the Issuer and approved by the Trustee and appointed by the Issuer, or, failing agreement on such selection within 20 business days following the expiry of the 20 business day period referred to above, selected by the Trustee only, in its sole discretion and without further liability to any person for making such selection, and appointed by the Issuer (in each case, such bank or other person so appointed being referred to as the “Expert”), to determine for the purpose of the Notes one or more adjustments to the Index or a substitute index (with or without adjustments) with the intention that the same would leave the Issuer and the Noteholders in no better and no worse position than they would have been had the Index not ceased to be published or the relevant fundamental change not been made. Any Expert so appointed shall act as an expert and not as an arbitrator and all fees, costs and expenses of the Expert, the Issuer and the Trustee in connection with such appointment shall be borne by the Issuer.
 
(C)  If the Index shall be adjusted or replaced by a substitute index as agreed by the Issuer and the Index Adviser or as determined by the Expert pursuant to the foregoing paragraphs, as the case may be, references in these Conditions to the Index and to any Index Figure shall be deemed amended in such manner as the Index Adviser and the Issuer may agree, or as the Expert may determine, to give effect to such adjustment or replacement. Such amendments shall be effective from the date of such agreement or determination and binding upon the Issuer, the Trustee and the Noteholders and the Issuer shall give notice to the Noteholders in accordance with Condition 12 of such amendments as promptly as practicable following such agreement or determination.
 
8.4  
Appointment of Indexation Adviser and Expert
 
At any time when under these Conditions it is necessary to have, or the Trustee requests, the appointment of an Indexation Adviser or Expert, the Issuer shall take such steps as are necessary to appoint an Indexation Adviser or, as the case may be, Expert, in either case approved by the Trustee and at the expense of the Issuer.
 
 
9  
EVENTS OF DEFAULT
 
9.1  
Events of Default
 
The Trustee at its discretion may, and if so requested in writing by the holders of at least one-quarter in nominal amount of the Notes then outstanding or if so directed by an Extraordinary Resolution shall (subject in each case to being indemnified and/or secured to its satisfaction), (but in the case of the happening of any of the events described in paragraphs (b), (c) and (e) to (g) inclusive below, only if the Trustee shall have certified in writing to the Issuer that such event is, in its opinion, materially prejudicial to the interests of the Noteholders), give notice in writing to the Issuer that each Note is, and each Note shall thereupon immediately become, due and repayable at its outstanding nominal amount together with accrued interest (each as adjusted for indexation in accordance with Condition 8) as provided in the Trust Deed if any of the following events (each an “Event of Default”) shall have occurred:
 
(a)  
Non-Payment
 
if default is made in the payment of any principal or interest due in respect of the Notes or any of them and the default continues for a period of 14 days in the case of principal and 21 days in the case of interest or, where relevant, the Issuer, having become obliged to redeem, purchase or procure the purchase of (as the case may be) any Notes pursuant to Condition 6.4 fails to do so within a period of 14 days of having become so obliged; or
 
(b)  
Breach of Other Obligations
 
if the Issuer fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Notes or the Trust Deed and (except where the Trustee shall have certified to the Issuer in writing that it considers such failure to be incapable of remedy in which case no such notice or continuation as is hereinafter mentioned will be required) the failure continues for the period of 60 days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Issuer of notice requiring the same to be remedied; or
 
(c)  
Cross-Default
 
if (i) any other indebtedness for borrowed money of the Issuer or any Principal Subsidiary becomes due and repayable prior to its stated maturity by reason of an event of default or (ii) any such indebtedness for borrowed money is not paid when due or, as the case may be, within any applicable grace period (as originally provided) or (iii) the Issuer or any Principal Subsidiary fails to pay when due (or, as the case may be, within any originally applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any indebtedness for borrowed money of any person or (iv) any security given by the Issuer or any Principal Subsidiary for any indebtedness for borrowed money of any person or any guarantee or indemnity of indebtedness for borrowed money of any person becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant indebtedness for borrowed money or any such guarantee or indemnity as aforesaid shall be due and payable, provided that the aggregate amount of the relevant indebtedness for borrowed money in respect of which any one or more of the events mentioned above in this sub-paragraph (c) has or have occurred equals or exceeds whichever is the greater of £20,000,000 or its equivalent in other currencies (on the basis of the middle spot rate for the relevant currency against the pound sterling as quoted by any leading bank on the day on which this paragraph applies) and two per cent. of the Capital and Reserves, and for the purposes of this sub-paragraph (c), “indebtedness for borrowed money” shall exclude Non-recourse Indebtedness; or
 
(d)  
Winding-up
 
if any order is made by any competent court or resolution passed for the winding up or dissolution of the Issuer, save for the purposes of and followed by amalgamation, merger, consolidation, reorganisation, reconstruction or other similar arrangement on terms previously approved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders; or
 
(e)  
Winding-up of Principal Subsidiary
 
if any order is made by any competent court or any resolution is passed for the winding up or dissolution of a Principal Subsidiary, save for the purposes of and followed by amalgamation, merger, consolidation, reorganisation, reconstruction or other similar arrangement (i) not involving or arising out of the insolvency of such Principal Subsidiary and under which all the surplus assets of such Principal Subsidiary are transferred to the Issuer or any of its Subsidiaries (other than an Excluded Subsidiary) or (ii) the terms of which have previously been approved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders; or
 
(f)  
Ceasing to Carry on the Business
 
if the Issuer or any Principal Subsidiary shall cease to carry on the whole or, in the opinion of the Trustee, substantially the whole of its business, save for the purposes of amalgamation, merger, consolidation, reorganisation, reconstruction or other similar arrangement (A) (x) not involving or arising out of the insolvency of the Issuer or such Principal Subsidiary and (y) under which all or, in the opinion of the Trustee, substantially all of its assets are transferred to another member of the Group (other than an Excluded Subsidiary) or to a transferee which is, or immediately upon such transfer becomes, a Principal Subsidiary or (B) under which all or, in the opinion of the Trustee, substantially all of its assets are transferred to a third party or parties (whether associates or not) for full consideration by the Issuer or a Principal Subsidiary on an arm’s length basis or (C) the terms of which have previously been approved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders, provided that (in the case of (A) or (B) above) if the Issuer transfers its Distribution Licence, the transferee has, at or around the time of transfer, either executed in favour of the Trustee an unconditional and irrevocable guarantee in respect of the Notes in such form as the Trustee may require or become a primary obligor under the Notes in accordance with Condition 13; or
 
(g)  
Insolvency
 
if the Issuer or any Principal Subsidiary shall suspend or shall threaten to suspend payment of its debts generally or shall be declared or adjudicated by a competent court to be unable, or shall admit in writing its inability, to pay its debts (within the meaning of section 123(1) or (2) of the Insolvency Act 1986) as they fall due, or shall be adjudicated or found insolvent by a competent court or shall enter into any composition or other similar arrangement with its creditors under section 1 of the Insolvency Act 1986, as amended; or
 
(h)  
Administration and Enforcement Proceedings
 
if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Issuer or any Principal Subsidiary or in relation to the whole or, in the opinion of the Trustee, a substantial part of the undertaking or assets of any of them or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or, in the opinion of the Trustee, a substantial part of the assets of any of them and in any of the foregoing cases it or he shall not be paid out or discharged within 90 days (or such longer period as the Trustee may in its absolute discretion permit); or
 
For the purposes of sub-paragraph (g) above, section 123(1)(a) of the Insolvency Act 1986 shall have effect as if for “£750” there was substituted “£250,000” or such higher figure as the Office of Gas and Electricity Markets (or any successor) may from time to time determine by notice in writing to the Secretary of State for Trade and Industry and the Issuer.
 
Neither the Issuer nor any Principal Subsidiary shall be deemed to be unable to pay its debts for the purposes of sub-paragraph (g) above if any such demand as is mentioned in section 123(1)(a) of the Insolvency Act 1986 is being contested in good faith by the Issuer or the relevant Principal Subsidiary with recourse to all appropriate measures and procedures or if any such demand is satisfied before the expiration of such period (if any) as may be stated in any notice given by the Trustee under this Condition 9.
 
Definitions
 
For the purposes of these Conditions:
 
“Excluded Subsidiary” means any Subsidiary of the Issuer (other than a Relevant Subsidiary):
 
(i)  
which is a single purpose company whose principal assets and business are constituted by the ownership, acquisition, development and/or operation of an asset;
 
(ii)  
none of whose indebtedness for borrowed money in respect of the financing of such ownership, acquisition, development and/or operation of an asset is subject to any recourse whatsoever to any member of the Group (other than another Excluded Subsidiary) in respect of the repayment thereof, except as expressly referred to in sub-paragraph (ii)(C) of the definition of Non-recourse Indebtedness below; and
 
(iii)  
which has been designated as such by the Issuer by written notice to the Trustee, provided that the Issuer may give written notice to the Trustee at any time that any Excluded Subsidiary is no longer an Excluded Subsidiary, whereupon it shall cease to be an Excluded Subsidiary;
 
“indebtedness for borrowed money” means any present or future indebtedness (whether being principal, premium, interest or other amounts) for or in respect of (i) money borrowed, (ii) liabilities under or in respect of any acceptance or acceptance credit, or (iii) any notes, bonds, debentures, debenture stock, loan stock or other securities offered, issued or distributed whether by way of public offer, private placing, acquisition consideration or otherwise and whether issued for cash or in whole or in part for a consideration other than cash;
 
“Non-recourse Indebtedness” means any indebtedness for borrowed money:
 
(i)  
which is incurred by an Excluded Subsidiary; or
 
(ii)  
in respect of which the person or persons to whom any such indebtedness for borrowed money is or may be owed by the relevant borrower (whether or not a member of the Group) has or have no recourse whatsoever to any member of the Group (other than an Excluded Subsidiary) for the repayment thereof other than:
 
(A) recourse to such borrower for amounts limited to the cash flow or net cash flow (other than historic cash flow or historic net cash flow) from any specific asset or assets over or in respect of which security has been granted in respect of such indebtedness for borrowed money; and/or
 
(B) recourse to such borrower for the purpose only of enabling amounts to be claimed in respect of such indebtedness for borrowed money in an enforcement of any encumbrance given by such borrower over any such asset or assets or the income, cash flow or other proceeds deriving therefrom (or given by any shareholder or the like in the borrower over its shares or the like in the capital of the borrower) to secure such indebtedness for borrowed money, provided that (aa) the extent of such recourse to such borrower is limited solely to the amount of any recoveries made on any such enforcement, and (bb) such person or persons is/are not entitled, by virtue of any right or claim arising out of or in connection with such indebtedness for borrowed money, to commence proceedings for the winding up or dissolution of the borrower or to appoint or procure the appointment of any receiver, trustee or similar person or officer in respect of the borrower or any of its assets (save for the assets the subject of such encumbrance); and/or
 
(C) recourse to such borrower generally, or directly or indirectly to a member of the Group, under any form of assurance, undertaking or support, which recourse is limited to a claim for damages (other than liquidated damages and damages required to be calculated in a specified way) for breach of an obligation (not being a payment obligation or an obligation to procure payment by another or an indemnity in respect thereof or any obligation to comply or to procure compliance by another with any financial ratios or other tests of financial condition) by the person against whom such recourse is available.
 
“Principal Subsidiary” at any time shall mean each Subsidiary of the Issuer (in each case not being an Excluded Subsidiary or any other Subsidiary of the Issuer, as the case may be, whose only indebtedness for borrowed money is Non-recourse Indebtedness):
 
(i)  
whose (a) profits on ordinary activities before tax or (b) gross assets, in each case attributable to the Issuer represent 20 per cent. or more of the consolidated profits on ordinary activities before tax of the Group or, as the case may be, consolidated gross assets of the Group, in each case as calculated by reference to the then latest audited financial statements of such Subsidiary (consolidated in the case of a company which itself has Subsidiaries) and the then latest audited consolidated financial statements of the Group provided that in the case of a Subsidiary acquired after the end of the financial period to which the then latest audited consolidated financial statements of the Group relate, the reference to the then latest audited consolidated financial statements of the Group for the purposes of the calculation above shall, until consolidated financial statements for the financial period in which the acquisition is made have been prepared and audited as aforesaid, be deemed to be a reference to such first-mentioned financial statements as if such Subsidiary had been shown in such financial statements by reference to its then latest relevant audited financial statements, adjusted as deemed appropriate by the Auditors; or
 
(ii)  
to which is transferred all or substantially all of the business, undertaking and assets of a Subsidiary of the Issuer which immediately prior to such transfer is a Principal Subsidiary, whereupon the transferor Subsidiary shall immediately cease to be a Principal Subsidiary and the transferee Subsidiary shall cease to be a Principal Subsidiary under the provisions of this sub-paragraph (ii), upon publication of its next audited financial statements (but without prejudice to the provisions of sub-paragraph (i) above) but so that such transferor Subsidiary or such transferee Subsidiary may be a Principal Subsidiary of the Issuer on or at any time after the date on which such audited financial statements have been published by virtue of the provisions of sub-paragraph (i) above or before, on or at any time after such date by virtue of the provisions of this sub-paragraph (ii).
 
A certificate by two directors of the Issuer that, in their opinion, a Subsidiary of the Issuer is or is not or was or was not at any particular time or throughout any specified period a Principal Subsidiary may be relied upon by the Trustee without further enquiry or evidence and the Trustee will not be responsible or liable for any loss occasioned by acting on such a certificate and, if relied upon by the Trustee, shall, in the absence of manifest error, be conclusive and binding on all parties, whether or not addressed to each such party.
 
 
10  
ENFORCEMENT
 
10.1  
Enforcement by the Trustee
 
The Trustee may at any time, at its discretion and without notice, take such proceedings against the Issuer as it may think fit to enforce the provisions of the Trust Deed, the Notes and the Coupons, but it shall not be bound to take any such proceedings or any other action in relation to the Trust Deed, the Notes or the Coupons unless (a) it has been so directed by an Extraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one quarter in outstanding nominal amount of the Notes then outstanding and (b) it has been indemnified and/or secured to its satisfaction.
 
10.2  
Enforcement by the Noteholders
 
No Noteholder or Couponholder shall be entitled to proceed directly against the Issuer unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and the failure shall be continuing.
 
 
11  
REPLACEMENT OF NOTES AND COUPONS
 
Should any Note or Coupon be lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified office of the Principal Paying Agent upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacements will be issued.
 
 
12  
NOTICES
 
12.1  
Notices to the Noteholders
 
All notices to the Noteholders will be valid if published in a leading English language daily newspaper published in London or such other English language daily newspaper with general circulation in Europe as the Trustee may approve. It is expected that publication will normally be made in the Financial Times. The Issuer shall also ensure that notices are duly published in a manner which complies with the rules and regulations of any stock exchange or other relevant authority on which the Notes are for the time being listed or traded. Any such notice will be deemed to have been given on the date of the first publication or, where required to be published in more than one newspaper, on the date of the first publication in all required newspapers. If publication as provided above is not practicable, notice will be given in such other manner, and shall be deemed to have been given on such date, as the Trustee may approve. Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Noteholders in accordance with this paragraph.
 
12.2  
Notices from the Noteholders
 
Notices to be given by any Noteholder shall be in writing and given by lodging the same, together with the relative Note or Notes, with the Principal Paying Agent or, if the Notes are held in a clearing system, may be given through the clearing system in accordance with its standard rules and procedures.
 
 
13  
SUBSTITUTION
 
The Trustee may, without the consent of the Noteholders or Couponholders, agree with the Issuer to the substitution of certain other entities (other than an Excluded Subsidiary) in place of the Issuer (or of any previous substitute under this Condition) as the principal debtor under the Notes, the Coupons and the Trust Deed, subject to:
 
(a)  
the Notes being unconditionally and irrevocably guaranteed by the Issuer;
 
(b)  
the Trustee being satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution; and
 
(c)  
certain other conditions set out in the Trust Deed being complied with.
 
 
14  
MEETINGS OF NOTEHOLDERS, MODIFICATION, WAIVER, AUTHORISATION AND DETERMINATION
 
14.1  
Meetings of Noteholders
 
The Trust Deed contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the modification or abrogation by Extraordinary Resolution of any of these Conditions or any of the provisions of the Trust Deed. The quorum at any meeting for passing an Extraordinary Resolution will be one or more persons present holding or representing more than 50 per cent. in outstanding nominal amount of the Notes for the time being outstanding, or at any adjourned such meeting one or more persons present whatever the outstanding nominal amount of the Notes held or represented by him or them, except that, at any meeting the business of which includes the modification or abrogation of certain of the provisions of these Conditions and certain of the provisions of the Trust Deed, the necessary quorum for passing an Extraordinary Resolution will be one or more persons present holding or representing not less than three-quarters, or at any adjourned such meeting not less than one-quarter, of the outstanding nominal amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Noteholders will be binding on all Noteholders, whether or not they are present at the meeting, and on all Couponholders.
 
14.2  
Modification, Waiver, Authorisation and Determination
 
The Trustee may agree, without the consent of the Noteholders or Couponholders, to any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of these Conditions or any of the provisions of the Trust Deed, or determine, without any such consent as aforesaid, that any Event of Default or Potential Event of Default (as defined in the Trust Deed) shall not be treated as such (provided that, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of the Noteholders) or may agree, without any such consent as aforesaid, to any modification which, in its opinion, is of a formal, minor or technical nature or to correct a manifest error.
 
14.3  
Trustee to have Regard to Interests of Noteholders as a Class
 
In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including, without limitation, any modification, waiver, authorisation, determination or substitution), the Trustee shall have regard to the general interests of the Noteholders as a class but shall not have regard to any interests arising from circumstances particular to individual Noteholders or Couponholders (whatever their number) and, in particular but without limitation, shall not have regard to the consequences of any such exercise for individual Noteholders or Couponholders (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political sub-division thereof and the Trustee shall not be entitled to require, nor shall any Noteholder or Couponholder be entitled to claim, from the Issuer, the Trustee or any other person any indemnification or payment in respect of any tax consequence of any such exercise upon individual Noteholders or Couponholders except to the extent already provided for in Condition 7 and/or any undertaking given in addition to, or in substitution for, Condition 7 pursuant to the Trust Deed.
 
14.4  
Notification to the Noteholders
 
Any modification, abrogation, waiver, authorisation, determination or substitution shall be binding on the Noteholders and the Couponholders and, unless the Trustee agrees otherwise, any modification or substitution shall be notified by the Issuer to the Noteholders as soon as practicable thereafter in accordance with Condition 12.
 
 
15  
INDEMNIFICATION OF THE TRUSTEE AND ITS CONTRACTING WITH THE ISSUER
 
15.1  
Indemnification of the Trustee
 
The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking action unless indemnified and/or secured to its satisfaction.
 
15.2  
Trustee Contracting with the Issuer
 
The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (a) to enter into business transactions with the Issuer and/or any of its Subsidiaries and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Issuer and/or any of its Subsidiaries, (b) to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such transactions or, as case may be, any such trusteeship without regard to the interests of, or consequences for, the Noteholders or Couponholders, and (c) to retain and not be liable to account for any profit made or any other amount or benefit received thereby or in connection therewith.
 
 
16  
FURTHER ISSUES
 
The Issuer is at liberty from time to time without the consent of the Noteholders or Couponholders to create and issue further notes or bonds (whether in bearer or registered form) either (a) ranking pari passu in all respects (or in all respects save for the first payment of interest thereon) and so that the same shall be consolidated and form a single series with the outstanding notes or bonds of any series (including the Notes) constituted by the Trust Deed or any supplemental deed or (b) upon such terms as to ranking, interest, conversion, redemption and otherwise as the Issuer may determine at the time of the issue. Any further notes or bonds which are to form a single series with the outstanding notes or bonds of any series (including the Notes) constituted by the Trust Deed or any supplemental deed shall, and any other further notes or bonds may (with the consent of the Trustee), be constituted by a deed supplemental to the Trust Deed. The Trust Deed contains provisions for convening a single meeting of the Noteholders and the holders of notes or bonds of other series in certain circumstances where the Trustee so decides.
 
 
17  
PRESCRIPTION
 
Notes and Coupons (which for this purpose shall not include Talons) will become void unless presented for payment within periods of 10 years (in the case of principal) and five years (in the case of interest) from the Relevant Date in respect of the Notes or, as the case may be, the Coupons, subject to the provisions of Condition 5. There shall not be included in any Coupon sheet issued upon exchange of a Talon any Coupon which would be void upon issue under this paragraph or Condition 5.
 
 
18  
GOVERNING LAW
 
The Trust Deed, the Notes and the Coupons are governed by, and will be construed in accordance with, English law.
 
 
19  
RIGHTS OF THIRD PARTIES
 
No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Note, but this does not affect any right or remedy of any person which exists or is available apart from that Act.
 



 
PRINCIPAL PAYING AGENT
HSBC Bank plc
Level 24
8 Canada Square
London E14 5HQ
 

 

 

Form of Coupon
 
On the front:
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
£120,000,000 per cent. Index-Linked Notes due 2056
 
Coupon for the amount due in accordance with the Conditions of the Notes on the Interest Payment Date falling in [June]/
[December] due on 20[07/08/09/10/11/12/13/14/15/16/17/18/19/20/21/22/23/24/25/26/27/28/29/30/31/32/33/34/35/36/
37/38/39/40/41/42/43/44/45/46/47/48/49/50/51/52/53/54/55/56].
 
This Coupon is payable to bearer (subject to the Conditions endorsed on the Note to which this Coupon relates, which shall be binding upon the holder of this Coupon whether or not it is for the time being attached to such Note) at the specified offices of the Paying Agents set out on the reverse hereof (or any further or other Paying Agents or specified offices duly appointed or nominated and notified to the Noteholders).
 
If the Note to which this Coupon relates shall have become due and payable before the maturity date of this Coupon, this Coupon shall become void and no payment shall be made in respect of it.
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 
 
 
[Director]
 
Cp No.
 
Denomination
 
ISIN
 
Series
 
Certif. No.
 
 
£50,000
 
XS0276994216
 
    

 
On the back:
 
PRINCIPAL PAYING AGENT
 
HSBC Bank plc
Level 24
8 Canada Square
London E14 5HQ
 
Form of Talon
 

 
On the front:
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
£120,000,000 1.541 per cent. Index-Linked Notes due 2056
 
Note in the principal amount of £50,000
 
Talon for further Coupons.
 
After all the Coupons relating to the Note to which this Talon relates have matured, further Coupons (including if appropriate a Talon for further Coupons) shall be issued at the specified offices of the Paying Agents set out on the reverse hereof (or any further or other Paying Agents or specified offices duly appointed or nominated and notified to the Noteholders).
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 

 

 
[Director]
 
Cp No.
 
Denomination
 
ISIN
 
Series
 
Certif. No.
 
 
£50,000
 
XS0276994216
 
    

 
On the back:
 
PRINCIPAL PAYING AGENT
 
HSBC Bank plc
Level 24
8 Canada Square
London E14 5HQ
 

Schedule 2
 
Part 1
 
Form of Temporary Global Note
 
ISIN: XS0276994216
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
(Incorporated with limited liability in England and Wales)
£120,000,000
1.541 per cent. Index-Linked Notes due 2056
 
Temporary Global Note
 
This is to certify that the bearer is entitled on 1 December 2056, or on such earlier date as the Notes designated above (the “Notes”) may be redeemed or repaid to such sum as is determined to be payable on such redemption or repayment in accordance with the terms and conditions (the “Conditions”) of the Notes set out in Schedule 1 to the trust deed dated 1 December 2006 (the “Trust Deed”) between Western Power Distribution (South West) plc (the “Issuer”) and HSBC Trustee (C.I.) Limited as trustee (the “Trustee”)) upon presentation and surrender of this Temporary Global Note and to interest at the rate of 1.541 per cent. per annum on the outstanding nominal amount of the Notes in arrear on 1 June and 1 December in each year, adjusted for indexation as provided in, and otherwise subject to and in accordance with, the Conditions.
 
On or after 10 January 2007 (the “Exchange Date”) this Temporary Global Note may be exchanged in whole or part (free of charge to the holder) by its presentation and, on exchange in full, surrender to or to the order of the Principal Paying Agent for interests in a Global Note (the “Global Note”) in bearer form in an aggregate nominal amount equal to the nominal amount of this Temporary Global Note submitted for exchange with respect to which there shall be presented to the Principal Paying Agent a certificate dated no earlier than the Exchange Date from Euroclear Bank S.A./N.V. (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) substantially to the following effect:
 
“CERTIFICATE
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
£120,000,000
1.541 per cent. Index-Linked Notes due 2056
Common Code 027699421 ISIN XS0276994216 (the “Notes”)
 
This is to certify that, based solely on certificates we have received in writing, by tested telex or by electronic transmission from member organisations appearing in our records as persons being entitled to a portion of the nominal amount set out below (our“Member Organisations”) substantially to the effect set out in the temporary global Note in respect of the Notes, as of the date hereof, £[•] nominal amount of the Notes (1) is owned by persons that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States federal income taxation regardless of its source (“United States persons”), (2) is owned by United States persons that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(iv) (“financial institutions”)) purchasing for their own account or for resale, or (b) acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution has agreed, on its own behalf or through its agent, that we may advise the Issuer or the Issuer’s agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (3) is owned by United States or foreign financial institutions for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7), and to the further effect that United States or foreign financial institutions described in clause (3) above (whether or not also described in clause (1) or (2)) have certified that they have not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.
 
We further certify (1) that we are not making available herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) any portion of such temporary global Note excepted in such certificates and (2) that as of the date hereof we have not received any notification from any of our Member Organisations to the effect that the statements made by such Member Organisation with respect to any portion of the part submitted herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) are no longer true and cannot be relied upon as of the date hereof.
 
We understand that this certificate is required in connection with certain tax laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorise you to produce this certificate to any interested party in such proceedings.
 
Yours faithfully
 
[EUROCLEAR BANK S.A./N.V.] or [CLEARSTREAM BANKING, SOCIÉTÉ ANONYME]
 
By:
 
Dated:
 
  

 
Any person appearing in the records of Euroclear or Clearstream, Luxembourg as entitled to an interest in this Temporary Global Note may require the exchange of an appropriate part of this Temporary Global Note for an equivalent interest in the Global Note by delivering or causing to be delivered to Euroclear or Clearstream, Luxembourg a certificate dated not more than 15 days before the Exchange Date in substantially the following form (copies of which will be available at the office of Euroclear in Brussels and Clearstream, Luxembourg in Luxembourg):
 
“CERTIFICATE
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
£120,000,000
1.541 per cent. Index-Linked Notes due 2056
Common Code 027699421 ISIN XS0276994216 (the “Notes”)
 
To:
 
Euroclear Bank S.A./N.V. or Clearstream Banking, société anonyme
 
This is to certify that as of the date hereof, and except as set out below, the Notes held by you for our account (1) are owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States federal income taxation regardless of its source (“United States person(s)”), (2) are owned by United States person(s) that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(iv) (“financial institutions”)) purchasing for their own account or for resale, or (b) acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution hereby agrees, on its own behalf or through its agent, that you may advise the Issuer or the Issuer’s agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (3) are owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and in addition if the owner of the Notes is a United States or foreign financial institution described in clause (3) above (whether or not also described in clause (1) or (2)) this is to further certify that such financial institution has not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.
 
As used herein, “United States” means the United States of America (including the States and the District of Columbia) and its “possessions” include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands.
 
We undertake to advise you promptly by tested telex on or prior to that date on which you intend to submit your certificate relating to the Notes held by you for our account in accordance with your documented procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certificate applies as of such date.
 
This certificate excepts and does not relate to £[•] nominal amount of such interest in the Notes in respect of which we are not able to certify and as to which we understand exchange for an equivalent interest in the Global Note (or, if relevant, exercise of any rights or collection of any interest) cannot be made until we do so certify.
 
We understand that this certificate is required in connection with certain tax laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorise you to produce this certificate to any interested party in such proceeding.
 
Dated:
 
By:
 

 
[Name of person giving certificate]
As, or as agent for the beneficial owner(s) of the above Notes to which this certificate relates.”
 

 
Upon any exchange of a part of this Temporary Global Note for an equivalent interest in the Global Note, the portion of the nominal amount hereof so exchanged shall be endorsed by or on behalf of the Principal Paying Agent in the Schedule hereto, whereupon the nominal amount hereof shall be reduced for all purposes by the amount so exchanged and endorsed.
 
The Global Note will be exchangeable in accordance with its terms for definitive Notes (the “Definitive Notes”) in bearer form with Coupons attached.
 
This Temporary Global Note is subject to the Conditions and the Trust Deed and until the whole of this Temporary Global Note shall have been exchanged for equivalent interests in the Global Note its holder shall be entitled to the same benefits as if he were the holder of the Global Note for interests in which it may be exchanged (or the relevant part of it as the case may be) except that (unless exchange of this Temporary Global Note for the relevant interest in the Global Note shall be improperly withheld or refused by or on behalf of the Issuer) no person shall be entitled to receive any payment on this Temporary Global Note.
 
This Temporary Global Note shall not be valid or become obligatory for any purpose until authenticated by or on behalf of the Principal Paying Agent.
 
This Temporary Global Note shall be governed by and construed in accordance with English law.
 
In witness whereof the Issuer has caused this Temporary Global Note to be signed on its behalf.
 
Dated 1 December 2006
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 

 

 
This Temporary Global Note is authenticated by or on behalf of the Principal Paying Agent.
 
By:
 

 

 
Authorised Signatory
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 


Schedule of Exchanges for Interests in the Global Note
 
The following exchanges of an interest in this Temporary Global Note for an interest in the Global Note have been made:
 

 
Date of Exchange
 
Amount of decrease in nominal amount of this Temporary Global Note
Nominal amount of this Temporary Global Note following such decrease
Notation made by or on behalf of the Principal Paying Agent

 


Schedule 2
 
Part 2
 
Form of Global Note
 
ISIN: XS0276994216
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
(Incorporated with limited liability in England and Wales)
£120,000,000
1.541 per cent. Index-Linked Notes due 2056
 
Global Note
 
This is to certify that the bearer is entitled on 1 December 2056, or on such earlier date as the Notes designated above (the “Notes”) may be redeemed or repaid to such sum as is determined to be payable on such redemption or repayment in accordance with the terms and conditions (the “Conditions”) of the Notes set out in Schedule 1 to the trust deed dated 1 December 2006 (the “Trust Deed”) between Western Power Distribution (South West) plc (the “Issuer”) and HSBC Trustee (C.I.) Limited as trustee (the “Trustee”)) upon presentation and surrender of this Global Note and to interest at the rate of 1.541 per cent. per annum on the outstanding nominal amount of the Notes in arrear on 1 June and 1 December in each year, adjusted for indexation as provided in, and otherwise subject to and in accordance with, the Conditions.
 
The aggregate nominal amount from time to time of this Global Note shall be that amount not exceeding £120,000,000 as shall be shown by the latest entry in the fourth column of Schedule A hereto, which shall be completed by or on behalf of the Principal Paying Agent upon exchange of the whole or a part of the Temporary Global Note initially representing the Notes for a corresponding interest herein or upon the redemption or purchase and cancellation of Notes represented hereby or exchanged for Definitive Notes as described below.
 
This Global Note is exchangeable in whole but not in part (free of charge to the holder) for the Definitive Notes described below (1) upon the happening of an Event of Default (as defined in Condition 9) by such holder giving notice to the Trustee or the Principal Paying Agent, or (2) if this Global Note is held on behalf of Euroclear or Clearstream, Luxembourg or the Alternative Clearing System (each as defined under “Notices” below) and any such clearing system is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so by such holder giving notice to the Trustee or the Principal Paying Agent or (3) if the Issuer would suffer a material disadvantage in respect of the Notes as a result of a change in the laws or regulations (taxation or otherwise) of any jurisdiction referred to in Condition 7 which would not be suffered were the Notes in definitive form and a certificate to such effect signed by two directors of the Issuer is delivered to the Trustee, by the Issuer giving notice to the Trustee, Principal Paying Agent and the Noteholders, of its intention to exchange this Global Note for Definitive Notes on or after the Exchange Date specified in the notice.
 
On or after the Exchange Date the holder of this Global Note may surrender this Global Note to or to the order of the Principal Paying Agent. In exchange for this Global Note, the Issuer shall deliver, or procure the delivery of, an equal aggregate nominal amount of duly executed and authenticated Definitive Notes having attached to them all Coupons in respect of interest which has not already been paid on this Global Note.
 
“Exchange Date” means a day falling not less than 60 days after that on which the notice requiring exchange is given and on which banks are open for business in the city in which the specified office of the Principal Paying Agent is located and except in the case of exchange pursuant to (2) above in the cities in which Euroclear and Clearstream, Luxembourg or, if relevant, the Alternative Clearing System (each as defined under “Notices” below) are located.
 
Except as otherwise described herein, this Global Note is subject to the Conditions and the Trust Deed and, until it is exchanged for Definitive Notes, its holder shall be entitled to the same benefits as if it were the holder of the Definitive Notes for which it may be exchanged and as if such Definitive Notes had been issued on the date of this Global Note.
 
The Conditions shall be modified with respect to Notes represented by this Global Note by the following provisions:
 
Payments
 
Principal, any premium and interest in respect of this Global Note shall be paid to its holder against presentation and (if no further payment falls to be made on it) surrender of it to or to the order of the Principal Paying Agent in respect of the Notes (or to or to the order of such other Paying Agent as shall have been notified to the Noteholders for this purpose) which shall endorse such payment or cause such payment to be endorsed in the appropriate Schedule hereto (such endorsement being prima facie evidence that the payment in question has been made). References in the Conditions to Coupons and Couponholders shall be construed accordingly. No person shall however be entitled to receive any payment on this Global Note falling due after the Exchange Date, unless exchange of this Global Note for Definitive Notes is improperly withheld or refused by or on behalf of the Issuer. Condition 5.7(c) and Condition 7.1(d) will apply to the Definitive Notes only.
 
Notices
 
So long as this Global Note is held on behalf of Euroclear Bank S.A./N.V. (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) or such other clearing system as shall have been approved by the Trustee (the “Alternative Clearing System”), notices required to be given to Noteholders may be given by their being delivered to Euroclear and Clearstream, Luxembourg or, as the case may be, the Alternative Clearing System, rather than by publication as required by the Conditions and any such notice shall be deemed to have been given to the Noteholders on the day after the day on which such notice is delivered to Euroclear and Clearstream, Luxembourg, or, as the case may be, the Alternative Clearing System.
 
Prescription
 
Claims in respect of principal, any premium and interest in respect of this Global Note will become void unless it is presented for payment within a period of 10 years (in the case of principal and premium) and five years (in the case of interest) from the appropriate Relevant Date (as defined in Condition 7).
 
Meetings
 
For the purposes of any meeting of Noteholders, the holder hereof shall (unless this Global Note represents only one Note) be treated as two persons for the purposes of any quorum requirements of a meeting of Noteholders and, at any such meeting, as having one vote in respect of each £50,000 nominal amount of Notes for which this Global Note may be exchanged.
 
Purchase and Cancellation
 
Cancellation of any Note represented by this Global Note which is required by the Conditions to be cancelled will be effected by reduction in the nominal amount of this Global Note on its presentation to or to the order of the Principal Paying Agent for notation in Schedule A. Notes may only be purchased by the Issuer or any of its respective Subsidiaries if (where they should be cancelled in accordance with the Conditions) they are purchased together with the right to receive interest therein.
 
Trustee’s Powers
 
In considering the interests of Noteholders in circumstances where this Global Note is held on behalf of any one or more of Euroclear, Clearstream, Luxembourg and an Alternative Clearing System, the Trustee may, to the extent it considers it appropriate to do so in the circumstances, (a) have regard to such information as may have been made available to it by or on behalf of the relevant clearing system or its operator as to the identity of its accountholders (either individually or by way of category) with entitlements in respect of this Global Note and (b) consider such interests on the basis that such accountholders were the holder of this Global Note.
 
Redemption at the option of Noteholders on a Restructuring Event
 
The option of the Noteholders provided for in Condition 6.4 may be exercised by the holder of this Global Note giving notice to the Principal Paying Agent within the time limits relating to the deposit of Notes with a Paying Agent set out in that Condition substantially in the form of the redemption notice available from any Paying Agent and stating the nominal amount of Notes in respect of which the option is exercised and at the same time presenting this Global Note to the Principal Paying Agent for notation accordingly in Schedule C hereto.
 
This Global Note shall not be valid or become obligatory for any purpose until authenticated by or on behalf of the Principal Paying Agent.
 


This Global Note is governed by and shall be construed in accordance with English law.
 
In witness whereof the Issuer has caused this Global Note to be signed on its behalf.
 
Dated 1 December 2006
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 

 

 

 
This Global Note is authenticated by or on behalf of the Principal Paying Agent.
 
By:
 

 

 
Authorised Signatory
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 

 


Schedule A

Nominal Amount of this Global Note
 
The aggregate nominal amount of this Global Note is as shown by the latest entry made by or on behalf of the nominal Paying Agent in the fourth column below. Increases in the nominal amount of this Global Note following exchanges of a part of the Temporary Global Note for interests in this Global Note and reductions in the nominal amount of this Global Note following redemption or the purchase and cancellation of Notes are entered in the second and third columns below.
 
Date
 
Reason for change in the nominal amount of this Global Note1 
 
Amount of such change
 
Initial nominal amount and nominal amount of this Global Note following such change
 
Notation made by or on behalf of the nominal Paying Agent (other than in respect of the initial nominal amount)
1 December 2006
 
Not applicable
 
Not applicable
 
£ zero
 
Not applicable
 
 
 
 
 
 
 

____________________
¹
State whether increase/reduction following (1) exchange of part of Temporary global Note (2) redemption of Notes or (3) purchase and cancellation of Notes.
 


Schedule B
 
Interest Payments in respect of this Global Note
 
The following payments of interest in respect of this Global Note and the Notes represented by this Global Note have been made:
 
Date made
 
Amount of interest due and payable
 
Amount of interest paid
 
Notation made by or on behalf of the Principal Paying Agent

 


Schedule C
 
Exercise of Noteholders’ Option on Restructuring Event
 
The following exercises of the option of the Noteholders provided for in Condition 6.4 have been made in respect of the stated nominal amount of this Global Note:
 
Date of Exercise
 
Nominal amount of this Global Note in respect of which exercise is made
Date on which redemption of such nominal amount is due
Notation made by or on behalf of the Principal Paying Agent

 


Schedule 3
Provisions for Meetings of Noteholders
 
 
Interpretation
 
1  
In this Schedule:
 
1.1  
references to a meeting are to a meeting of Noteholders and include, unless the context otherwise requires, any adjournment
 
1.2  
“agent” means a holder of a voting certificate or a proxy for a Noteholder
 
1.3  
“block voting instruction” means an instruction issued in accordance with paragraphs 8 to 14
 
1.4  
“Extraordinary Resolution” means a resolution passed at a meeting duly convened and held in accordance with this Trust Deed by a majority of at least 75 per cent. of the votes cast
 
1.5  
“voting certificate” means a certificate issued in accordance with paragraphs 5, 6, 7 and 14 and
 
1.6  
references to persons representing a proportion of the Notes are to Noteholders or agents holding or representing in the aggregate at least that proportion in nominal amount of the Notes for the time being outstanding.
 
 
Powers of meetings
 
2  
A meeting shall, subject to the Conditions and without prejudice to any powers conferred on other persons by this Trust Deed, have power by Extraordinary Resolution:
 
2.1  
to sanction any proposal by the Issuer or the Trustee for any modification, abrogation, variation or compromise of, or arrangement in respect of, the rights of the Noteholders and/or the Couponholders against the Issuer, whether or not those rights arise under this Trust Deed
 
2.2  
to sanction the exchange or substitution for the Notes of, or the conversion of the Notes into, shares, notes or other obligations or securities of the Issuer or any other entity
 
2.3  
to assent to any modification of this Trust Deed, the Notes or the Coupons proposed by the Issuer or the Trustee
 
2.4  
to authorise anyone to concur in and do anything necessary to carry out and give effect to an Extraordinary Resolution
 
2.5  
to give any authority, direction or sanction required to be given by Extraordinary Resolution
 
2.6  
to appoint any persons (whether Noteholders or not) as a committee or committees to represent the Noteholders’ interests and to confer on them any powers or discretions which the Noteholders could themselves exercise by Extraordinary Resolution
 
2.7  
to approve a proposed new Trustee and to remove a Trustee
 
2.8  
to approve the substitution of any entity for the Issuer (or any previous substitute) as principal debtor under this Trust Deed and
 
2.9  
to discharge or exonerate the Trustee from any liability in respect of any act or omission for which it may become responsible under this Trust Deed, the Notes or the Coupons
 
provided that the special quorum provisions in paragraph 19 shall apply to any Extraordinary Resolution (a “special quorum resolution”) for the purpose of sub-paragraph 2.2 or 2.8 or for the purpose of making a modification to this Trust Deed, the Notes or the Coupons which would have the effect of:
 
(i)  
modifying the maturity of the Notes or the dates on which interest is payable on them or
 
(ii)  
modifying the outstanding nominal amount of, or interest on, or other amounts in respect of or reducing or altering the method of calculating the rate of interest on, or any redemption amount of, the Notes or
 
(iii)  
changing the currency of payment of the Notes or the Coupons or
 
(iv)  
modifying the provisions in this Schedule concerning the quorum required at a meeting or the majority required to pass an Extraordinary Resolution or
 
(v)  
amending this proviso.
 
 
Convening a meeting
 
3  
The Issuer or the Trustee may at any time convene a meeting. If it receives a written request by Noteholders holding at least 10 per cent. in nominal amount of the Notes for the time being outstanding and is indemnified to its satisfaction against all costs and expenses, the Trustee shall convene a meeting. Every meeting shall be held at a time and place approved by the Trustee.
 
4  
At least 21 days’ notice (exclusive of the day on which the notice is given and of the day of the meeting) shall be given to the Noteholders. A copy of the notice shall be given by the party convening the meeting to the other parties. The notice shall specify the day, time and place of meeting and, unless the Trustee otherwise agrees, the nature of the resolutions to be proposed and shall explain how Noteholders may appoint proxies or representatives, obtain voting certificates and use block voting instructions and the details of the time limits applicable.
 
 
Arrangements for voting
 
5  
If a holder of a Note wishes to obtain a voting certificate in respect of it for a meeting, he must deposit it for that purpose at least 48 hours before the time fixed for the meeting with a Paying Agent or to the order of a Paying Agent with a bank or other depositary nominated by the Paying Agent for the purpose. The Paying Agent shall then issue a voting certificate in respect of it.
 
6  
A voting certificate shall:
 
6.1  
be a document in the English language
 
6.2  
be dated
 
6.3  
specify the meeting concerned and the serial numbers of the Notes deposited and
 
6.4  
entitle, and state that it entitles, its bearer to attend and vote at that meeting in respect of those Notes.
 
7  
Once a Paying Agent has issued a voting certificate for a meeting in respect of a Note, it shall not release the Note until either:
 
7.1  
the meeting has been concluded or
 
7.2  
the voting certificate has been surrendered to the Paying Agent.
 
8  
If a holder of a Note wishes the votes attributable to it to be included in a block voting instruction for a meeting, then, at least 48 hours before the time fixed for the meeting, (i) he must deposit the Note for that purpose with a Paying Agent or to the order of a Paying Agent with a bank or other depositary nominated by the Paying Agent for the purpose and (ii) he or a duly authorised person on his behalf must direct the Paying Agent how those votes are to be cast. The Paying Agent shall issue a block voting instruction in respect of the votes attributable to all Notes so deposited.
 
9  
A block voting instruction shall:
 
9.1  
be a document in the English language
 
9.2  
be dated
 
9.3  
specify the meeting concerned
 
9.4  
list the total number and serial numbers of the Notes deposited, distinguishing with regard to each resolution between those voting for and those voting against it
 
9.5  
certify that such list is in accordance with Notes deposited and directions received as provided in paragraphs 8, 11 and 14 and
 
9.6  
appoint a named person (a “proxy”) to vote at that meeting in respect of those Notes and in accordance with that list.
 
A proxy need not be a Noteholder.
 
10  
Once a Paying Agent has issued a block voting instruction for a meeting in respect of the votes attributable to any Notes:
 
10.1  
it shall not release the Notes, except as provided in paragraph 11, until the meeting has been concluded and
 
10.2  
the directions to which it gives effect may not be revoked or altered during the 48 hours before the time fixed for the meeting.
 
11  
If the receipt for a Note deposited with a Paying Agent in accordance with paragraph 8 is surrendered to the Paying Agent at least 48 hours before the time fixed for the meeting, the Paying Agent shall release the Note and exclude the votes attributable to it from the block voting instruction.
 
12  
Each block voting instruction shall be deposited at least 24 hours before the time fixed for the meeting at such place as the Trustee shall designate or approve, and in default it shall not be valid unless the chairman of the meeting decides otherwise before the meeting proceeds to business. If the Trustee requires, a notarially certified copy of each block voting instruction shall be produced by the proxy at the meeting but the Trustee need not investigate or be concerned with the validity of the proxy’s appointment.
 
13  
A vote cast in accordance with a block voting instruction shall be valid even if it or any of the Noteholders’ instructions pursuant to which it was executed has previously been revoked or amended, unless written intimation of such revocation or amendment is received from the relevant Paying Agent by the Issuer or the Trustee at its registered office or by the chairman of the meeting in each case at least 24 hours before the time fixed for the meeting.
 
14  
No Note may be deposited with or to the order of a Paying Agent at the same time for the purposes of both paragraph 5 and paragraph 8 for the same meeting.
 
 
Chairman
 
15  
The chairman of a meeting shall be such person as the Trustee may nominate in writing, but if no such nomination is made or if the person nominated is not present within 15 minutes after the time fixed for the meeting the Noteholders or agents present shall choose one of their number to be chairman, failing which the Issuer may appoint a chairman.
 
16  
The chairman may, but need not, be a Noteholder or agent. The chairman of an adjourned meeting need not be the same person as the chairman of the original meeting.
 
 
Attendance
 
17  
The following may attend and speak at a meeting:
 
17.1  
Noteholders and agents
 
17.2  
the chairman
 
17.3  
the Issuer and the Trustee (through their respective representatives) and their respective financial and legal advisers.
 
No-one else may attend or speak.
 
 
Quorum and Adjournment
 
18  
No business (except choosing a chairman) shall be transacted at a meeting unless a quorum is present at the commencement of business. If a quorum is not present within 15 minutes from the time initially fixed for the meeting, it shall, if convened on the requisition of Noteholders or if the Issuer and the Trustee agree, be dissolved. In any other case it shall be adjourned until such date, not less than 14 nor more than 42 days later, and time and place as the chairman may decide. If a quorum is not present within 15 minutes from the time fixed for a meeting so adjourned, the meeting shall be dissolved.
 
19  
Two or more Noteholders or agents present in person shall be a quorum:
 
19.1  
in the cases marked “No minimum proportion” in the table below, whatever the proportion of the Notes which they represent
 
19.2  
in any other case, only if they represent the proportion of the Notes shown by the table below.
 
 
Column 1
 
Column 2
 
 
Column 3
 
 
Purpose of meeting
 
Any meeting except one referred to in column 3
Meeting previously adjourned through want of a quorum
Required proportion
Required proportion
 
To pass a special quorum resolution
 
75 per cent.
 
25 per cent.
 
To pass any other Extraordinary Resolution
A clear majority
 
No minimum proportion
 
Any other purpose
 
10 per cent.
 
No minimum proportion
 

 
20  
The chairman may with the consent of (and shall if directed by) a meeting adjourn the meeting from time to time and from place to place. Only business which could have been transacted at the original meeting may be transacted at a meeting adjourned in accordance with this paragraph or paragraph 18.
 
21  
At least 10 days’ notice of a meeting adjourned through want of a quorum shall be given in the same manner as for an original meeting and that notice shall state the quorum required at the adjourned meeting. No notice need, however, otherwise be given of an adjourned meeting.
 
 
Voting
 
22  
Each question submitted to a meeting shall be decided by a show of hands unless a poll is (before, or on the declaration of the result of, the show of hands) demanded by the chairman, the Issuer, the Trustee or one or more persons representing 2 per cent. of the Notes.
 
23  
Unless a poll is demanded a declaration by the chairman that a resolution has or has not been passed shall be conclusive evidence of the fact without proof of the number or proportion of the votes cast in favour of or against it.
 
24  
If a poll is demanded, it shall be taken in such manner and (subject as provided below) either at once or after such adjournment as the chairman directs. The result of the poll shall be deemed to be the resolution of the meeting at which it was demanded as at the date it was taken. A demand for a poll shall not prevent the meeting continuing for the transaction of business other than the question on which it has been demanded.
 
25  
A poll demanded on the election of a chairman or on a question of adjournment shall be taken at once.
 
26  
On a show of hands every person who is present in person and who produces a Note or a voting certificate or is a proxy has one vote. On a poll every such person has one vote for each £50,000 nominal amount of Notes so produced or represented by the voting certificate so produced or for which he is a proxy or representative. Without prejudice to the obligations of proxies, a person entitled to more than one vote need not use them all or cast them all in the same way.
 
27  
In case of equality of votes the chairman shall both on a show of hands and on a poll have a casting vote in addition to any other votes which he may have.
 
 
Effect and Publication of an Extraordinary Resolution
 
28  
An Extraordinary Resolution shall be binding on all the Noteholders, whether or not present at the meeting, and on all the Couponholders and each of them shall be bound to give effect to it accordingly. The passing of such a resolution shall be conclusive evidence that the circumstances justify its being passed. The Issuer shall give notice of the passing of an Extraordinary Resolution to Noteholders within 14 days but failure to do so shall not invalidate the resolution.
 
 
Minutes
 
29  
Minutes shall be made of all resolutions and proceedings at every meeting and, if purporting to be signed by the chairman of that meeting or of the next succeeding meeting, shall be conclusive evidence of the matters in them. Until the contrary is proved every meeting for which minutes have been so made and signed shall be deemed to have been duly convened and held and all resolutions passed or proceedings transacted at it to have been duly passed and transacted.
 
 
Trustee’s Power to Prescribe Regulations
 
30  
Subject to all other provisions in this Trust Deed the Trustee may without the consent of the Noteholders prescribe such further regulations regarding the holding of meetings and attendance and voting at them as it in its sole discretion determines including (without limitation) such requirements as the Trustee thinks reasonable to satisfy itself that the persons who purport to make any requisition in accordance with this Trust Deed are entitled to do so and as to the form of voting certificates or block voting instructions so as to satisfy itself that persons who purport to attend or vote at a meeting are entitled to do so.
 


This Trust Deed is delivered on the date stated at the beginning.
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC 
 
By:
 
D.C.S. OOSTHUISEN
 
  
By:
 
SALLY A. JONES
 
Title:
 
DIRECTOR
 
  
Title:
 
COMPANY SECRETARY
 

 

 

 
HSBC TRUSTEE (C.I.) LIMITED
 
By:  PAUL CATTERMOLE  
 

 

 
Title:  AUTHORISED SIGNATORY     
 

 

 EX-4.K 6 ppl10-k2006exhibit4k.htm EXHIBIT 4(K) Exhibit 4(k)
Exhibit 4(k)

 
Dated 21 December 2006



WESTERN POWER
DISTRIBUTION (SOUTH WALES) PLC
 
and
 
HSBC TRUSTEE (C.I.) LIMITED
 

 
 
TRUST DEED
 
constituting
£225,000,000 4.80436 per cent. Notes due 2037



This Trust Deed is made on 21 December 2006 between:

(1)      WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC (“WPD South Wales” or the “Issuer”) a company incorporated in England and Wales whose registered office is at Avonbank, Feeder Road, Bristol BS2 0TB and
 
(2)       HSBC TRUSTEE (C.I.) LIMITED (the “Trustee”, which expression, where the context so admits, includes any other trustee for the time being of this Trust Deed) a company incorporated under the laws of Jersey whose registered office is at P.O. Box 88, 1 Grenville Street, St. Helier, Jersey, JE4 9PF.
 
Whereas:
 
(A)  
       The Issuer has authorised the issue of £225,000,000 4.80436 per cent. Notes due 2037 to be constituted by this Trust
       Deed.
 
(B)  
       The Trustee has agreed to act as trustee of this Trust Deed on the following terms and conditions.
 
This Deed witnesses and it is declared as follows:
 
1
Interpretation
 
1.1
Definitions: Capitalised terms used, but not defined, herein shall bear the same respective meanings given to such terms in the Conditions and, in addition, the following expressions have the following meanings:
 
“Auditors” means the auditors for the time being of the Issuer or, if they are unable or unwilling to carry out any action requested of them under this Trust Deed, such other firm of accountants as may be nominated or approved in writing by the Trustee for the purpose
 
“Authorised Signatory” means any Director of the Issuer or any other person who is for the time being authorised by the relevant Issuer to sign documents for the purposes of these presents and who has been notified in writing to the Trustee as being so authorised
 
“Clearing System” means Clearstream, Luxembourg or Euroclear or both of them as applicable
 
“Clearstream, Luxembourg” means Clearstream Banking, société anonyme
 
“Conditions” means the terms and conditions set out in Schedule 1 as from time to time modified in accordance with this Trust Deed and, with respect to any Notes represented by the Global Note, as modified by the provisions of the Global Note. Any reference to a particularly numbered Condition shall be construed accordingly
 
“Couponholder” means the bearer of a Coupon
 
“Coupons” means the bearer coupons relating to the Notes or, as the context may require, a specific number of them and includes any replacement Coupons issued pursuant to the Conditions
 
“EEA Regulated Market” means a market as defined by Article 1(13) of the Investment Services Directive 93/22/EEC
 
“Euroclear” means Euroclear Bank S.A./N.V.
 
“Event of Default” means an event described in Condition 9 which, if so required by that Condition, has been certified by the Trustee to be, in its opinion, materially prejudicial to the interests of the Noteholders
 
“Excluded Subsidiary” has the meaning set out in Condition 9
 
“Extraordinary Resolution” has the meaning set out in Schedule 3
 
“FSMA” means the Financial Services and Markets Act 2000
 
“Global Note” means the permanent global note which will represent the Notes, or some of them, after exchange of the Temporary Global Note, or a portion of it, substantially in the form set out in Part 2 of Schedule 2
 
“Group” has the meaning set out in Condition 3.3
 
“Market” means the EEA Regulated Market of the London Stock Exchange
 
“Material Adverse Effect” means a material adverse effect that a removal, qualification or amendment as provided in Condition 6.4(d)(vi)(C) has on the financial condition of the Issuer or any Distribution Subsidiary, provided that the Trustee shall have no duty to enquire or satisfy itself as to the existence of a Material Adverse Effect and shall be entitled to rely conclusively upon the certificate of two directors of the Issuer regarding the same as provided in such Condition, and the Trustee shall bear no liability of any nature whatsoever to the Issuer, the Noteholders or any other person as a result thereof
 
“Notes” means bearer notes substantially in the form set out in Schedule 1 comprising the £225,000,000 4.80436 per cent. Notes due 2037 constituted by this Trust Deed and for the time being outstanding or, as the context may require, a specific number of them and includes any replacement Notes issued pursuant to the Conditions and (except for the purposes of Clause 3.1) the Temporary Global Note and the Global Note
 
“Noteholder” means the bearer of a Note
 
“outstanding” means, in relation to the Notes, all the Notes issued except (a) those which have been redeemed in accordance with the Conditions, (b) those in respect of which the date for redemption has occurred and the redemption moneys (including all interest accrued on such Notes to the date for such redemption and any interest payable under the Conditions after such date) have been duly paid to the Trustee or to the Principal Paying Agent as provided in Clause 2 and remain available for payment against presentation and surrender of Notes and/or Coupons, as the case may be, (c) those which have become void, (d) those which have been purchased and cancelled as provided in the Conditions, (e) those mutilated or defaced Notes which have been surrendered in exchange for replacement Notes, (f) (for the purpose only of determining how many Notes are outstanding and without prejudice to their status for any other purpose) those Notes alleged to have been lost, stolen or destroyed and in respect of which replacement Notes have been issued, and (g) the Temporary Global Note to the extent that it shall have been exchanged for the Global Note pursuant to its provisions and the Global Note to the extent that it shall have been exchanged for definitive Notes pursuant to its provisions provided that for the purposes of (1) ascertaining the right to attend and vote at any meeting of the Noteholders, (2) the determination of how many Notes are outstanding for the purposes of Conditions 9, 10 and 14 and Schedule 3, (3) the exercise of any discretion, power or authority which the Trustee is required, expressly or impliedly, to exercise in or by reference to the interests of the Noteholders and (4) the certification (where relevant) by the Trustee as to whether a Potential Event of Default is in its opinion materially prejudicial to the interests of the Noteholders, those Notes which are beneficially held by or on behalf of the Issuer or any of its affiliates and not cancelled shall (unless no longer so held) be deemed not to remain outstanding
 
“Paying Agency Agreement” means the agreement referred to as such in the Conditions, as altered from time to time, and includes any other agreements approved in writing by the Trustee appointing Successor Paying Agents or altering any such agreements
 
“Paying Agents” means the banks (including the Principal Paying Agent) referred to as such in the Conditions or any Successor Paying Agents in each case at their respective specified offices
 
“Potential Event of Default” means an event or circumstance which could with the giving of notice, lapse of time, issue of a certificate and/or fulfilment of any other requirement provided for in Condition 9 become an Event of Default
 
“Principal Paying Agent” means the bank named as such in the Conditions or any Successor Principal Paying Agent
 
“Principal Subsidiary” has the meaning set out in Condition 9
 
“specified office” means, in relation to a Paying Agent, the office identified with its name at the end of the Conditions or any other office approved by the Trustee and notified to Noteholders pursuant to Clause 6.11
 
“Subsidiary” has the meaning ascribed to it in the Conditions
 
“Successor” means, in relation to the Paying Agents, such other or further person as may from time to time be appointed by the Issuer as a Paying Agent with the written approval of, and on terms approved in writing by, the Trustee and notice of whose appointment is given to Noteholders pursuant to Clause 6.11
 
“Temporary Global Note” means the temporary global note which will represent the Notes on issue substantially in the form set out in Part 1 of Schedule 2
 
“this Trust Deed” means this Trust Deed (as from time to time altered in accordance with this Trust Deed) and any other document executed in accordance with this Trust Deed (as from time to time so altered) and expressed to be supplemental to this Trust Deed
 
“trust corporation” means a trust corporation (as defined in the Law of Property Act 1925) or a corporation entitled to act as a trustee pursuant to applicable foreign legislation relating to trustees
 
1.2
Construction of Certain References: References to:
 
 
1.2.1
costs, charges, remuneration or expenses include any value added, turnover or similar tax charged in respect thereof;
 
 
1.2.2
“pounds” “sterling” or “pounds sterling” or the signs “£” or “GBP” shall be construed as references to the lawful currency for the time being of the United Kingdom; and
 
 
1.2.3
any provision of any statute shall be deemed also to refer to any statutory modification or re-enactment thereof or any statutory instrument, order or regulation made thereunder or under such re-enactment;
 
 
1.2.4
Schedules, Clauses and paragraphs shall be construed as references to, respectively, the Schedules to and the Clauses and paragraphs of this Trust Deed;
 
 
1.2.5
any action, remedy or method of judicial proceedings for the enforcement of rights of creditors shall be deemed to include, in respect of any jurisdiction other than England, references to such action, remedy or method of judicial proceedings for the enforcement of rights of creditors available or appropriate in such jurisdiction as shall most nearly approximate thereto;
 
 
1.2.6
principal and/or premium and/or interest in respect of the Notes or to any moneys payable by the Issuer under this Trust Deed shall be deemed to include, in the case of principal and/or premium, a reference to any specific redemption price (as specified in the Conditions) and, in any case, a reference to any additional amounts which may be payable under the Conditions; and
 
 
1.2.7
references in this Trust Deed to “reasonable” or “reasonably” and similar expressions relating to the Trustee and any exercise of power, opinion, determination or other similar matter shall be construed as meaning reasonable or reasonably (as the case may be) having regard to, and taking into account the interests of, the Noteholders only.
 
1.3
Headings: Headings shall be ignored in construing this Trust Deed.
 
1.4
Contracts: References in this Trust Deed to any document are to such document as amended, supplemented or replaced from time to time and include any document that amends, supplements or replaces them.
 
1.5
Schedules: The Schedules are part of this Trust Deed and have effect accordingly.
 
1.6
Contracts (Rights of Third Parties) Act 1999: A person who is not a party to this Trust Deed has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Trust Deed except and to the extent that Clause 7.4 expressly provides for such Act to apply.
 
2
Amount of the Notes and Covenant to Pay
 
2.1
Amount of the Notes: The aggregate nominal amount of the Notes is limited to £225,000,000.
 
2.2
Covenant to pay: The Issuer will on any date when any Notes become due to be redeemed unconditionally pay to or to the order of the Trustee in pounds sterling in same day funds the amount specified in the Conditions as being payable in respect of the Notes becoming due for redemption on that date and will (subject to the Conditions) until such payment (both before and after judgment) unconditionally so pay to or to the order of the Trustee interest on the outstanding nominal amount of the Notes outstanding as set out in the Conditions provided that (1) payment of any sum due in respect of the Notes made to the Principal Paying Agent as provided in the Paying Agency Agreement shall, to that extent, satisfy such obligation except to the extent that there is failure in its subsequent payment to the relevant Noteholders or Couponholders under the Conditions and (2) a payment made after the due date or pursuant to Condition 9 will be deemed to have been made when the full amount due has been received by the Principal Paying Agent or the Trustee and notice to that effect has been given to the Noteholders (if required under Clause 6.9), except to the extent that there is failure in its subsequent payment to the relevant Noteholders or Couponholders under the Conditions. The Trustee will hold the benefit of this covenant on trust for the Noteholders and Couponholders.
 
2.3
Discharge: Subject to Clause 2.4, any payment to be made in respect of the Notes or the Coupons by the Issuer or the Trustee may be made as provided in the Conditions and any payment so made will (subject to Clause 2.4) to that extent be a good discharge to the Issuer or the Trustee, as the case may be.
 
2.4
Payment after a Default: At any time after an Event of Default or a Potential Event of Default has occurred the Trustee may:
 
 
2.4.1
by notice in writing to the Issuer and the Paying Agents, require the Paying Agents, until notified by the Trustee to the contrary, so far as permitted by applicable law:
 
(i)  
to act as Paying Agents of the Trustee under this Trust Deed and the Notes on the terms of the Paying Agency Agreement (with consequential amendments as necessary and except that the Trustee’s liability for the indemnification, remuneration and expenses of the Paying Agents will be limited to the amounts for the time being held by the Trustee in respect of the Notes on the terms of this Trust Deed) and thereafter to hold all Notes and Coupons and all moneys, documents and records held by them in respect of Notes and Coupons to the order of the Trustee or
 
(ii)  
to deliver all Notes and Coupons and all moneys, documents and records held by them in respect of the Notes and Coupons to the Trustee or as the Trustee directs in such notice and
 
 
2.4.2
by notice in writing to the Issuer and until such notice is withdrawn require it to make all subsequent payments in respect of the Notes and Coupons to or to the order of the Trustee and not to the Principal Paying Agent.
 
3
Form of the Notes
 
3.1
The Global Notes: The Notes will initially be represented by the Temporary Global Note in the nominal amount of £225,000,000. Interests in the Temporary Global Note will be exchangeable for the Global Note as set out in the Temporary Global Note. The Global Note will be exchangeable for definitive Notes as set out in the Global Note.
 
3.2
The Definitive Notes: The definitive Notes, the Coupons and Talons will be security printed in accordance with applicable legal and stock exchange requirements substantially in the forms set out in Schedule 1. The Notes will be endorsed with the Conditions.
 
3.3
Signature: The Notes and the Coupons will be signed manually or in facsimile by an Authorised Signatory of the Issuer and the Notes will be authenticated by or on behalf of the Principal Paying Agent. The Issuer may use the facsimile signature of a person who at the date of this Trust Deed is such an Authorised Signatory even if at the time of issue of any Notes or Coupons he no longer holds that office. Notes and Coupons so executed and authenticated will be binding and valid obligations of the Issuer.
 
4
Stamp Duties and Taxes
 
4.1
Stamp Duties: The Issuer will pay any stamp, issue, documentary or other taxes and duties, including interest and penalties, payable in Belgium, Luxembourg and the United Kingdom in respect of the creation, issue and offering of the Notes and the Coupons and the execution or delivery of this Trust Deed. The Issuer will also indemnify the Trustee, the Noteholders and the Couponholders from and against all stamp, issue, documentary or other taxes paid by any of them in any jurisdiction in connection with any action taken by or on behalf of the Trustee or, as the case may be, (and where permitted under these presents so to do) the Noteholders or the Couponholders to enforce the Issuer’s obligations under this Trust Deed, the Notes or the Coupons.
 
4.2
Change of Taxing Jurisdiction: If the Issuer becomes subject generally to the taxing jurisdiction of a territory or a taxing authority of or in that territory with power to tax other than or in addition to the United Kingdom or any such authority of or in such territory then the Issuer will (unless the Trustee otherwise agrees) give the Trustee an undertaking satisfactory to the Trustee in terms corresponding to the terms of Condition 7 with the substitution for, or (as the case may require) the addition to, the references in that Condition to the United Kingdom of references to that other or additional territory or authority to whose taxing jurisdiction the Issuer has become so subject. In such event this Trust Deed, the Notes and the Coupons will be read accordingly.
 
5
Application of Moneys Received by the Trustee
 
5.1
Declaration of Trust: All moneys received by the Trustee in respect of the Notes or amounts payable under this Trust Deed will, despite any appropriation of all or part of them by the Issuer, be held by the Trustee on trust to apply them (subject to Clause 5.2):
 
 
5.1.1
first, in payment of all costs, charges, expenses and liabilities properly incurred by the Trustee (including remuneration payable to it) in carrying out its functions under this Trust Deed
 
 
5.1.2
secondly, in payment of any amounts owing in respect of the Notes or Coupons pari passu and rateably and
 
 
5.1.3
thirdly, in payment of any balance to the Issuer for itself.
 
If the Trustee holds any moneys in respect of Notes or Coupons which have become void, the Trustee will hold them on these trusts.
 
5.2
Accumulation: If the amount of the moneys at any time available for payment in respect of the Notes under Clause 5.1 is less than 10 per cent. of the nominal amount of the Notes then outstanding, the Trustee may, at its discretion, invest such moneys. The Trustee may retain such investments and accumulate the resulting income until the investments and the accumulations, together with any other funds for the time being under its control and available for such payment, amount to at least 10 per cent. of the nominal amount of the Notes then outstanding and then such investments, accumulations and funds (after deduction of, or provision for, any applicable taxes) will be applied as specified in Clause 5.1.
 
5.3
Investment: Moneys held by the Trustee may be invested in its name or under its control in any investments or other assets anywhere whether or not they produce income or deposited in its name or under its control at such bank or other financial institution in such currency as the Trustee may, in its absolute discretion, think fit. If that bank or institution is the Trustee or a subsidiary, holding or associated company of the Trustee, it need only account for an amount of interest equal to the standard amount of interest payable by it on such a deposit to an independent customer. The Trustee may at any time vary or transpose any such investments or assets or convert any moneys so deposited into any other currency, and will not be responsible for any resulting loss, whether by depreciation in value, change in exchange rates or otherwise.
 
6
Covenants
 
So long as any Note is outstanding, the Issuer will:
 
6.1
Books of Account: keep, and procure that each of its Subsidiaries keeps, proper books of account and, at any time after an Event of Default or Potential Event of Default has occurred or if the Trustee reasonably believes that such an event has occurred, so far as permitted by applicable law, allow, and procure that each such Subsidiary will allow, the Trustee and anyone appointed by it to whom the Issuer and/or the relevant Subsidiary has no reasonable objection, access to its books of account at all reasonable times during normal business hours
 
6.2
Notice of Events of Default: notify the Trustee in writing immediately on becoming aware of the occurrence of any Event of Default or Potential Event of Default
 
6.3
Information: so far as permitted by applicable law, give the Trustee such information, opinions and certificates as it reasonably requires to perform its functions
 
6.4
Financial Statements etc.: send to the Trustee at the time of their issue and in the case of annual financial statements in any event within 180 days of the end of each financial year one copy in English of every balance sheet, profit and loss account, report or other notice, statement or circular issued, or which legally or contractually should be issued, to the members or creditors (or any class of them) of the Issuer or any holding company thereof generally in their capacity as such
 
6.5
Certificate of Authorised Signatories: send to the Trustee, within 14 days of its annual audited financial statements being made available to its members, and also within 14 days of any request by the Trustee a certificate of the Issuer signed by any two of its Authorised Signatories that, having made all reasonable enquiries, to the best of the knowledge, information and belief of the Issuer as at a date (the “Certification Date”) not more than five days before the date of the certificate no Event of Default, Potential Event of Default, Restructuring Event or Potential Restructuring Event (as defined below) or other breach of this Trust Deed had occurred since the Certification Date of the last such certificate or (if none) the date of this Trust Deed or, if such an event had occurred, giving details of it
 
6.6
Certificate of two directors of the Issuer: send to the Trustee, within 28 days of a request by the Trustee, a certificate signed by two directors of the Issuer as to the amount of the Capital and Reserves of the Issuer as at the date specified in such request
 
6.7
Notices to Noteholders: send to the Trustee not less than three days prior to being sent to the Noteholders the form of each notice to be given to Noteholders and, once given, two copies of each such notice, such notice to be in a form approved by the Trustee (such approval, unless so expressed, not to constitute approval for the purposes of Section 21 of the FSMA of any such notice which is a communication within the meaning of Section 21 of the FSMA)
 
6.8
Further Acts: so far as permitted by applicable law, do such further things as may be necessary in the opinion of the Trustee to give effect to this Trust Deed
 
6.9
Notice of late payment: forthwith upon request by the Trustee give notice to the Noteholders of any unconditional payment to the Principal Paying Agent or the Trustee of any sum due in respect of the Notes or Coupons made after the due date for such payment
 
6.10
Listing: use all reasonable endeavours to maintain the listing of the Notes on the official list of the Financial Services Authority in its capacity as competent authority under the FSMA and the trading of such Notes on the Market but, if it is unable to do so, having used such endeavours, or if the maintenance of such listing or trading is agreed by the Trustee to be unduly onerous and the Trustee is satisfied that the interests of the Noteholders would not be thereby materially prejudiced, instead use all reasonable endeavours to obtain and maintain a listing of the Notes on another stock exchange and for admission to trading on another market in each case approved in writing by the Trustee
 
6.11
Change in Agents: give at least 14 days’ prior notice to the Noteholders of any future appointment, resignation or removal of a Paying Agent or of any change by a Paying Agent of its specified office and not make any such appointment or removal without the Trustee’s written approval
 
6.12
Notes held by Issuer etc.: send to the Trustee as soon as practicable after being so requested by the Trustee a certificate of the Issuer signed by any two of its Authorised Signatories stating the number of Notes held at the date of such certificate by or on behalf of the Issuer or its affiliates
 
6.13
Subsidiaries: give to the Trustee at the same time as sending the certificate referred to in Clause 6.5 or within 28 days of a request by the Trustee, a certificate signed by two directors of the Issuer listing those Subsidiaries of the Issuer which as at the last day of the last financial year of the Issuer or as at the date specified in such request were Relevant Subsidiaries, Principal Subsidiaries and Excluded Subsidiaries and confirming that there are no Subsidiaries of the type referred to in Clauses 6.14.1 or 6.14.2
 
6.14
Restriction on Principal Subsidiaries: not permit to exist and will not create any Subsidiary (not being an Excluded Subsidiary or any other Subsidiary whose only indebtedness for borrowed money is Non-recourse Indebtedness):
 

 
6.14.1
whose (a) profits on ordinary activities before tax or (b) gross assets, in each case attributable to the Issuer, represent 20 per cent. or more of the consolidated profits on ordinary activities before tax of the Group or, as the case may be, consolidated gross assets of the Group, in each case as calculated by reference to the then latest audited financial statements of such Subsidiary (consolidated in the case of a company which itself has Subsidiaries) and the then latest audited consolidated financial statements of the Group provided that in the case of a Subsidiary acquired after the end of the financial period to which the then latest audited consolidated financial statements of the Group relate, the reference to the then latest audited consolidated financial statements of the Group for the purposes of the calculation above shall, until consolidated financial statements for the financial period in which the acquisition is made have been prepared and audited as aforesaid, be deemed to be a reference to such first-mentioned financial statements as if such Subsidiary had been shown in such financial statements by reference to its then latest relevant audited financial statements, adjusted as deemed appropriate by the Auditors; or
 
 
6.14.2
to which is transferred all or substantially all of the business, undertaking and assets of a Subsidiary of the Issuer which immediately prior to such transfer is a Subsidiary, with such profits and/or gross assets as are described in 6.14.1 above,
 
unless such Subsidiary carries on a “distribution business” as defined in Condition 1 of the Standard Conditions of the Utilities Act 2000 Determination of Standard Licence Conditions for Electricity Distribution Licences (as amended from time to time); and
 
6.15
forthwith give notice in writing to the Trustee of:
 
 
6.15.1
the occurrence of any Restructuring Event or of any event (a “Potential Restructuring Event”) which, depending on any certification as provided in the definition of “Restructuring Event”, may be a Restructuring Event;
 
 
6.15.2
(if at the time any Restructuring Event occurs there are Rated Securities) the occurrence of any Rating Downgrade in respect of that Restructuring Event within the Restructuring Period; and
 
 
6.15.3
(if at the time any Restructuring Event occurs there are no Rated Securities) the obtaining of a rating in accordance with the definition of “Negative Rating Event” or the occurrence of a Negative Rating Event
 
6.16
Covenant of Compliance: The Issuer shall comply with and perform and observe all the provisions of the Trust Deed and the Notes which are expressed to be binding on it and shall take such steps as are reasonable to enforce all its rights under the Trust Deed and the Notes. The Conditions shall be binding on the Issuer and the Noteholders. The Trustee shall be entitled to enforce the obligations of the Issuer under the Notes as if the same were set out and contained in this Trust Deed, which shall be read and construed as one document with the Notes.
 
7
Remuneration and Indemnification of the Trustee
 
7.1
Normal Remuneration: So long as any Note is outstanding the Issuer will pay the Trustee as remuneration for its services as Trustee such sum on such dates in each case as they may from time to time agree. Such remuneration will accrue from day to day from the date of this Trust Deed. However, if any payment to a Noteholder or Couponholder of moneys due in respect of any Note or Coupon is improperly withheld or refused, such remuneration will again accrue as from the date of such withholding or refusal until payment to such Noteholder or Couponholder is duly made.
 
7.2
Extra Remuneration: If an Event of Default or Potential Event of Default shall have occurred or if the Trustee finds it expedient or necessary or is requested by the Issuer to undertake duties which they both agree to be of an exceptional nature or otherwise outside the scope of the Trustee’s normal duties under this Trust Deed, the Issuer will pay such additional remuneration as they may agree or, failing agreement as to any of the matters in this sub-Clause (or as to such sums referred to in Clause 7.1), as determined by an investment bank (acting as an expert) selected by the Trustee and approved by the Issuer or, failing such approval, nominated by the President for the time being of The Law Society of England and Wales. The expenses involved in such nomination and such investment bank’s fee will be borne by the Issuer. The determination of such investment bank will be conclusive and binding on the Issuer, the Trustee, the Noteholders and the Couponholders save in the case of a manifest error.
 
7.3
Expenses: The Issuer will also on demand by the Trustee pay or discharge all costs, charges, liabilities and expenses properly incurred by the Trustee in the preparation and execution of this Trust Deed and the performance of its functions under this Trust Deed including, but not limited to, legal and travelling expenses and any stamp, documentary or other taxes or duties paid by the Trustee in connection with any legal proceedings reasonably brought or contemplated by the Trustee against the Issuer to enforce any provision of this Trust Deed, the Notes or the Coupons. Such costs, charges, liabilities and expenses will:
 
 
7.3.1
in the case of payments made by the Trustee before such demand carry interest from the date of the demand at the rate of 2 per cent. per annum over the base rate of HSBC Bank plc on the date on which the Trustee made such payments and
 
 
7.3.2
in other cases carry interest at such rate from 30 days after the date of the demand or (where the demand specifies that payment is to be made on an earlier date) from such earlier date.
 
7.4
Indemnity: The Issuer will on demand by the Trustee indemnify it in respect of Amounts or Claims paid or incurred by it in acting as trustee under this Trust Deed (including (1) any Agent/Delegate Liabilities and (2) in respect of disputing or defending any Amounts or Claims made against the Trustee or any Agent/Delegate Liabilities). The Issuer will on demand by such agent or delegate indemnify it against such Agent/Delegate Liabilities. “Amounts or Claims” are losses, liabilities, costs, claims, actions, demands or expenses and “Agent/Delegate Liabilities” are Amounts or Claims which the Trustee is or would be obliged to pay or reimburse to any of its agents or delegates appointed pursuant to this Trust Deed. The Contracts (Rights of Third Parties) Act 1999 applies to this Clause 7.4.
 
7.5
Continuing Effect: Clauses 7.3 and 7.4 will continue in full force and effect as regards the Trustee even if it no longer is Trustee.
 
8
Provisions Supplemental to the Trustee Act 1925 and the Trustee Act 2000
 
By way of supplement to the Trustee Act 1925 it is expressly declared as follows:
 
8.1
Advice: The Trustee may act on the opinion or advice of, or information obtained from, any expert and will not be responsible to anyone for any loss occasioned by so acting whether such advice is obtained or addressed to the Issuer, the Trustee or any other person. Any such opinion, advice or information may be sent or obtained by letter, telex or fax and the Trustee will not be liable to anyone for acting in good faith on any opinion, advice or information purporting to be conveyed by such means even if it contains some error or is not authentic and notwithstanding any limitation on liability contained therein, monetary or otherwise.
 
8.2
Trustee to Assume Performance: The Trustee need not notify anyone of the execution of this Trust Deed nor shall it be bound to take any steps to ascertain whether any Event of Default, Potential Event of Default, Restructuring Event, Potential Restructuring Event or Negative Rating Event has happened and, until it shall have actual knowledge or express notice to the contrary, the Trustee shall be entitled to assume that no Event of Default, Potential Event of Default, Restructuring Event, Potential Restructuring Event or Negative Rating Event has happened and that the Issuer is observing and performing all its obligations under this Trust Deed, the Notes and the Coupons.
 
8.3
Resolutions of Noteholders: The Trustee will not be responsible for having acted in good faith on a resolution purporting to have been passed at a meeting of Noteholders in respect of which minutes have been made and signed even if it is later found that there was a defect in the constitution of the meeting or the passing of the resolution or that the resolution was not valid or binding on the Noteholders or Couponholders.
 
8.4
Certificate signed by Authorised Signatories: If the Trustee, in the exercise of its functions, requires to be satisfied or to have information as to any fact or the expediency of any act, it may call for and accept as sufficient evidence of that fact or the expediency of that act a certificate signed by any two Authorised Signatories of the Issuer as to that fact or to the effect that, in their opinion, that act is expedient and the Trustee need not call for further evidence and will not be responsible for any loss occasioned by acting on such a certificate. The Trustee shall be entitled to rely on any certificate of two Authorised Signatories of the Issuer where the Issuer procures the delivery of the same pursuant to its obligations to do so under the Conditions or this Trust Deed and such certificate shall be binding on the Issuer, the Trustee and the Noteholders.
 
8.5
Report of the Auditors: The Trustee shall be entitled to rely on any certificate or report of the Auditors whether or not such report is addressed to the Trustee and notwithstanding that such report and/or any engagement letter or other document entered into by the Trustee contains a monetary or other limit on the liability of the Auditors. Such report shall, in the absence of manifest error, be conclusive and binding on all parties, and the Trustee shall not be responsible for any loss occasioned by acting on any such report.
 
8.6
Deposit of Documents: The Trustee may appoint as custodian, on any terms, any bank or entity whose business includes the safe custody of documents or any lawyer or firm of lawyers believed by it to be of good repute and may deposit this Trust Deed and any other documents with such custodian and pay all sums due in respect thereof. The Trustee is not obliged to appoint a custodian of securities payable to bearer.
 
8.7
Discretion: The Trustee will have absolute and uncontrolled discretion as to the exercise of its powers, trusts and discretions and will not be responsible for any loss, liability, cost, claim, action, demand, expense or inconvenience which may result from their exercise or non-exercise.
 
8.8
Agents: Whenever it considers it expedient in the interests of the Noteholders, the Trustee may, in the conduct of its trust business, instead of acting personally, employ and pay an agent selected by it, whether or not a lawyer or other professional person, to transact or conduct, or concur in transacting or conducting, any business and to do or concur in doing all acts required to be done by the Trustee (including the receipt and payment of money).
 
8.9
Delegation: Whenever it considers it expedient in the interests of the Noteholders, the Trustee may delegate to any person on any terms (including power to sub-delegate) all or any of its functions.
 
8.10
Nominees: In relation to any asset held by it under this Trust Deed, the Trustee may appoint any person to act as its nominee on any terms.
 
8.11
Forged Notes: The Trustee will not be liable to the Issuer or any Noteholder or Couponholder by reason of having accepted as valid or not having rejected any Note or Coupon purporting to be such and later found to be forged or not authentic.
 
8.12
Confidentiality: Unless ordered to do so by a court of competent jurisdiction the Trustee shall not be required to disclose to any Noteholder or Couponholder any confidential financial or other information made available to the Trustee by the Issuer and no Noteholder or Couponholder shall be entitled to take any action to obtain such information from the Trustee.
 
8.13
Determinations Conclusive: As between itself and the Noteholders and Couponholders the Trustee may in its absolute discretion determine all questions and doubts arising in relation to any of the provisions of this Trust Deed including (without limitation) determination of whether or not a default in performance by the Issuer of any obligation under the Notes or Trust Deed is materially prejudicial to the interests of Noteholders and Couponholders. Such determinations, whether made upon such a question actually raised or implied in the acts or proceedings of the Trustee, will be conclusive and shall bind the Trustee, the Noteholders and the Couponholders.
 
8.14
Currency Conversion: Where it is necessary or desirable to convert any sum from one currency to another, it will (unless otherwise provided hereby or required by law) be converted at such rate or rates, in accordance with such method and as at such date as may reasonably be specified by the Trustee but having regard to current rates of exchange, if available. Any rate, method and date so specified will be binding on the Issuer, the Noteholders and the Couponholders.
 
8.15
Events of Default: The Trustee may determine whether or not an Event of Default or Potential Event of Default is in its opinion capable of remedy and/or materially prejudicial to the interests of the Noteholders. Any such determination will be conclusive and binding on the Issuer, the Noteholders and the Couponholders.
 
8.16
Payment for and Delivery of Notes: The Trustee will not be responsible for the receipt or application by the Issuer of the proceeds of the issue of the Notes, any exchange of Notes or the delivery of Notes to the persons entitled to them.
 
8.17
Notes held by the Issuer etc.: In the absence of knowledge or express notice to the contrary, the Trustee may assume without enquiry (other than requesting a certificate under Clause 6.12) that no Notes are for the time being held by or on behalf of the Issuer or its affiliates.
 
8.18
Responsibility for agents etc.: If the Trustee exercises reasonable care in selecting any custodian, agent, delegate or nominee appointed under this clause (an “Appointee”), it will not have any obligation to supervise the Appointee or be responsible for any loss, liability, cost, claim, action, demand or expense incurred by reason of the Appointee’s misconduct or default or the misconduct or default of any substitute appointed by the Appointee.
 
8.19
Responsibility for Rating: The Trustee shall (a) have no responsibility for the maintenance of any rating of the Notes by any Rating Agency and (b) shall not be liable to Noteholders if any exercise by it of its trusts, powers and discretions results in a change to the rating assigned by any Rating Agency to any class of Notes.
 
8.20
No Liability for error of judgement: The Trustee shall not be liable for any error of judgement made in good faith by any officer and/or employee of the Trustee in the administration of its corporate matters.
 
8.21
Clearing Systems: The Trustee may call for any certificate or other document to be issued by Euroclear, Clearstream, Luxembourg or any other clearing system through which the Notes are cleared as to the principal amount of Notes represented by a Global Note standing to the account of any person and may have regard to any information provided to it by Euroclear, Clearstream, Luxembourg or such other clearing system as to the identity (either individually or by category) of any of their accountholders with entitlements to such Global Note, and the Trustee may consider such interests as if such accountholders were the holders of any such Global Note. Any such certificate, document or information may be accepted and fully relied upon by the Trustee. The Trustee shall not be liable to any person by reason of having accepted as valid or accurate or not having rejected any certificate, document or information to such effect purporting to be issued by Euroclear, Clearstream, Luxembourg or such other clearing system and subsequently found to be forged, not authentic or inaccurate.
 
8.22
Legal Opinions: The Trustee shall not be responsible to any person for failing to request, require or receive any legal opinion relating to the Notes or for checking or commenting upon the content of any such legal opinion and shall not be responsible for any loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever incurred thereby.
 
8.23
No Action:
 
 
(i)
The Trustee shall not be bound to take any action in connection with this Trust Deed or any obligations arising pursuant thereto, including, without prejudice to the generality of the foregoing, forming any opinion or employing any financial adviser, where it is not satisfied that the Issuer will be able to indemnify it against all loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever incurred thereby which may be incurred in connection with such action and may demand prior to taking any such action that there be paid to it in advance such sums as it reasonably considers (without prejudice to any further demand) shall be sufficient so to indemnify it and on such demand being made the Issuer shall be obliged to make payment of all such sums in full.
 
 
(ii)
No provision of this Trust Deed shall require the Trustee to do anything which may (i) be illegal or contrary to applicable law or regulation; or (ii) cause it to expend or risk its own funds or otherwise incur any loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever incurred thereby in the performance of any of its duties or in the exercise of any of its rights, powers or discretions, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or loss, damage, cost, charge, claim, demand, expense, judgment, action, proceeding or other liability whatsoever is not assured to it.
 
8.24
Professional and other charges: Any trustee of the trust presents being a lawyer, accountant, broker or other person engaged in any profession or business shall be entitled to charge and be paid all usual and proper professional and other charges for business transacted and acts done by him or his firm in connection with the trusts of this Trust Deed or the Paying Agency Agreement and also his reasonable charges in addition to disbursements for all other work and business done and all time spent by him or his firm in connection with matters arising in connection with this Trust Deed including matters which might or should have been attended to in person by a trustee not being a banker, accountant or other professional person.
 
8.25
Holder Absolute Owner: The Issuer, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for all purposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Note or Coupon or any notice of previous loss or theft of the Note or Coupon or of any trust or interest therein) and shall not be required to obtain any proof thereof or as to the identity of such bearer.
 
8.26
Enforcement: The Trustee may at any time, at its discretion and without notice, take such proceedings against the Issuer as it may think fit to enforce the provisions of the Trust Deed, the Notes and the Coupons, but it shall not be bound to take any such proceedings or any other action in relation to the Trust Deed, the Notes or the Coupons unless (a) it has been so directed by an Extraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one-quarter in outstanding nominal amount of the Notes then outstanding and (b) it has been indemnified and/or secured to its satisfaction. No Noteholder or Couponholder shall be entitled to proceed directly against the Issuer unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and the failure shall be continuing.
 
9
Trustee Liable for Negligence
 
Section 1 of the Trustee Act 2000 shall not apply to any function of the Trustee, provided that if the Trustee fails to show the degree of care and diligence required of it as trustee, nothing in this Trust Deed shall relieve or indemnify it from or against any liability which would otherwise attach to it in respect of any negligence, default, breach of duty or breach of trust of which it may be guilty.
 
10
Waiver and Proof of Default
 
10.1
Waiver: The Trustee may, without the consent of the Noteholders or Couponholders and without prejudice to its rights in respect of any subsequent breach, from time to time and at any time, if in its opinion the interests of the Noteholders will not be materially prejudiced thereby, waive or authorise, on such terms as seem expedient to it, any breach or proposed breach by the Issuer of this Trust Deed or the Conditions or determine that an Event of Default, Potential Event of Default, Restructuring Event or Potential Restructuring Event will not be treated as such provided that the Trustee will not do so in contravention of an express direction given by an Extraordinary Resolution or a request made pursuant to Condition 9. No such direction or request will affect a previous waiver, authorisation or determination. Any such waiver, authorisation or determination will be binding on the Noteholders and the Couponholders and, if the Trustee so requires, will be notified to the Noteholders as soon as practicable.
 
10.2
Proof of Default: Proof that the Issuer has failed to pay a sum due to the holder of any one Note or Coupon will (unless the contrary be proved) be sufficient evidence that it has made the same default as regards all other Notes or Coupons which are then payable.
 
11
Trustee not Precluded from Entering into Contracts
 
The Trustee and any other person, whether or not acting for itself, may acquire, hold or dispose of any Note, Coupon or other security (or any interest therein) of the Issuer or any other person, may enter into or be interested in any contract or transaction with any such person and may act on, or as depositary or agent for, any committee or body of holders of any securities of any such person in each case with the same rights as it would have had if the Trustee were not acting as Trustee and need not account for any profit.
 
12
Modification and Substitution
 
12.1
Modification: The Trustee may agree without the consent of the Noteholders or Couponholders to any modification to this Trust Deed which is, in its opinion, of a formal, minor or technical nature or to correct a manifest error. The Trustee may also so agree to any modification to this Trust Deed which is in its opinion not materially prejudicial to the interests of the Noteholders, but such power does not extend to any such modification as is mentioned in the proviso to paragraph 2 of Schedule 3.
 
12.2
Substitution:
 

 
12.2.1
The Trustee may, without the consent of the Noteholders or Couponholders, agree to the substitution of the Issuer’s successor in business or any Subsidiary of the Issuer (other than an Excluded Subsidiary) (the “Substituted Obligor”) in place of the Issuer (or of any previous substitute under this sub-Clause) as the principal debtor under this Trust Deed, the Notes and the Coupons provided that:
 
(i)  
a deed is executed or undertaking given by the Substituted Obligor to the Trustee, in form and manner satisfactory to the Trustee, agreeing to be bound by this Trust Deed, the Notes and the Coupons (with consequential amendments as the Trustee may deem appropriate) as if the Substituted Obligor had been named in this Trust Deed, the Notes and the Coupons as the principal debtor in place of the Issuer
 
(ii)  
if the Substituted Obligor is subject generally to the taxing jurisdiction of a territory or any authority of or in that territory with power to tax (the “Substituted Territory”) other than the territory to the taxing jurisdiction of which (or to any such authority of or in which) the Issuer is subject generally (the “Issuer’s Territory”), the Substituted Obligor will (unless the Trustee otherwise agrees) give to the Trustee an undertaking satisfactory to the Trustee in terms corresponding to Condition 7 with the substitution for the references in that Condition to the Issuer’s Territory of references to the Substituted Territory whereupon the Trust Deed, the Notes and the Coupons will be read accordingly
 
(iii)  
if any two Authorised Signatories of the Substituted Obligor certify that it will be solvent immediately after such substitution, the Trustee need not have regard to the Substituted Obligor’s financial condition, profits or prospects or compare them with those of the Issuer
 
(iv)  
the Trustee is satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution
 
(v)  
the Issuer and the Substituted Obligor comply with such other requirements as the Trustee may direct in the interests of the Noteholders and
 
(vi)  
(unless the Issuer’s successor in business is the Substituted Obligor as the principal debtor under this Trust Deed, the Notes and the Coupons) the obligations of the Substituted Obligor as the principal debtor under this Trust Deed, the Notes and the Coupons are guaranteed by the Issuer (with consequential amendments as necessary) to the Trustee’s satisfaction.
 

 
12.2.2
Release of Substituted Issuer: An agreement by the Trustee pursuant to Clause 12.2 will, if so expressed, release the Issuer (or a previous substitute) from any or all of its obligations under this Trust Deed, the Notes and the Coupons. Notice of the substitution will be given to the Noteholders within 14 days of the execution of such documents and compliance with such requirements.
 
 
12.2.3
Completion of Substitution: On completion of the formalities set out in Clause 12.2, the Substituted Obligor will be deemed to be named in this Trust Deed, the Notes and the Coupons as the principal debtor in place of the Issuer (or of any previous substitute) and this Trust Deed, the Notes and the Coupons will be deemed to be amended as necessary to give effect to the substitution.
 
13
Appointment, Retirement and Removal of the Trustee
 
13.1
Appointment: Subject as provided in clause 13.2 below, the Issuer has the power of appointing new trustees but no-one may be so appointed unless previously approved by an Extraordinary Resolution. A trust corporation will at all times be a Trustee and may be the sole Trustee. Any appointment of a new Trustee will be notified by the Issuer to the Noteholders as soon as practicable.
 
13.2
Retirement and Removal: Any Trustee may retire at any time on giving at least three months’ written notice to the Issuer without giving any reason or being responsible for any costs occasioned by such retirement and the Noteholders may by Extraordinary Resolution remove any Trustee provided that the retirement or removal of a sole trust corporation will not be effective until a trust corporation is appointed as successor Trustee. If a sole trust corporation gives notice of retirement or an Extraordinary Resolution is passed for its removal, the Issuer will use all reasonable endeavours to procure that another trust corporation be appointed as Trustee and if it does not procure the appointment of a new trustee within 30 days of the expiry of the Trustee’s notice referred to in this Clause, the Trustee shall be entitled to procure forthwith a new trustee.
 
13.3
Co-Trustees: The Trustee may, despite Clause 13.1, by written notice to the Issuer appoint anyone to act as an additional Trustee jointly with the Trustee:
 
 
13.3.1
         if the Trustee considers the appointment to be in the interests of the Noteholders and/or the
         Couponholders
 
 
13.3.2
         to conform with a legal requirement, restriction or condition in a jurisdiction in which a particular act
         is to be performed or
 
 
13.3.3
         to obtain a judgment or to enforce a judgment or any provision of this Trust Deed in any jurisdiction.
 
Subject to the provisions of this Trust Deed the Trustee may confer on any person so appointed such functions as it thinks fit. The Trustee may by written notice to the Issuer and that person remove that person. At the Trustee’s request, the Issuer will forthwith do all things as may be required to perfect such appointment or removal and it irrevocably appoints the Trustee as its attorney in its name and on its behalf to do so.
 
13.4
Competence of a Majority of Trustees: If there are more than two Trustees the majority of them will be competent to perform the Trustee’s functions provided the majority includes a trust corporation.
 
13.5
Merger: Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Clause, without the execution or filing of any paper or any further act on the part of the parties hereto.
 
14
Couponholders
 
No notices need be given to Couponholders. They will be deemed to have notice of the contents of any notice given to Noteholders. Even if it has express notice to the contrary, in exercising any of its functions by reference to the interests of the Noteholders, the Trustee will assume that the holder of each Note is the holder of all Coupons relating to it.
 
15
Currency Indemnity
 
15.1
Currency of Account and Payment: Pounds sterling (the “Contractual Currency”) is the sole currency of account and payment for all sums payable by the Issuer under or in connection with this Trust Deed, the Notes and the Coupons, including damages.
 
15.2
Extent of discharge: An amount received or recovered in a currency other than the Contractual Currency (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the insolvency, winding-up or dissolution of the Issuer or otherwise), by the Trustee or any Noteholder or Couponholder in respect of any sum expressed to be due to it from the Issuer will only discharge the Issuer to the extent of the Contractual Currency amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so).
 
15.3
Indemnity: If that Contractual Currency amount is less than the Contractual Currency amount expressed to be due to the recipient under this Trust Deed, the Notes or the Coupons, the Issuer will indemnify it against any loss sustained by it as a result. In any event, the Issuer will indemnify the recipient against the cost of making any such purchase.
 
15.4
Indemnity separate: The indemnities in this Clause 15 and in Clause 7.4 constitute separate and independent obligations from the other obligations in this Trust Deed, will give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted by the Trustee and/or any Noteholder or Couponholder and will continue in full force and effect despite any judgment, order, claim or proof for a liquidated amount in respect of any sum due under this Trust Deed, the Notes and/or the Coupons or any other judgment or order.
 
16
Communications
 
Any communication shall be by letter or fax:
 
in the case of the Issuer, to it at:
 
Avonbank
Feeder Road
Bristol BS2 0TB
 
Telephone no.:
 +44(0) 117 933 2020
Fax no.:
 +44(0) 117 933 2108
Attention:
 The Treasurer
 
and in the case of the Trustee, to it at:
 
P.O. Box 88
1 Grenville Street
St. Helier
Jersey JE4 9PF
 
Telephone no.:
+44 1534 606 150
Fax no.:
+44 1534 606 159
Attention:
Manager, Corporate Services
 
Communications will take effect, in the case of delivery, when delivered or, in the case of fax, when despatched. Communications not by letter shall be confirmed by letter but failure to send or receive that letter shall not invalidate the original communication.
 
17
Further Issues
 
17.1
Supplemental Trust Deed: If the Issuer issues further securities as provided in the Conditions, the Issuer shall, before their issue, execute and deliver to the Trustee a deed supplemental to this Trust Deed containing such provisions (corresponding to any of the provisions of this Trust Deed) as the Trustee may require.
 
17.2
Meetings of Noteholders: If the Trustee so directs, Schedule 3 shall apply equally to Noteholders and to holders of any securities issued pursuant to the Conditions as if references in it to “Notes” and “Noteholders” were also to such securities and their holders respectively.
 
18
Governing Law and Submission to Jurisdiction
 
18.1
Governing Law: This Trust Deed shall be governed by and construed in accordance with English law.
 
18.2
Jurisdiction: The courts of England are to have jurisdiction to settle any disputes which may arise out of or in connection with this Agreement and accordingly any legal action or proceedings arising out of or in connection with this Agreement (“Proceedings”) may be brought in such courts. The Trustee irrevocably submits to the jurisdiction of such courts and waives any objection to Proceedings in such courts whether on the ground of venue or on the ground that the Proceedings have been brought in an inconvenient forum. These submissions are for the benefit of the Issuer and shall not limit the right of any of it to take Proceedings in any other court of competent jurisdiction nor shall the taking of Proceedings in any one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction (whether concurrently or not).
 
18.3
Service of Process: The Trustee irrevocably appoints HSBC Bank plc of 8 Canada Square, London E14 5HQ as its authorised agent for service of process in England. If for any reason such agent shall cease to be such agent for the service of process, the Trustee shall forthwith appoint a new agent for service of process in England and deliver to the Issuer a copy of the new agent’s acceptance of that appointment within 30 days. Nothing shall affect the right to serve process in any other manner permitted by law.
 
19
Counterparts
 
This Trust Deed may be executed and delivered in any number of counterparts each of which will be deemed an original.
 


Schedule 1
Form of Definitive Note
On the front:
 
Denomination
 
ISIN
 
Series
 
Certif. No.
 
£50,000
 
XS0280014282
 
    

WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC
(Incorporated with limited liability in England and Wales)
£225,000,000
4.80436 per cent. Notes due 2037

 
This Note forms part of a series designated as specified in the title (the “Notes”) of Western Power Distribution (South Wales) plc (the “Issuer”) constituted by the Trust Deed referred to on the reverse hereof. The Notes are subject to, and have the benefit of, that Trust Deed and the terms and conditions (the “Conditions”) set out on the reverse hereof.
 
This is to certify that the bearer of this Note is entitled on 21 December 2037, or on such earlier date as the Note may be redeemed or repaid to such sum as is determined in accordance with the Conditions to be payable on such redemption or repayment together with interest on the outstanding nominal amount of such Note from 21 December 2006 at the rate of 4.80436 per cent. per annum payable annually in arrear on 21 December in each year, subject to and in accordance with the Conditions.
 
This Note shall not be valid or become obligatory for any purpose until authenticated by or on behalf of the Principal Paying Agent.
 
In witness whereof the Issuer has caused this Note to be signed in facsimile on its behalf.
 
Dated as of [·]
 
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
 
By:
 

 
[Director]
 


This Note is authenticated by or on behalf of the Principal Paying Agent.
 
By:
 

 

 
Authorised Signatory
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 


On the back:
 
Terms and Conditions
 
The £225,000,000 4.$0436 per cent. Notes due 2037 (the "Notes", which expression shall in these Conditions, unless the context otherwise requires, include any further notes issued pursuant to Condition 16 and forming a single series with the Notes) of Western Power Distribution (South Wales) plc (the "Issuer") are constituted by a Trust Deed (the "Trust Deed's dated 21 December 2006 (the "Issue Date') made between the Issuer arid HSBC Trustee (C.L) Limited (the "Trustee", which expression shall include its successor(s)) as trustee for the holders of the Notes (the "Noteholders") and the holders of the interest coupons appertaining to the Notes (the "Couponholders" and the "Coupons" respectively, which expressions shall, unless the context otherwise requires, include the talons for further interest coupons (the "Talons") and the holders of the Talons).

The statements in these Conditions include summaries of, and are subject to, the detailed provisions of and definitions in the Trust Deed. Copies of the Trust Deed and the Agency Agreement dated 21 December 2006 (the "Agency Agreement") made between the Issuer, the initial Paying Agents and the Trustee are available for inspection during normal business hours by the Noteholders and the Couponholders at the principal office for the time being of the Trustee, being at the date of issue of the Notes at 1, Grenville Street, St. Helier, Jersey JE4 9PF and at the specified office of each of the Paying Agents. The Noteholders and the Couponholders are entitled to the benefit of are bound by, and are deemed to have notice of, all the provisions of tire Trust Deed and tire Agency Agreement applicable to them.
 
1. FORM, DENOMINATION AND TITLE
1.1 Form and Denomination
The Notes are in form, serially numbered, in the denomination of £50,000 with Coupons
and one Talon attached on issue.

1.2 Title
Title to the Notes and to the Coupons will pass by delivery.

 
1.3
Holder Absolute Owner

The Issuer, any Paying Agent and the Trustee may (to the fullest extent permitted by applicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for all purposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice of ownership or writing on the Note or Coupon or any notice of previous loss or theft of the Note or Coupon or of any trust or interest therein) and shall not be required to obtain any proof thereof or as to the identity of such bearer.

2.  
STATUS

The Notes and the Coupons are direct, unconditional, unsubordinated and (subject to the provisions of Condition 3) unsecured obligations of the Issuer and (subject as provided above) rank pari passu, among themselves and (save for certain obligations required to be preferred by law) equally with all other outstanding unsecured obligations (other than subordinated obligations, if any) of the Issuer from time to time outstanding.
 
     3.    NEGATIVE PLEDGE
 
3.1 Negative Pledge

So long as any Note remains outstanding (as defined in the Trust Deed) the Issuer will, and will procure that each of its Distribution Subsidiaries (as defined below) will, ensure that no Relevant Indebtedness (as defined below) of the Issuer or any Distribution Subsidiary or of any other person and no guarantee by the Issuer or any Distribution Subsidiary of any Relevant Indebtedness of any person will be scented by a mortgage, charge, hen, pledge or other security interest (each a "Security Interest") upon, or with respect to, any of the present or future business, undertaking assets or revenues (including any uncalled capital) of the Issuer or any Distribution Subsidiary unless the Issuer, before or at the same time as the creation of the Security Interest, take any and all action necessary to ensure that:

 
(a)
all amounts payable by the Issuer under the Notes, the Coupons and the Trust Iced are secured equally and rateably with the Relevant Indebtedness or guarantee, as the case may be, by the same Security Interest, in. each case to the satisfaction of the Trustee; or

 
(b)
such outer Security Interest or guarantee or other arrangement (whether or not including the giving of a Security Interest) is provided in respect of all amounts payable by the Issuer under the Notes, the Coupons and the Trust Deed either (i) as the Trustee shall in its absolute discretion deem not materially less beneficial to the interests of the Noteholders or (ii) as shall be approved by an Extraordinary Resolution (as defined in the Trust Deed) of the Noteholders,

save that the above restriction shall not apply to any Security Interest (1) provided by or in respect of a company becoming a Distribution Subsidiary after the issue date of the Notes and where such Security Interest existed at the time that company becomes a Distribution Subsidiary (provided that such Security Interest was not created in contemplation of that company becoming a Distribution Subsidiary and the principal amount secured at the time of that company becoming a Distribution Subsidiary is not subsequently ink) or (2) created or outstanding in respect of any Non-recourse Indebtedness (as defined in Condition 9) or any leasing or hire purchase agreement of the Issuer or any Distribution Subsidiary provided that the aggregate outstanding principal amount secured by all such Security Interests created or outstanding under this exception (2) shall not at any time exceed the greater of £75,000,000 or 10 per cent. of the Regulatory Asset Base (as defined below) at such time (or the equivalent thereof in any other currency or currencies).

3.2 Restriction on distribution of dividends

So long as any Note or Coupon remains outstanding, the Issuer shall not at any time declare or make a distribution (as defined in Section 209 of the Income and Corporation Taxes Act 1988) or grant a loan or any other credit facility to any of its shareholders unless (1) immediately following the occurrence of any such event, the Net Debt (as defined below) at such time would not exceed 85 per cent. of the Regulatory Asset Base relating to the year in which the relevant distribution or grant was first declared or made; and (2) written certification thereof, signed by two directors of the Issuer, has been provided to the Trustee on or prior to such distribution or grant. Such certification may be relied upon by the Trustee without further enquiry or evidence and, if relied upon by the Trustee, shall, in the absence of manifest error, be conclusive and binding on all parries whether or not addressed to each such party.

3.3 Definitions
For the purposes of these Conditions:
"Capital and Reserves" means the aggregate of:
 
 
(a)
 the amount paid up or credited as paid up on the share capital of the Issuer and
     
 
(b)
the total of the capital, revaluation and revenue reserves of the Group (as defined below), including any share premium account, capital redemption reserve and credit balance on the profit and loss account, but excluding sums set aside for taxation and amounts attributable to outside shareholders in Subsidiary Undertakings (as defined below) and deducting any debit balance on the profit and loss account,

all as shown in the theft latest audited consolidated balance sheet and profit and loss account of the Group prepared in accordance with the historical cost convention (as modified by the revaluation of certain fixed assets) for the purposes of the Companies Act 1985, but adjusted as may be necessary in rest of any variation in the paid up share capital or share premium account of the Issuer since the date of that balance sheet and further adjusted as may be necessary to reflect any change since the date of that balance sheet in the Subsidiary Undertakings comprising the Group and/or as the Auditors (as defined in the Trust Deed) may consider appropriate.

A certificate by two directors of the Issuer as to the amount of the Capital and Reserves at any given time may be relied upon by the Trustee without further enquiry or evidence and, if relied upon by the Trustee, shall, in the absence of manifest error, be conclusive and binding on all parties whether or not addressed to each such party;

"consolidated" means, in relation to the financial statements and accounts of the Issuer and/or the Group, those statements and accounts as consolidated under International Financial Reporting Standards, provided that if such consolidated accounts are not prepared, it shall mean the nonconsolidated financial statements and accounts of the Issuer prepared in accordance with generally accepted accounting principles in the United Kingdom;

"Distribution Licence" means an electricity distribution licence granted under section 6(I)(c) of the Electricity Act 1989, as amended from time to time;

"Distribution Subsidiary" means any Subsidiary of the Issuer which holds a Distribution Licence from time to time;

"Group" means the Issuer and, if and to the extent it has any, its Subsidiary Undertakings and "member of the Group" shall be construed accordingly;

"Net Debt", at any time, means the aggregate amount of all indebtedness for borrowed money (as defined in Condition 9) of the Issuer at such time less the aggregate of'.

 
(a)
amounts credited to current accounts or deposits and certificates of deposit (with a term not exceeding three months) at, or issued by, any bank, building society or other financial institution;
     
 
(b)
 cash in band; and
     
 
(c)
 the lower of book and market value (calculated, where relevant, by reference to their bid price) of gilts issued by the United Kingdom Government, in each case beneficially owned by the Issuer and in each case so that no amount shall be included or excluded more than once;
 
"Regulatory Asset Base", in respect of any year, means the regulatory asset base of the Issuer most recently published in respect of such year by the Office of Gas and Electricity Markets ("OFGEM") or any successor of OFGEM;

"Relevant Indebtedness" means (i) any present or future indebtedness (whether being principal, premium, interest or other amounts) in the form of or represented by bonds, notes, debentures, debenture stock, loan stock or other securities, whether issued for cash or in whole or in part for a consideration other than cash, and which, with the agreement of the person issuing the same, are or are capable of being quoted, listed or ordinarily dealt in on any stock exchange or recognised over-the-counter or other securities market; or (ii) monies borrowed or raised from, err any acceptance credit opened by, a bank, building society or other financial institution; or (iii) any leasing or hire purchase agreement which would be treated as a finance lease in the accounts of the relevant person;

"Subsidiary" means a subsidiary within the meaning of section 736 of the Companies Act 1985;

"Subsidiary Undertaking" shall have the meaning given to it by section 258 of the Companies Act 1985 (but, in relation to the Issuer, shall exclude any undertaking (as defined in the Companies Act 1985) whose accounts are not included in the then latest published audited consolidated accounts of the Issuer, or (in the case of an undertaking which has first become a subsidiary undertaking of a member of the Group since the date as at which any such audited accounts were prepared) would not have beers so included or consolidated if it had become so on or before that date); and any reference to an obligation being "guaranteed" shall include a refe to an indemnity being given in respect of that obligation.
 
4. INTEREST
 
4.1 Interest Rate and Interest Payment Dates

The Notes bear interest on their outstanding principal amount from and including 21 December 2006 at the rate of 4.80436 per cent. per annum, payable annually in arrear on 21 December in each year (each an "Interest Payment Date") until 21 December 2037.
4.2 Interest Accrual

Each Note will cease to bear interest from and including its due date for redemption unless, upon due presentation, payment of the principal in respect of the Note is improperly withheld or refused or unless default is otherwise made in respect of payment, in which event interest shall continue to accrue as provided in the Trust Deed.

4.3 Calculation of Broken Interest

When interest is required to be calculated in respect of a period of less than a full year, it shall be calculated on the basis of (a) the actual number of days in the period from and including the date from which interest begins to accrue (the "Accrual Date") to but excluding the date on which it falls due divided by (b) the actual number of days from and including the Accrual Date to but excluding the next following Interest Payment Date.
 
5. PAYMENTS AND EXCHANGES OF TALONS
 
5.1 Payments in respect of Notes

Payments of principal and interest in respect of each Note will be trade against presentation and surrender (or, in the case of part payment only, endorsement) of the Note, except that payments of interest due on an Interest Payment Date will be made against presentation and surrender (or, in the case of part payment only, endorsement) of the relevant Coupon, in each case at the specified office outside the United States of any of the Paying Agents.

5.2 Method of Payment

Payments will be made by credit or transfer to a pounds sterling account maintained by the payee with or, at the option of the payee, by a pounds sterling cheque drawn on, a bank in London.

5.3 Missing Unmatured Coupons

Each Note should be presented for payment together with all relative unmatured Coupons (which expression shall, for the avoidance of doubt, include Coupons falling to be issued on exchange of matured Talons). Upon the date on which any Note becomes due and repayable, all unmatured Coupons appertaining to the Note (whether or not attached) shall become void and no payment shall be made in respect of such Coupons.

5.4 Payments subject to Applicable Laws

Payments in respect of principal and interest on the Notes are subject in all cases to any fiscal or other laws and regulations applicable in the place of payment, but without prejudice to the provisions of Condition 7.

5.5 Payment only on a Presentation Date

A holder shall be entitled to present a Note or Coupon for payment only on a Presentation Date and shall not, except as provided in Condition 4, be entitled to any further interest or other payment if a Presentation Date is after the due date.

"Presentation Date" means a day which (subject to Condition 8):
(a) is or falls after the relevant due date;
 
(b) is a Business Day in the place of the specified office of the Paying Agent at which the
  Note or Coupon is presented for payment; and

(c) in the case of payment by credit or transfer to a pounds sterling account in London as
  referred to above), is a Business Day in London.

In this Condition, "Business Day" means, in relation to any place, a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in that place.

5.6 Exchange of Talons

On and after the Interest Payment Date on which the final Coupon comprised in any Coupon sheet man=, the Talon comprised in the Coupon sheet may be surrendered at the specified office of any Paying Agent in exchange for a further Coupon sheet (including any appropriate further Talon), subject to the provisions of Condition $. Each Talon shall, for the purposes of these Conditions, he deemed to mature on the Interest Payment Date on which the final Coupon comprised in the relative Coupon sheet matures.

5.7 Initial Paying Agents

The names of the initial Paying Agents and their initial specified offices are set out at the end of these Conditions. The Issuer reserves the right, subject to the prior written approval of the Trustee, at any time to vary or terminate the appointment of any Paying Agent and to appoint additional or other Paying Agents provided that:
(a)
 there will at all times be a Principal Paying Agent;
     
 
(b)
there will at all times be at least one Paying Agent (which may be the Principal Paying Agent) having its specified office is a European city which so long as the Notes are admitted to official listing on the London Stock Exchange plc shall be London or such other place as the UK Listing Authority tray approve; and

 
(c)
there will at all times be a Paying Agent in a Member State of the European Union that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive.

Notice of any termination or appointment and of any changes in specified offices will be given to the Noteholders promptly by the Issuer in accordance with Condition 12.
 
6. REDEMPTION AND PURCHASE
 
6.1 Redemption at Maturity

Unless previously redeemed or purchased and cancelled as provided below, the Issuer will redeem the Notes at their principal amount on 21 December 2037.

6.2 Redemption at the option of the Issuer on 21 December 2026

The Issuer may at its option, having given not less than 30 nor more than 90 days' notice to the Noteholders in accordance with Condition 12 (which shall be irrevocable), redeem all, but not same only, of the Notes on 21 December 2026 at the price which shall be the higher of the following:

(A) the principal amount thereof, and

(B)  
that price (the "Redemption Price"), expressed as a percentage rounded to three decimal places (0.0005 being rounded down), at which the Gross Redemption Yield (as defined below) on the Notes, if they were to be purchased at such price on the third dealing day prior to the publication of the notice of redemption, would be equal to the Gross Redemption Yield on such dealing day of the Reference Stock (as defined below) on the basis of the middle market price of the Reference Stock prevailing at or about 3.00 p.m, (London time) on such dealing day, as determined by the Trustee (or such other person(s) as the Trustee may approve), together, in each case, with interest (if any) accrued to (but excluding) 21 December 2026.

Any reference in these Terms and Conditions to principal shall be deemed to include any sum payable as the Redemption Price save in respect of such references in Conditions 6.3 and 6.4.

In this Condition:

"Calculation Agent" shall mean an independent investment bank of international repute, appointed by the Issuer with the prior written approval of the Trustee in order to perform the function of calculating the Gross Redemption Yield;

"Reference Stock" means 4'k per cent. Treasury Stock due 2036 or of such other United Kingdom Government Stock as the Trustee, with the advice of three leading brokers obtained by the Issuer operating in the gilt edged market and/or gilt edged market makers, shall determine to be appropriate; and

The "Gross Redemption Yield" on the Notes and the Reference Stock will be expressed as a percentage and will be calculated by the Calculation Agent on the basis set out by the United Kingdom Debt Management Office in the paper "Formulae for Calculating Gilt Prices from Yields" page 4, Section One: Price/Yield Formulae "Conventional Gilts"; "Double-dated and Undated Gilts with Assumed (or Actual) Redemption on a QuasiCoupon Date" (published on 8 June 1998 and updated on 15 January 2002 and as Rather ups or amended from time to time) on a semi-annual compounding basis (converted on an annualised yield and rounded up (if necessary) to four decimal places) or on such other basis as the Trustee tray approve.

At any time when under these Conditions it is necessary to have, or the Trustee requests, the advice of brokers and/or markket makers operating in the gilt edged market, the Issuer shall select and appoint them with the prior written approval of the Trustee and at the expense of the Issuer.
At any time when under these Conditions it is necessary to have a Calculation Agent to perform any functions under these Conditions, the Issuer will appoint such Calculation Agent on or before any such time.

Notices of redemption will specify the date fixed for redemption and the applicable Redemption Price. Upon the expiry of any notice of redemption, the Issuer shall be bound m redeem the Notes at the applicable Redemption Price.

6.3 Redemption for Taxation Reasons

If the Issuer satisfies the Trustee immediately before the giving of the notice referred to below that:

(a) as a result of any change in, or amendment to, the laws or regulations of a Relevant Jurisdiction (as defined in Condition 7), or any change in the application or official interpretation of the laws or regulations of a Relevant Jurisdiction, which change or amendment becomes effective after 19 December 2006, on the neat Interest Payment Date the Issuer would be required to pay additional amounts as provided or referred to in Condition 7; and

(b) the requirement cannot be avoided by the Issuer taking reasonable measures available to it,

the Issuer may at its option, having given not less than 30 nor more than 60 days' notice to the Noteholders in accordance with Condition 12 (which notice shall be irrevocable), redeem all the Notes, but not some only, at any time at their principal amount together with interest accrued to but excluding the date of redemption, provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would be required to pay such additional amounts were a payment in respect of the Notes then due. Prior to the publication of any notice of redemption pursuant to this paragraph the Issuer shall deliver to the Trustee a certificate signed by two directors of the Issuer stating that the requirement referred to in (a) above will apply on the next Interest Payment Date and cannot be avoided by the Issuer taking reasonable measures available to it, and the Trustee shall be entitled to accept the certificate as sufficient evidence of the satisfaction of the conditions precedent set out above, in which event it shall be conclusive and binding on the Noteholders and the Couponholders.

 
6.4
Redemption at the option of Noteholders on a Restructuring Event

(a)  (i) If, at any time while any of the Notes remains outstanding, a Restructuring Event (as defined below) occurs and prior to the commencement of or during the Restructuring Period (as defined below):

(A) an independent financial adviser (as described below) shall have certified in writing to the Trustee that such Restructuring Event will not be or is not, in its opinion, materially prejudicial to the interests of the Noteholdes; or

(B) if there are Rated Securities (as defined below), each Rating Agency (as defined below) that at such time has assigned a current rating to the Rated Securities confirms in writing to the Trustee that it will not be withdrawing or reducing the then current rating assigned to the Rated Securities by it from an investment grade rating (BBB-Baa3, or their respective equivalents for the time being, or better) to a non-investment grade rating (BB+Bal, or their respective equivalents for the time being, or worse) or, if tire Rating Agency shall have already rated the Rated Securities below investment grade (as described above), the rating will not be lowered by one full rating category or more, in each case as a result, in whole or in part, of any event or circumstance comprised in or arising as a result of the applicable Restructuring Event,

the following provisions of this Condition 6.4 shall cease to have any further effect in relation to such Restructuring Event.

 
(ii)
If, at any time while any of the Notes remains outstanding, a Restructuring Event occurs and (subject to Condition 6.4(a)(i)):

(A) within the Restructuring Period, either.

(x) if at the time such Restructuring Event occurs there are Rated Securities, a Rating Downgrade (as defined below) in reed of such Restructuring Event also occurs; or

(y) if at such time there are no Rated Securities, a Negative Rating Event (as defined below) in respect of such Restructuring Event also occurs; and

(B) an independent financial adviser shall have certified in writing to the Trustee that such Restructuring Event is, in its opinion, materially prejudicial to the interests of the Noteholders (a "Negative Certification"),

then, unless at any time the Issuer shall have given notice under Condition 62 or 6.3, the holder of each Note will, upon the giving by the Issuer of a Put Event Notice (as defined below), have the option (the "Restructuring Put Option") to require the Issuer to redeem or, at the option of the Issuer, purchase (or procure the purchase of) that Note on the Put Date (as defined below), at its principal amount together with (or, where purchased, together with an amount equal to) interest (if any) accrued to (but excluding) the Put Date.

A Restructuring Event shall be deemed not to be materially prejudicial to the interests of the Noteholders if, notwithstanding the occurrence of a Rating Downgrade or a Negative Rating Event, the rating assigned to the Rated Securities by any Rating Agency (as defined below) is subsequently increased to, or, as the case may be, there is assigned to the Notes or other unsecured and unsubordinated debt of the Issuer (or of any Subsidiary of the Issuer and which is guaranteed on an unsecured and unsubordinated basis by the Issuer) having an initial maturity of five years or more by any Rating Agency, an investment grade rating (BBB-fBaa3) or their respective equivalents for the time being) or better prior to any Negative Certification being issued.

Any certification by an independent financial adviser as aforesaid as to whether or not, in its opinion, any Restructuring Event is materially prejudicial to the interests of the Noteholders shall, in the absence of manifest error, be conclusive and binding on the Trustee, the Issuer and the Noteholders. The Issuer may, at any now, with the prior written approval of the Trustee appoint an independent financial adviser for the purposes of this Condition 6.4. If, within 14 London business days following the occurrence of a Restructuring Event, the Issuer shall not have appointed an independent financial adviser for the purposes of Condition 6.4(a)(ii)(B) and (if so required by the Trustee) the Trustee is indemnified and/or segued to its satisfaction against the costs of such adviser, the Trustee may appoint an independent financial adviser for such purpose following consultation with the Issuer.

(b) Promptly upon the Issuer becoming aware of the occurrence of a Put Event (as defined below), and in any event not later than 14 days after the occurrence of a Put Event, the Issuer shall, and at any time upon the Trustee becoming similarly so aware the Trustee may, and if so requested by the holders of at least one-quarter in nominal amount of the Notes then outstanding shall (and subject to it being indemnified and/or secured to its satisfaction), give notice (a "Put Event Notice") to the Noteholders in accordance with Condition 12 specifying the nature of the Put Event and the procedure for exercising the Restructuring Put Option.

(c) To exercise the Restructuring Put Option, the holder of a Note must deliver at the specified office of any Paying Agent on any Business Day (as defined in Condition 5.5) at the place of such specified office falling within the Put Period, a duly signed and completed notice of exercise in the form (for the time being current arid which may, if this Note is held in a clearing system, be any form acceptable to the clearing system delivered in a manner acceptable to the clearing system) obtainable from any specified office of any Paying Agent (a "Put Notice") and in which the holder must specify a bank account (or, if payment is to be made by cheque, an address) to which payment is to be made under this paragraph accompanied by such Notes or evidence satisfactory to the Paying Agent concerned that such Notes will, following the delivery of the Put Notice, be held to its order or under its control. A Put Notice given by a holder of any Note shall be irrevocable except where, prior to the due date of redemption, an Event of Default has occurred and is continuing, in which event such holder, at its option, may elect by notice to the Issuer to withdraw the Put Notice. For the purposes of this Condition, the "Put Period" shall mean the period of 45 days after that on which a Put Event Notice is given.Subject to the relevant Noteholder having complied with this Condition, the Issuer shall redeem or, at the option of the Issuer, purchase (or procure the purchase of) the relevant Note on the fifteenth day after the date of expiry of the Put Period (the "Put Date'") unless previously redeemed or purchased.

(d) For the purposes of these Conditions:
 
(i)  A "Negative Rating Event" shall be deemed to have occurred if (A) the issuer does not, either prior to or not later than 14 days after the date of a Negative Certification in respect of the relevant Restructuring Event, seek, and thereupon use all reasonable endeavours to obtain, a rating of the Notes or any other unsecured and unsubordinated debt of the Issuer (or of any Subsidiary of the Issuer and which is guaranteed on an unsecured and unsubordinated basis by the Issuer) having an initial maturity of five years or more from a Rating Agency or (B) if it does so seek and use such endeavours, it is unable, as a result of such Restructuring Event, to obtain such a rating of at least investment grade (BBB. IBaa3, or their restive equivalents for the time being).
   
(ii)  
 		  A "Put Event" occurs on the date of the last to occur of (A) a Restructuring Event, (B) either a Rating Downgrade or, as the case may be, a Negative Rating Event and (C) the relevant Negative Certification.
   
(iii)  
"Rating Agency" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Ire. or any of its subsidiaries and their successors, Moody's Investors Service Limited or any of its subsidiaries and their successors, Fitch Ratings Limited or any of its subsidiaries and their successors or any rating agency substituted for any of them (or any permitted substitute of them) by the Issuer from time to time with the prior written approval of the Trustee.
(iv)   A "Rating Downgrade" shall be deemed to have occurred in respect of a Restructuring Event if the then current rating assigned to the Rated Securities by any Rating Agency (whether provided by a Rating Agency at the invitation of the Issuer or by its own volition) is withdrawn or reduced firm an investment grade rating (BBB-lBaa3) or their respective equivalents for the time being, or better) to a non-investment grade rating (BB+/Bal) or their respective equivalents for the time being, or worse) or, if the Rating Agency shall then have already rated the Rated Securities below investment grade (as described above), the rating is lowered one full rating category.
   
(v)  "Rated Securities" means the Notes, if at any time and for so long as they have a rating from a Rating Agency, and otherwise any other unsecured and unsubordinated debt of the Issuer (or of any Subsidiary of the Issuer and which is guaranteed on an unsecured and unsubordinated basis by the Issuer) having an initial maturity of five years or more which is rated by a Rating Agency.
   
(vi) 
 		 "Restructuring Event" means the occurrence of any one or more of the following events:
 
(A) (x) the Secretary of State for Trade and Industry (or any successor) giving any Distribution Subsidiary and/or the Issuer written notice of any revocation of its Distribution Licence or (y) any Distribution Subsidiary and/or the Issuer agreeing in writing with the Secretary of State for Trade and Industry (or any successor) to any revocation or surrender of its Distribution Licence or (z) any legislation (whether primary or subordinate) being enacted terminating or revoking the Distribution Licence of any Distribution Subsidiary and/or the Issuer, except in any such case in circumstances where a licence or licences on substantially no less favourable terms is or are granted to (1) the Issuer or a wholly owned Subsidiary of the Issuer (the "Relevant Subsidiary"), and in the case of such Relevant Subsidiary at the time of such grant it either executes in favour of the Trustee an unconditional and irrevocable guarantee in respect of the Notes in such form as the Trustee may approve or becomes the primary obligor under the Notes in accordance with Condition 14; or

(B) any modification (other than a modification which is of a formal, minor or technical nature) being made to the tams and conditions of any Distribution Subsidiary's or the Issuer's Distribution Licence unless two directors of the Distribution Subsidiary or, as the case may be, of the Issuer, have certified to the Trustee that the modified terms and conditions are not materially less favourable to the business of the Distribution Subsidiary or, as the case may be, of the Issuer; or

(C) any legislation (whether primary or subordinate) is enacted which removes, qualifies or amends (other than an amendment which is of a formal, minor or technical nature) the functions and duties of the Secretary of State for Trade and Industry (or any successor) and/or the Gas and Electricity Markets Authority (or any successor) under section 3A of the Electricity Act 1989, as amended by the Utilities Act 2000 (as this may be amended from time to time), unless two directors of the Issuer have certified to the Trustee that such removal, qualification or amendment does not have a materially adverse effect (as defined in the Trust Deed) on the financial condition of the Issuer or any Distribution Subsidiary.

(vii) "Restructuring Period" means:

(A) if at the time a Restructuring Event occurs there are Rated Securities, the period of 90 days starting from and including the day on which that Restructuring Event occurs; or

(B) if at the time a Restructuring Event occurs there are no Rated Securities, the period starting from and including the day on which that Restructuring Event occurs and ending on the day 90 days following the later of (x) the date (if any) on which the Issuer shall seek to obtain a rating as contemplated by the definition of Negative Rating Event; (y) the expiry of the 14 days referred to in the definition of Negative Rating Event; and (2) the date on which a Negative Certification shall have been given to the Issuer in respect of that Restructuring Event.

(viii) A Rating Downgrade or a Negative Rating Event or a non-investment grade rating for the purpose of Condition 6.4(a)(i)(B) shall he deemed not to have occurred as a result or in respect of a Restructuring Event if the Rating Agency making the relevant reduction in rating or, where applicable, declining to assign a rating of at least investment grade as provided in this Condition 6.4 does not announce or publicly confirm or inform the Trustee in writing at its request that the reduction or, where applicable, declining to assign a rating of at least investment grade was the result, in whole or in part, of any event or circumstance comprised in or arising as a result of the applicable Restructuring Event.

The Trustee is under to obligation, responsibility or liability to ascertain whether a Restructuring Event, a Negative Rating Event or any event which could lead to the occurrence of or could constitute a Restructuring Event has occurred and, until it shall have express notice pursuant to the Trust Iced to the contrary, the Trustee may assume that no Restructuring Event, Negative Rating Event or other such event has occurred. In determining whether or not a Restructuring Event has occurred, the Trustee shall be entitled to rely solely and without liability on an opinion given in a certificate signed by two directors of the Issuer.

6.5 Purchases

The Issuer or any affiliate of the Issuer may at any time purchase Notes (provided that all unmatured Coupons appertaining to the Notes are purchased with the Notes) at any price in the open market or otherwise. Such Notes may be held, reissued, resold or, at the option of the Issuer, surrendered to any Paying Agent for cancellation.

6.6 Cancellations

All Notes which are redeemed will forthwith be cancelled (together with all unmatured Coupons attached thereto or surrendered therewith at the time of redemption). All Notes so cancelled and any Notes purchased and cancelled pursuant to Condition 6.5 above (together with all nominated Coupons cancelled therewith) shall be forwarded to the Principal Paying Agent end cannot be reissued or resold.

6.7 Notices Final

Upon the expiry of any notice as is referred to in Condition 6.2, 6.3 or 6.4 above the Issuer shall be bound to redeem the Notes to which the notice refers in accordance with the terms of such Condition (in the case of Condition 6.4 above, save as otherwise provided therein).

7. TAXATION

7.1 Payment without Withholding

All payments in respect of the Notes by or on behalf of the Issuer shall be made without withholding or reduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature ("Taxes") imposed or levied by or on behalf of any Relevant Jurisdiction, unless the withholding or deduction of the Taxes is required by law. In that event, the Issuer will pay such additional amounts as may be necessary in order that the net amounts received by the Noteholders and Couponholders after the withholding or deduction shall equal the respective amounts which would have been receivable in respect of the Notes or, as the case stay be, Coupons in the absence of the withholding or deduction; except that no additional amounts shall be payable in relation to any payment in respect of any Note or Coupon:

(a) presented for payment by or on behalf of, a holder who is liable to the Taxes in respect of the Note or Coupon by reason of his having some connection with a Relevant Jurisdiction other than the mere holding of the Note or Coupon; or

(b) presented for payment by or on behalf of a holder who could lawfully avoid (but has not so avoided) such deduction or withholding by complying or procuring that any third party complies with any statutory requirements or by making or procuring that any third party makes a declaration of non-residence or other similar claim for exemption to any tax authority in the place where the relevant Note or Coupon is presented; or

(c) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive; or

(d) presented for payment by or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Note or Coupon to another Paying Agent in a Member State of the European Union; or

(e) presented for payment more than 30 days after the Relevant Date (as defined below) except to the extent that a holder would have been entitled to additional amounts on presenting the same for payment on the last day of the period of 30 days assuming, whether or not such is in fact the case, that day to have beets a Presentation Date (as defined in Condition 5.5).

7.2 Interpretation

In these Conditions:

"Relevant Date" means the date on which the payment first becomes due but, if the full amount of the money payable has not been received by the Principal Paying Agent or the Trustee on or before the due date, it means the date on which, the full amount of the money having been so received, notice to that effect has been duly given to the Noteholders by the Issuer in accordance with Condition 12; and
"Relevant Jurisdiction" means the United Kingdom or any political subdivision or any authority thereof or therein having power to tax.

7.3 Additional Amounts

Any reference in these Conditions to any amounts in respect of the Notes shall be deemed also to refer to any additional amounts which may be payable under this Condition or under any undertakings given in addition to, or in substitution for, this Condition pursuant to the Trust Deed.

8.  
PRESCRIPTION

Notes and Coupons (which for this purpose shall not include Talons) will become void unless presented for payment within periods of 10 years (in the case of principal) and five years (in the case of interest) from the Relevant Date in respect of the Notes or, as the case may be, the Coupons, subject to the provisions of Condition 5. There shall not be included in any Coupon shy issued upon exchange of a Talon any Coupon which would be void upon issue under this paragraph or Condition 5.
 
9. EVENTS OF DEFAULT
 
 9.1 Events of Default

The Trustee at its discretion may, and if so requested in writing by the holders of at least onequarter in nominal amount of the Notes then outstanding or if so directed by an Extraordinary Resolution shall (subject in each case to being indemnified and/or secured to its satisfaction), (but in the case of the happening of any of the events described in paragraphs (b), (c) and (e) to (g) inclusive below, only if the Trustee shall have certified in writing to the Issuer that such event is, in its opinion, materially prejudicial to the interests of the Noteholders), give notice in writing to the Issuer that each Note is, and each Note shall thereupon immediately become, due and repayable at its principal amount together with accrued interest as provided in the Trust Deed if any of the following events (each an "Event of Default") shall have occurred:

(a)  
Non-Payment
 
if default is made in the payment of any principal or interest due in respect of the Notes or any of them and the default continues for a period of 14 days in the case of principal and 21 days in the case of interest or, where relevant, the Issuer, having become obliged to redeem, purchase or procure the purchase of (as the case may be) any Notes pursuant to Condition 6.4 fails to do so within a period of 14 days of having become so obliged; or

(b)  
Breach of Other Obligations

if the Issuer fails to perform or observe any of its other obligations, covenants, conditions or provisions under the Notes or the Trust Deed and (except where the Trustee shall have certified to the Issuer in writing that it considers such failure to be incapable of remedy in which case no such notice or continuation as is hereinafter mentioned will be required) the failure continues for the period of 60 days (or such longer period as the Trustee may in its absolute discretion permit) next following the service by the Trustee on the Issuer of notice requiring the same to be remedied; or

(c)  
Cross-Default

if (i) any other indebtedness for borrowed money of the Issuer or any Principal Subsidiary becomes due and repayable prior to its stated maturity by reason of an event of default or (ii) any such indebtedness for borrowed money is not paid when due or, as the case may be, within any applicable grace period (as originally provided) or (iii) the Issuer or any Principal Subsidiary fails to pay when due (or, as the case may be, within any originally applicable grace period) any amount payable by it under any present or future guarantee for, or indemnity in respect of, any indebtedness for borrowed money of any person or (iv) any security given by the Issuer or any Principal Subsidiary for any indebtedness for borrowed money of any person or any guarantee or indemnity of indebtedness for borrowed money of any person becomes enforceable by reason of default in relation thereto and steps are taken to enforce such security save in any such case where there is a bona fide dispute as to whether the relevant indebtedness for borrowed money or any such guarantee or indemnity as aforesaid shall be due and payable, provided that the aggregate amount of the relevant indebtedness for borrowed money in respect of which any one or more of the events mentioned above in this subparagraph (c) has or have occurred equals or exceeds whichever is the greater of £20,000,000 or its equivalent in other currencies (on the basis of the middle spot rate for the relevant currency against the pound sterling as quoted by any leading bank on the day on which this paragraph applies) and two per cent. of the Capital and Reserves, and for the purposes of this sub-paragraph (c), "indebtedness for borrowed money" shall exclude Non-recourse Indebtedness; or

(d)  
Winding-up

if any order is made by any competent court or resolution passed for the winding up or dissolution of tire Issuer, save for the purposes of and followed by amalgamation, merger, consolidation, reorganisation, reconstruction or other similar arrangement on terms previously approved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders; or

(e)  
Winding-up of Principal Subsidiary

if any order is made by any competent court or any resolution is passed for the winding up or dissolution of a Principal Subsidiary, save for the purposes of and followed by amalgamation, merger, consolidation, reorganisation, reconstruction or other similar arrangement (i) not involving or arising out of the insolvency of such Principal Subsidiary and under which all the surplus assets of such Principal Subsidiary are transferred to the Issuer or any of its Subsidiaries (other than an Excluded Subsidiary) or (ii) the terms of which have previously been approved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders; or

(f)  
Ceasing to Carry an the Business

if the Issuer or any Principal Subsidiary shall cease to carry on the whole or, in the opinion of the Trustee, substantially the whole of its business, save for the purposes of amalgamation, merger, consolidation, reorganisation, reconstruction or other similar arrangement (A) (x) not involving or arising out of the insolvency of the Issuer or such Principal Subsidiary and (y) under which all or, in the opinion of the Trustee, substantially all of its assets are transferred to another member of the Group (other than an Excluded Subsidiary) or to a transferee which is, or immediately upon such transfer becomes, a Principal Subsidiary or (B) under which all or, in the opinion of the Trust, substantially all of its assets are transferred to a third party or parties (whether associates or not) for full consideration by the Issuer or a Principal Subsidiary on an arm's length basis or (C) the terms of which have previously been approved in writing by the Trustee or by an Extraordinary Resolution of the Noteholders, provided that (in the case of (A) or (B) above) if the Issuer transfer& its Distribution Licence, the transferee has, at or around the time of transfer, either executed in favour of the Trustee an unconditional and irrevocable guarantee in respect of the Notes in such form as the Trustee may require or become a primary obligor under the Notes in accordance with Condition 13; or

(g)  
Insolvency

if the Issuer or any Principal Subsidiary shall suspend or shall threaten to suspend payment of its debts generally or shall be declared or adjudicated by a competent court to be unable, or shall admit in writing its inability, to pay its debts (within the meaning of section 123(1) or (2) of the Insolvency Act 1986) as they fall due, or shall be adjudicated or found insolvent by a competent court or shall enter into any composition or other similar arrangement with its creditors under section 1 of the Insolvency Act 1986, as amended; or

(h)  
Administration and Enforcement Proceeding

if a receiver, administrative receiver, administrator or other similar official shall be appointed in relation to the Issuer or any Principal Subsidiary or in relation to the whole or, in the opinion of the Trust, a substantial part of the undertaking or assets of any of them or a distress, execution or other process shall be levied or enforced upon or sued out against, or an encumbrancer shall take possession of, the whole or, in the opinion of the Trustee, a substantial part of the assets of any of them and in any of the foregoing cases it or he shall not he paid out or discharged within 90 days (or such longer period as the Trustee may in its absolute discretion permit); or

For the purposes of sub-paragraph (g) above, section 123(I)(a) of the Insolvency Act 1986 shall have effect as if for "£750' there was substituted "£250,000" or such higher figure as the Office of Gas and Electricity Markets (or any successor) may from time to time determine by notice in writing to the Secretary of State for Trade and Industry and the Issuer.

Neither the Issuer nor any Principal Subsidiary shall be deemed to be unable to pay its debts for the purposes of sub-paragraph (g) above if any such demand as is mentioned in section 123(I)(a) of the Insolvency Act 1986 is being contested in good faith by the Issuer or the relevant Principal Subsidiary with recourse to all appropriate measures and procedures or if any such demand is satisfied before the expiration of such period (if any) as may be stated in any notice given by the Trustee under this Condition 9,

Definitions

For the purposes of these Conditions:

"Excluded Subsidiary" means any Subsidiary of the Issuer (other than a Relevant Subsidiary):

 
(i)
which is a single purpose company whose principal assets and business are constituted by the ownership, acquisition, development and/or operation of an asset;
     
(ii)
none of whose indebtedness for borrowed money in respect of the financing of such ownership, acquisition, development and/or operation of an asset is subject to any  recourse whatsoever to any member of the Group (other than another Excluded Subsidiary) in respect of the repayment thereof, except as expressly referred to in sub paragraph (ii)(C) of the definition of Non-recourse Indebtedness below; and
     
   (iii)  which has been designated as such by the Issuer by written notice to the Trustee, provided that the Issuer tray give written notice to the Trustee at any time that any Excluded Subsidiary is no longer an Excluded Subsidiary, whereupon it shall cease to be an Excluded Subsidiary;

"indebtedness for borrowed money" means any present or future indebtedness (whether being principal, premium, interest or other amounts) far or in respect of (i) money borrowed, (ii) liabilities under or in respect of any acceptance or acceptance credit, or (iii) any notes, bonds, debentures, debenture stock, loan stock or other securities offered, issued or distributed whether by way of public offer, private placing, acquisition consideration or otherwise and whether issued for cash or in whole or in part for a consideration other than cash;
"Non-recourse Indebtedness" means any indebtedness for borrowed money:
(i) which is ink by an Excluded Subsidiary; or

(ii) in respect of which the person or persons to whom any such indebtedness for borrowed money is or may be owed by the relevant borrower (whether or not a member of the Group) has or have no recourse whatsoever to any member of the Group (other than an Excluded Subsidiary) for the repayment thereof other than:

(A) recourse to such borrower for amounts limited to the cash flow or net cash flow (other than historic cash flow or historic net cash flow) from any specific asset or assets over or in respect of which security has beers granted in respect of such indebtedness for borrowed money; and/or

(B) recourse to such borrower for the purpose only of enabling amounts to be claimed in respect of such indebtedness for borrowed money in an enforcement of any encumbrance given by such borrower over any such asset or assets or the income, cash flow or other proceeds deriving therefrom (or given by any shareholder or the like in the borrower over its shares or the like in the capital of the borrower) to secure such indebtedness for borrowed money, provided that (era) the extent of such recourse to such borrower is limited solely to the amount of any recoveries made on any such enforcement, and (bb) such person or persons is/are not entitled, by virtue of any right or claim arising out of or in connection with such indebtedness for borrowed money, to commence proceedings for the winding up or dissolution of the borrower or to appoint or procure the appointment of any receiver trustee or similar person or officer in respect of the borrower or any of its assets (save for the assets the subject of such encumbrance); and/or

(C) recourse to such borrower generally, or directly or indirectly to a member of the Group, under any form of assurance, undertaking or support, which recourse is limited to a claim for damages (other than liquidated damages and damages required to be calculated in a specified way) for breach of an obligation (not being a payment obligation or an obligation to procure payment by another or an indemnity in respect thereof or any obligation to comply or to procure compliance by another with any financial ratios or other tests of financial condition) by the person against whom such recourse is available.

"Principal Subsidiary" at any time shall mean each Subsidiary of the Issuer (in each case not being an Excluded Subsidiary or any other Subsidiary of the Issuer, as the case may be, whose only indebtedness for borrowed money is Non-recourse Indebtedness):

(a) whose (a) profits on ordinary activities before tax or (b) gross assets, in each case attributable to the Issuer represent 20 per cent. or more of the consolidated profits on ordinary activities before tax of the Group or, as the case may be, consolidated gross assets of the Group, in each case as calculated by reference to the then latest audited financial statements of such Subsidiary (consolidated in the case of a company which itself has Subsidiaries) and the then latest audited consolidated financial statements of the Group provided that in the case of a Subsidiary acquired after the end of the financial period to which the then latest audited consolidated financial statements of the Group relate, the reference to the then latest audited consolidated financial statements of the Group for the purposes of the calculation above shall, until consolidated financial statements for the financial period in which the acquisition is made have been prepared and audited as aforesaid, be deemed to be a reference to such first-mentioned financial statements as if such Subsidiary had been shown in such financial statements by reference to its then latest relevant audited financial statements, adjusted as deemed appropriate by the Auditors; or

(ii) to which is transferred all or substantially all of the business, undertaking and assets of a Subsidiary of the Issuer which immediately prior to such transfer is a Principal Subsidiary, whereupon the transferor Subsidiary shall immediately cease to be a Principal Subsidiary and the transfer= Subsidiary shall cease to be a Principal Subsidiary under the provisions of this sub-paragraph (ii), upon publication of its next audited financial statements (but without prejudice to the provisions of sub-paragraph (a) above) but so that such transferor Subsidiary or such transferee Subsidiary may be a Principal Subsidiary of the Issuer on or at any time after the date on which such audited financial statements have beet published by virtue of the provisions of sub-paragraph (a) above or before, on or at any time after such date by virtue of the provisions of this sub-paragraph (ii).

A certificate by two directors of the Issuer that, in their opinion, a Subsidiary of the Issuer is or is not or was or was not at any particular time or throughout any specified period a Principal Subsidiary may be relied upon by the Trustee without father enquiry or evidence and the Trustee will not be responsible or liable for any loss occasioned by acting on such a certificate and, if relied upon by the Trustee, shall, in the absence of manifest error, be conclusive and binding on all parties, whether or not addressed to each such party.

10. ENFORCEMENT

10.1 Enforcement by the Trustee

The Trustee may at any time, at its discretion and without notice, take such proceedings against the Issuer as it may think fit to enforce the provisions of the Trust Deed, the Notes and the Coupons, but it shall not be bound to take any such proceedings or any other action in relation to the Trust Decd, the Notes or the Coupons unless (a) it has been so directed by an Extraordinary Resolution of the Noteholders or so requested in writing by the holders of at least one-quarter in principal amount of the Notes then outstanding and (b) it has been indemnified and/or secured to its satisfaction.

10.2 Enforcement by the Noteholders

No Noteholder or Couponholder shall be entitled to proceed directly against the Issuer unless the Trustee, having become bound so to proceed, fails so to do within a reasonable period and the failure shall be continuing.

11.  
REPLACEMENT OF NOTES AND COUPONS

Should any Note or Coupon be lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified office of the Principal Paying Agent upon payment by the claimant of the expenses incurred in connection with the replacement and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Notes or Coupons must be surrendered before replacement, will be issued.

12. NOTICES

12.1 Notices to the Noteholders

All notices to the Noteholders will be valid if published in a leading English language daily newspaper published in London or such outer English language daily newspaper with general circulation in Europe as the Trustee may approve. It is expected that publication will normally be made in the Financial Times. The Issuer shall also ensure that notices are duly published in a manner which complies with the rules and regulations of any stock exchange or other relevant authority on which the Notes are for the time being listed or traded. Any such notice will be deemed to have been given on the date of the first publication or, where required to be published in more than one newspaper, on the date of the first publication in all required newspapers. If publication as provided above is not practicable, notice will be given in such other manner, and shall be deemed to have been given on such date, as the Trustee may approve. Couponholders will be deemed for all purposes to have notice of the contents of any notice given to the Noteholders in accordance with this paragraph.

12.2 Notices from the Noteholders

Notices to be given by any Noteholder shall be in writing and given by lodging the same, together with the relative Note or Notes, with the Principal Paying Agent or, if the Notes are held in a clearing system, may be given through the clearing system in accordance with its standard rules and procedures.

13. SUBSTITUTION

The Trustee may, without the consent of the Noteholders or Couponholders, agree with the Issuer to the substitution of certain other entities (other than an Excluded Subsidiary) in place of the Issuer (or of any previous substitute under this Condition) as the principal debtor under the Notes, the Coupons and the Trust Deed, subject to:

  (a) the Notes being unconditionally and irrevocably guaranteed by the Issuer,
     
  (b) the Trustee being satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution; and
     
 
(c)
certain other conditions set out in the Trust Deed being complied with.

14. MEETINGS OF NOTEHOLDERS, MODIFICATION, WAIVER, AUTHORISATION AND DETERMINATION

14.1 Meetings of Noteholders

The Trust Deed contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the modification or abrogation by Extraordinary Resolution of any of these Conditions or any of the provisions of the Trust Deed. The quorum at any meeting for passing an Extraordinary Resolution will be one or more persons present holding or representing more than 50 per cent. in principal amount of the Notes for the time being outstanding, or at any adjourned such meeting one or more persons present whatever the principal amount of the Notes held or represented by him or them, except that, at any meeting the business of which includes the modification or abrogation of certain of the provisions of these Conditions and certain of the provisions of the Trust Deed, the necessary quorum for passing an Extraordinary Resolution will be one or more persons present holding or representing not less than three-quarters, or at any adjourned such meeting not less than one-quarter, of the principal amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Noteholders will be binding on all Noteholders, whether or not they are present at the meeting, and on all Couponholders.

14.2 Modification, Waiver, Authorisation and Determination

The Trustee may agree, without the consent of the Noteholders or Couponholders, to airy modification of, or to the waiver or authorisation of any breach or proposed breach of, any of these Conditions or any of the provisions of the Trust Deed, or determine, without any such consent as aforesaid, that any Event of Default or Potential Event of Default (as defined in the Trust Deed) shall not be treated as such (provided that, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of the Noteholders) or may agree, without any such consent as aforesaid, to any modification which, in its opinion, is of a formal, minor or technical nature or to correct a manifest error.

14.3 Trustee to have Regard to Interests of Noteholders as a Class

In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including, without limitation, any modification, waiver, authorisation, determination or substitution), the Trustee shall have regard to the general interests of the Noteholders as a class but shall not have regard to any interests arising from circumstances particular to individual Noteholders or Couponholders (whatever their number) and, in particular but without limitation, shall not have regard to the consequences of any such exercise for individual Noteholders or Couponholders (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political sub-division thereof and the Trustee shall not be entitled to require, nor shall any Noteholder or Couponholder be entitled to claim, from the Issuer, the Trustee or any other person any indemnification or payment in respect of any tax consequence of any such exercise upon individual Noteholders or Couponholders except to the extent already provided for in Condition 7 and/or any undertaking given in addition to, or in substitution for, Condition 7 pursuant to the Trust Deed.

14.4 Notification to the Noteholders

Any modification, abrogation, waiver, authorisation, determination or substitution shall be binding on the Noteholders and the Couponholders and, unless the Trustee agrees otherwise, any modification or substitution shall be notified by the Issuer to the Noteholders as soon as practicable thereafter in accordance with Condition 12.

15. INDEMNIFICATION OF THE TRUSTEE AND IT'S CONTRACTING WITH THE ISSUER

15.1 Indemnification of the Trustee

The Trust Deed contains provisions for the indemnification of the Trustee and for its relief firm responsibility, including provisions relieving it from taking action unless indemnified and/or secured to its satisfaction.

15.2 Trustee Contracting with the Issuer

The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (a) to enter into business transactions with the Issuer and/or any of its Subsidiaries and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Issuer and/or any of its Subsidiaries, (b) to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such transactions or, as case may be, any such trusteeship without regard to the interests of or consequences for, the Noteholders or Couponholders, and (c) to retain and not be liable to account for any profit made or any other amount or benefit received thereby or in connection therewith.

16.  
FURTHER ISSUES

The Issuer is at liberty from time to time without the consent of the Noteholders or Couponholders to create and issue further notes or bonds (whether in bearer or registered form) either (a) ranking par/ passu in all respects (or in all respects save for the first payment of interest thereon) and so that the same shall be consolidated and form a single series with the outstanding notes or bonds of any series (including the Notes) constituted by the Trust Deed or any supplemental deed or (b) upon such terms as to ranking, interest, conversion, redemption and otherwise as the Issuer may determine at the time of the issue. Any thither notes or bonds which are to form a single series with the outstanding notes or bonds of any series (including the Notes) constituted by the Trust Deed or any supplemental deed shall, and any other further notes or bonds may (with the consent of the Trustee), be constituted by a deed supplemental to the Trust Deed. The Trust Iced contains provisions for convening a single meeting of the Noteholders and the holders of notes or bonds of other series in certain circumstances where the Trustee so decides.

17. GOVERNING LAW

The Trust Deed, the Notes and the Coupons are governed by, and will be construed in accordance with, English law.

18. RIGHTS OF THIRD PARTIES

No rights are conferred on any person under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Note, but this does not affect any right or remedy of any person which exists or is available apart from that Act.




Form of Coupon
 
On the front:
 
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
£225,000,000 4.80436 per cent. Notes due 2037

Coupon for £2,402.18 due on 21 December 20[07/08/09/10/11/12/13/14/15/16/17/18/19/20/21/22/23/24/25/26/27/28/29/30/31/32/33/34/35/36/37].
 
This Coupon is payable to bearer (subject to the Conditions endorsed on the Note to which this Coupon relates, which shall be binding upon the holder of this Coupon whether or not it is for the time being attached to such Note) at the specified offices of the Paying Agents set out on the reverse hereof (or any further or other Paying Agents or specified offices duly appointed or nominated and notified to the Noteholders).
 
If the Note to which this Coupon relates shall have become due and payable before the maturity date of this Coupon, this Coupon shall become void and no payment shall be made in respect of it.
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
By:



[Director]

Cp No.
Denomination
ISIN
Series
Certif. No.
 
£50,000
XS00280014282
    

On the back:
PRINCIPAL PAYING AGENT
HSBC Bank plc
Level 24
8 Canada Square
London E14 5HQ

 


Form of Talon
 

 
On the front:
 
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
£225,000,000 4.80436 per cent. Notes due 2037

Note in the principal amount of £50,000
 
Talon for further Coupons.
 
After all the Coupons relating to the Note to which this Talon relates have matured, further Coupons (including if appropriate a Talon for further Coupons) shall be issued at the specified offices of the Paying Agents set out on the reverse hereof (or any further or other Paying Agents or specified offices duly appointed or nominated and notified to the Noteholders).
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
By:


[Director]

Cp No.
Denomination
ISIN
Series
Certif. No.
 
£50,000
XS00280014282
    

On the back:

PRINCIPAL PAYING AGENT
HSBC Bank plc
Level 24
8 Canada Square
London E14 5HQ


Schedule 2
Part 1
Form of Temporary Global Note
ISIN: XS00280014282
 
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC
(Incorporated with limited liability in England and Wales)
£225,000,000
4.80436 per cent. Notes due 2037

Temporary Global Note

This is to certify that the bearer is entitled on 21 December 2037, or on such earlier date as the Notes designated above (the “Notes”) may be redeemed or repaid to such sum as is determined to be payable on such redemption or repayment in accordance with the terms and conditions (the “Conditions”) of the Notes set out in Schedule 1 to the trust deed dated 21 December 2006 (the “Trust Deed”) between Western Power Distribution (South Wales) plc (the “Issuer”) and HSBC Trustee (C.I.) Limited as trustee (the “Trustee”)) upon presentation and surrender of this Temporary Global Note and to interest at the rate of 4.80436 per cent. per annum on the outstanding nominal amount of the Notes in arrear on 21 December in each year, subject to and in accordance with the Conditions.
 
On or after 30 January 2007 (the “Exchange Date”) this Temporary Global Note may be exchanged in whole or part (free of charge to the holder) by its presentation and, on exchange in full, surrender to or to the order of the Principal Paying Agent for interests in a Global Note (the “Global Note”) in bearer form in an aggregate nominal amount equal to the nominal amount of this Temporary Global Note submitted for exchange with respect to which there shall be presented to the Principal Paying Agent a certificate dated no earlier than the Exchange Date from Euroclear Bank S.A./N.V. (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) substantially to the following effect:

“CERTIFICATE
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
£225,000,000
4.80436 per cent. Notes due 2037
Common Code 028001428 ISIN XS00280014282 (the “Notes”)

This is to certify that, based solely on certificates we have received in writing, by tested telex or by electronic transmission from member organisations appearing in our records as persons being entitled to a portion of the nominal amount set out below (our“Member Organisations”) substantially to the effect set out in the temporary global Note in respect of the Notes, as of the date hereof, £225,000,000 nominal amount of the Notes (1) is owned by persons that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States federal income taxation regardless of its source (“United States persons”), (2) is owned by United States persons that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(iv) (“financial institutions”)) purchasing for their own account or for resale, or (b) acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution has agreed, on its own behalf or through its agent, that we may advise the Issuer or the Issuer’s agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (3) is owned by United States or foreign financial institutions for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7), and to the further effect that United States or foreign financial institutions described in clause (3) above (whether or not also described in clause (1) or (2)) have certified that they have not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.
 
We further certify (1) that we are not making available herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) any portion of such temporary global Note excepted in such certificates and (2) that as of the date hereof we have not received any notification from any of our Member Organisations to the effect that the statements made by such Member Organisation with respect to any portion of the part submitted herewith for exchange (or, if relevant, exercise of any rights or collection of any interest) are no longer true and cannot be relied upon as of the date hereof.
 
We understand that this certificate is required in connection with certain tax laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorise you to produce this certificate to any interested party in such proceedings.
 
Yours faithfully
 
[EUROCLEAR BANK S.A./N.V.] or [CLEARSTREAM BANKING, SOCIÉTÉ ANONYME]
 
By:
 
Dated:
 
  

 
Any person appearing in the records of Euroclear or Clearstream, Luxembourg as entitled to an interest in this Temporary Global Note may require the exchange of an appropriate part of this Temporary Global Note for an equivalent interest in the Global Note by delivering or causing to be delivered to Euroclear or Clearstream, Luxembourg a certificate dated not more than 15 days before the Exchange Date in substantially the following form (copies of which will be available at the office of Euroclear in Brussels and Clearstream, Luxembourg in Luxembourg):
 
“CERTIFICATE
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
£225,000,000
4.80436 per cent. Notes due 2037
Common Code 028001428 ISIN XS00280014282 (the “Notes”)

To:
 
Euroclear Bank S.A./N.V. or Clearstream Banking, société anonyme
 
This is to certify that as of the date hereof, and except as set out below, the Notes held by you for our account (1) are owned by person(s) that are not citizens or residents of the United States, domestic partnerships, domestic corporations or any estate or trust the income of which is subject to United States federal income taxation regardless of its source (“United States person(s)”), (2) are owned by United States person(s) that (a) are foreign branches of United States financial institutions (as defined in U.S. Treasury Regulations Section 1.165-12(c)(1)(iv) (“financial institutions”)) purchasing for their own account or for resale, or (b) acquired the Notes through foreign branches of United States financial institutions and who hold the Notes through such United States financial institutions on the date hereof (and in either case (a) or (b), each such United States financial institution hereby agrees, on its own behalf or through its agent, that you may advise the Issuer or the Issuer’s agent that it will comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (3) are owned by United States or foreign financial institution(s) for purposes of resale during the restricted period (as defined in U.S. Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and in addition if the owner of the Notes is a United States or foreign financial institution described in clause (3) above (whether or not also described in clause (1) or (2)) this is to further certify that such financial institution has not acquired the Notes for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.
 
As used herein, “United States” means the United States of America (including the States and the District of Columbia) and its “possessions” include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands.
 
We undertake to advise you promptly by tested telex on or prior to that date on which you intend to submit your certificate relating to the Notes held by you for our account in accordance with your documented procedures if any applicable statement herein is not correct on such date, and in the absence of any such notification it may be assumed that this certificate applies as of such date.
 
This certificate excepts and does not relate to £[•] nominal amount of such interest in the Notes in respect of which we are not able to certify and as to which we understand exchange for an equivalent interest in the Global Note (or, if relevant, exercise of any rights or collection of any interest) cannot be made until we do so certify.
 
We understand that this certificate is required in connection with certain tax laws of the United States. In connection therewith, if administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably authorise you to produce this certificate to any interested party in such proceeding.
 
Dated:
 
By:
 

 
[Name of person giving certificate]
As, or as agent for the beneficial owner(s) of the above Notes to which this certificate relates.”

 
Upon any exchange of a part of this Temporary Global Note for an equivalent interest in the Global Note, the portion of the nominal amount hereof so exchanged shall be endorsed by or on behalf of the Principal Paying Agent in the Schedule hereto, whereupon the nominal amount hereof shall be reduced for all purposes by the amount so exchanged and endorsed.
 
The Global Note will be exchangeable in accordance with its terms for definitive Notes (the “Definitive Notes”) in bearer form with Coupons attached.
 
This Temporary Global Note is subject to the Conditions and the Trust Deed and until the whole of this Temporary Global Note shall have been exchanged for equivalent interests in the Global Note its holder shall be entitled to the same benefits as if he were the holder of the Global Note for interests in which it may be exchanged (or the relevant part of it as the case may be) except that (unless exchange of this Temporary Global Note for the relevant interest in the Global Note shall be improperly withheld or refused by or on behalf of the Issuer) no person shall be entitled to receive any payment on this Temporary Global Note.
 
This Temporary Global Note shall not be valid or become obligatory for any purpose until authenticated by or on behalf of the Principal Paying Agent.
 
This Temporary Global Note shall be governed by and construed in accordance with English law.
 
In witness whereof the Issuer has caused this Temporary Global Note to be signed on its behalf.
 
Dated 21 December 2006
 
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
By:

 

 
This Temporary Global Note is authenticated by or on behalf of the Principal Paying Agent.
 
By:
 

 

 
Authorised Signatory
 
ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 


Schedule of Exchanges for Interests in the Global Note
 
The following exchanges of an interest in this Temporary Global Note for an interest in the Global Note have been made:
 
 
Date of Exchange
 
 
Amount of decrease in nominal amount of this Temporary Global Note
 
 
Nominal amount of this Temporary Global Note following such decrease
 
 
Notation made by or on behalf of the Principal Paying Agent
 
       

 


Schedule 2
Part 2
Form of Global Note
ISIN: XS00280014282

WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
(Incorporated with limited liability in England and Wales)
£225,000,000
4.80436 per cent. Notes due 2037

Global Note

This is to certify that the bearer is entitled on 21 December 2037, or on such earlier date as the Notes designated above (the “Notes”) may be redeemed or repaid to such sum as is determined to be payable on such redemption or repayment in accordance with the terms and conditions (the “Conditions”) of the Notes set out in Schedule 1 to the trust deed dated 21 December 2006 (the “Trust Deed”) between Western Power Distribution (South Wales) plc (the “Issuer”) and HSBC Trustee (C.I.) Limited as trustee (the “Trustee”)) upon presentation and surrender of this Global Note and to interest at the rate of 4.80436 per cent. per annum on the outstanding nominal amount of the Notes in arrear on 21 December in each year, subject to and in accordance with the Conditions.
 
The aggregate nominal amount from time to time of this Global Note shall be that amount not exceeding £225,000,000 as shall be shown by the latest entry in the fourth column of Schedule A hereto, which shall be completed by or on behalf of the Principal Paying Agent upon exchange of the whole or a part of the Temporary Global Note initially representing the Notes for a corresponding interest herein or upon the redemption or purchase and cancellation of Notes represented hereby or exchanged for Definitive Notes as described below.
 
This Global Note is exchangeable in whole but not in part (free of charge to the holder) for the Definitive Notes described below (1) upon the happening of an Event of Default (as defined in Condition 9) by such holder giving notice to the Trustee or the Principal Paying Agent, or (2) if this Global Note is held on behalf of Euroclear or Clearstream, Luxembourg or the Alternative Clearing System (each as defined under “Notices” below) and any such clearing system is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so by such holder giving notice to the Trustee or the Principal Paying Agent or (3) if the Issuer would suffer a material disadvantage in respect of the Notes as a result of a change in the laws or regulations (taxation or otherwise) of any jurisdiction referred to in Condition 7 which would not be suffered were the Notes in definitive form and a certificate to such effect signed by two directors of the Issuer is delivered to the Trustee, by the Issuer giving notice to the Trustee, Principal Paying Agent and the Noteholders, of its intention to exchange this Global Note for Definitive Notes on or after the Exchange Date specified in the notice.
 
On or after the Exchange Date the holder of this Global Note may surrender this Global Note to or to the order of the Principal Paying Agent. In exchange for this Global Note, the Issuer shall deliver, or procure the delivery of, an equal aggregate nominal amount of duly executed and authenticated Definitive Notes having attached to them all Coupons in respect of interest which has not already been paid on this Global Note.
 
“Exchange Date” means a day falling not less than 60 days after that on which the notice requiring exchange is given and on which banks are open for business in the city in which the specified office of the Principal Paying Agent is located and except in the case of exchange pursuant to (2) above in the cities in which Euroclear and Clearstream, Luxembourg or, if relevant, the Alternative Clearing System (each as defined under “Notices” below) are located.
 
Except as otherwise described herein, this Global Note is subject to the Conditions and the Trust Deed and, until it is exchanged for Definitive Notes, its holder shall be entitled to the same benefits as if it were the holder of the Definitive Notes for which it may be exchanged and as if such Definitive Notes had been issued on the date of this Global Note.
 
The Conditions shall be modified with respect to Notes represented by this Global Note by the following provisions:
 
Payments
 
Principal, any premium and interest in respect of this Global Note shall be paid to its holder against presentation and (if no further payment falls to be made on it) surrender of it to or to the order of the Principal Paying Agent in respect of the Notes (or to or to the order of such other Paying Agent as shall have been notified to the Noteholders for this purpose) which shall endorse such payment or cause such payment to be endorsed in the appropriate Schedule hereto (such endorsement being prima facie evidence that the payment in question has been made). References in the Conditions to Coupons and Couponholders shall be construed accordingly. No person shall however be entitled to receive any payment on this Global Note falling due after the Exchange Date, unless exchange of this Global Note for Definitive Notes is improperly withheld or refused by or on behalf of the Issuer. Condition 5.7(c) and Condition 7.1(d) will apply to the Definitive Notes only.
 
Notices
 
So long as this Global Note is held on behalf of Euroclear Bank S.A./N.V. (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) or such other clearing system as shall have been approved by the Trustee (the “Alternative Clearing System”), notices required to be given to Noteholders may be given by their being delivered to Euroclear and Clearstream, Luxembourg or, as the case may be, the Alternative Clearing System, rather than by publication as required by the Conditions and any such notice shall be deemed to have been given to the Noteholders on the day after the day on which such notice is delivered to Euroclear and Clearstream, Luxembourg, or, as the case may be, the Alternative Clearing System.
 
Prescription
 
Claims in respect of principal, any premium and interest in respect of this Global Note will become void unless it is presented for payment within a period of 10 years (in the case of principal and premium) and five years (in the case of interest) from the appropriate Relevant Date (as defined in Condition 7).
 
Meetings
 
For the purposes of any meeting of Noteholders, the holder hereof shall (unless this Global Note represents only one Note) be treated as two persons for the purposes of any quorum requirements of a meeting of Noteholders and, at any such meeting, as having one vote in respect of each £50,000 nominal amount of Notes for which this Global Note may be exchanged.
 
Purchase and Cancellation
 
Cancellation of any Note represented by this Global Note which is required by the Conditions to be cancelled will be effected by reduction in the nominal amount of this Global Note on its presentation to or to the order of the Principal Paying Agent for notation in Schedule A. Notes may only be purchased by the Issuer or any of its respective Subsidiaries if (where they should be cancelled in accordance with the Conditions) they are purchased together with the right to receive interest therein.
 
Trustee’s Powers
 
In considering the interests of Noteholders in circumstances where this Global Note is held on behalf of any one or more of Euroclear, Clearstream, Luxembourg and an Alternative Clearing System, the Trustee may, to the extent it considers it appropriate to do so in the circumstances, (a) have regard to such information as may have been made available to it by or on behalf of the relevant clearing system or its operator as to the identity of its accountholders (either individually or by way of category) with entitlements in respect of this Global Note and (b) consider such interests on the basis that such accountholders were the holder of this Global Note.
 
Redemption at the option of Noteholders on a Restructuring Event
 
The option of the Noteholders provided for in Condition 6.4 may be exercised by the holder of this Global Note giving notice to the Principal Paying Agent within the time limits relating to the deposit of Notes with a Paying Agent set out in that Condition substantially in the form of the redemption notice available from any Paying Agent and stating the nominal amount of Notes in respect of which the option is exercised and at the same time presenting this Global Note to the Principal Paying Agent for notation accordingly in Schedule C hereto.
 
This Global Note shall not be valid or become obligatory for any purpose until authenticated by or on behalf of the Principal Paying Agent.
 


This Global Note is governed by and shall be construed in accordance with English law.
 
In witness whereof the Issuer has caused this Global Note to be signed on its behalf.
 
Dated 21 December 2006
 
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
By:



This Global Note is authenticated by or on behalf of the Principal Paying Agent.
By:


Authorised Signatory

ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.
 

 


Schedule A
Nominal Amount of this Global Note

The aggregate nominal amount of this Global Note is as shown by the latest entry made by or on behalf of the nominal Paying Agent in the fourth column below. Increases in the nominal amount of this Global Note following exchanges of a part of the Temporary Global Note for interests in this Global Note and reductions in the nominal amount of this Global Note following redemption or the purchase and cancellation of Notes are entered in the second and third columns below.
 
 
Date
 
 
Reason for change in the nominal amount of this Global Note
 
 
Amount of such change
 
 
Initial nominal amount and nominal amount of this Global Note following such change
 
 
Notation made by or on behalf of the nominal Paying Agent (other than in respect of the initial nominal amount)
 
 
21 December 2006
 
 
Not applicable
 
 
Not applicable
 
 
£ zero
 
 
Not applicable
 
 

 



Schedule B
Interest Payments in respect of this Global Note

The following payments of interest in respect of this Global Note and the Notes represented by this Global Note have been made:
 
 
Date made
 
 
Amount of interest due and payable
 
 
Amount of interest paid
 
 
Notation made by or on behalf of the Principal Paying Agent
 

 



Schedule C
Exercise of Noteholders’ Option on Restructuring Event

The following exercises of the option of the Noteholders provided for in Condition 6.4 have been made in respect of the stated nominal amount of this Global Note:
 
 
Date of Exercise
 
 
Nominal amount of this Global Note in respect of which exercise is made
 
 
Date on which redemption of such nominal amount is due
 
 
Notation made by or on behalf of the Principal Paying Agent
 

 



 
Schedule 3
Provisions for Meetings of Noteholders
 
Interpretation
 
1
In this Schedule:
 
1.1
references to a meeting are to a meeting of Noteholders and include, unless the context otherwise requires, any adjournment
 
1.2
“agent” means a holder of a voting certificate or a proxy for a Noteholder
 
1.3
“block voting instruction” means an instruction issued in accordance with paragraphs 8 to 14
 
1.4
“Extraordinary Resolution” means a resolution passed at a meeting duly convened and held in accordance with this Trust Deed by a majority of at least 75 per cent. of the votes cast
 
1.5
“voting certificate” means a certificate issued in accordance with paragraphs 5, 6, 7 and 14 and
 
1.6
references to persons representing a proportion of the Notes are to Noteholders or agents holding or representing in the aggregate at least that proportion in nominal amount of the Notes for the time being outstanding.
 
 
Powers of meetings
 
2
A meeting shall, subject to the Conditions and without prejudice to any powers conferred on other persons by this Trust Deed, have power by Extraordinary Resolution:
 
2.1
to sanction any proposal by the Issuer or the Trustee for any modification, abrogation, variation or compromise of, or arrangement in respect of, the rights of the Noteholders and/or the Couponholders against the Issuer, whether or not those rights arise under this Trust Deed
 
2.2
to sanction the exchange or substitution for the Notes of, or the conversion of the Notes into, shares, notes or other obligations or securities of the Issuer or any other entity
 
2.3
to assent to any modification of this Trust Deed, the Notes or the Coupons proposed by the Issuer or the Trustee
 
2.4
to authorise anyone to concur in and do anything necessary to carry out and give effect to an Extraordinary Resolution
 
2.5
to give any authority, direction or sanction required to be given by Extraordinary Resolution
 
2.6
to appoint any persons (whether Noteholders or not) as a committee or committees to represent the Noteholders’ interests and to confer on them any powers or discretions which the Noteholders could themselves exercise by Extraordinary Resolution
 
2.7
to approve a proposed new Trustee and to remove a Trustee
 
2.8
to approve the substitution of any entity for the Issuer (or any previous substitute) as principal debtor under this Trust Deed and
 
2.9
to discharge or exonerate the Trustee from any liability in respect of any act or omission for which it may become responsible under this Trust Deed, the Notes or the Coupons
 
provided that the special quorum provisions in paragraph 19 shall apply to any Extraordinary Resolution (a “special quorum resolution”) for the purpose of sub-paragraph 2.2 or 2.8 or for the purpose of making a modification to this Trust Deed, the Notes or the Coupons which would have the effect of:
 
(i)  
modifying the maturity of the Notes or the dates on which interest is payable on them or
 
(ii)  
modifying the outstanding nominal amount of, or interest on, or other amounts in respect of or reducing or altering the method of calculating the rate of interest on, or any redemption amount of, the Notes or
 
(iii)  
changing the currency of payment of the Notes or the Coupons or
 
(iv)  
modifying the provisions in this Schedule concerning the quorum required at a meeting or the majority required to pass an Extraordinary Resolution or
 
(v)  
amending this proviso.
 
 
Convening a meeting
 
3
The Issuer or the Trustee may at any time convene a meeting. If it receives a written request by Noteholders holding at least 10 per cent. in nominal amount of the Notes for the time being outstanding and is indemnified to its satisfaction against all costs and expenses, the Trustee shall convene a meeting. Every meeting shall be held at a time and place approved by the Trustee.
 
4
At least 21 days’ notice (exclusive of the day on which the notice is given and of the day of the meeting) shall be given to the Noteholders. A copy of the notice shall be given by the party convening the meeting to the other parties. The notice shall specify the day, time and place of meeting and, unless the Trustee otherwise agrees, the nature of the resolutions to be proposed and shall explain how Noteholders may appoint proxies or representatives, obtain voting certificates and use block voting instructions and the details of the time limits applicable.
 
 
Arrangements for voting
 
5
If a holder of a Note wishes to obtain a voting certificate in respect of it for a meeting, he must deposit it for that purpose at least 48 hours before the time fixed for the meeting with a Paying Agent or to the order of a Paying Agent with a bank or other depositary nominated by the Paying Agent for the purpose. The Paying Agent shall then issue a voting certificate in respect of it.
 
6
A voting certificate shall:
 
6.1
be a document in the English language
 
6.2
be dated
 
6.3
specify the meeting concerned and the serial numbers of the Notes deposited and
 
6.4
entitle, and state that it entitles, its bearer to attend and vote at that meeting in respect of those Notes.
 
7
Once a Paying Agent has issued a voting certificate for a meeting in respect of a Note, it shall not release the Note until either:
 
7.1
the meeting has been concluded or
 
7.2
the voting certificate has been surrendered to the Paying Agent.
 
8
If a holder of a Note wishes the votes attributable to it to be included in a block voting instruction for a meeting, then, at least 48 hours before the time fixed for the meeting, (i) he must deposit the Note for that purpose with a Paying Agent or to the order of a Paying Agent with a bank or other depositary nominated by the Paying Agent for the purpose and (ii) he or a duly authorised person on his behalf must direct the Paying Agent how those votes are to be cast. The Paying Agent shall issue a block voting instruction in respect of the votes attributable to all Notes so deposited.
 
9
A block voting instruction shall:
 
9.1
be a document in the English language
 
9.2
be dated
 
9.3
specify the meeting concerned
 
9.4
list the total number and serial numbers of the Notes deposited, distinguishing with regard to each resolution between those voting for and those voting against it
 
9.5
certify that such list is in accordance with Notes deposited and directions received as provided in paragraphs 8, 11 and 14 and
 
9.6
appoint a named person (a “proxy”) to vote at that meeting in respect of those Notes and in accordance with that list.
 
A proxy need not be a Noteholder.
 
10
Once a Paying Agent has issued a block voting instruction for a meeting in respect of the votes attributable to any Notes:
 
10.1
it shall not release the Notes, except as provided in paragraph 11, until the meeting has been concluded and
 
10.2
the directions to which it gives effect may not be revoked or altered during the 48 hours before the time fixed for the meeting.
 
11
If the receipt for a Note deposited with a Paying Agent in accordance with paragraph 8 is surrendered to the Paying Agent at least 48 hours before the time fixed for the meeting, the Paying Agent shall release the Note and exclude the votes attributable to it from the block voting instruction.
 
12
Each block voting instruction shall be deposited at least 24 hours before the time fixed for the meeting at such place as the Trustee shall designate or approve, and in default it shall not be valid unless the chairman of the meeting decides otherwise before the meeting proceeds to business. If the Trustee requires, a notarially certified copy of each block voting instruction shall be produced by the proxy at the meeting but the Trustee need not investigate or be concerned with the validity of the proxy’s appointment.
 
13
A vote cast in accordance with a block voting instruction shall be valid even if it or any of the Noteholders’ instructions pursuant to which it was executed has previously been revoked or amended, unless written intimation of such revocation or amendment is received from the relevant Paying Agent by the Issuer or the Trustee at its registered office or by the chairman of the meeting in each case at least 24 hours before the time fixed for the meeting.
 
14
No Note may be deposited with or to the order of a Paying Agent at the same time for the purposes of both paragraph 5 and paragraph 8 for the same meeting.
 
 
Chairman
 
15
The chairman of a meeting shall be such person as the Trustee may nominate in writing, but if no such nomination is made or if the person nominated is not present within 15 minutes after the time fixed for the meeting the Noteholders or agents present shall choose one of their number to be chairman, failing which the Issuer may appoint a chairman.
 
16
The chairman may, but need not, be a Noteholder or agent. The chairman of an adjourned meeting need not be the same person as the chairman of the original meeting.
 
 
Attendance
 
17
The following may attend and speak at a meeting:
 
17.1
Noteholders and agents
 
17.2
the chairman
 
17.3
the Issuer and the Trustee (through their respective representatives) and their respective financial and legal advisers.
 
No-one else may attend or speak.
 
 
Quorum and Adjournment
 
18
No business (except choosing a chairman) shall be transacted at a meeting unless a quorum is present at the commencement of business. If a quorum is not present within 15 minutes from the time initially fixed for the meeting, it shall, if convened on the requisition of Noteholders or if the Issuer and the Trustee agree, be dissolved. In any other case it shall be adjourned until such date, not less than 14 nor more than 42 days later, and time and place as the chairman may decide. If a quorum is not present within 15 minutes from the time fixed for a meeting so adjourned, the meeting shall be dissolved.
 
19
Two or more Noteholders or agents present in person shall be a quorum:
 
19.1
in the cases marked “No minimum proportion” in the table below, whatever the proportion of the Notes which they represent
 
19.2
in any other case, only if they represent the proportion of the Notes shown by the table below.
 
 
Column 1
 
 
Column 2
 
 
Column 3
 
 
 
Any meeting except one referred to in column 3
 
 
Meeting previously adjourned through want of a quorum
 
 
Required proportion
 
 
Required proportion
 
 
To pass a special quorum resolution
 
 
75 per cent.
 
 
25 per cent.
 
 
To pass any other Extraordinary Resolution
 
 
A clear majority
 
 
No minimum proportion
 
 
Any other purpose
 
 
10 per cent.
 
 
No minimum proportion
 

 
20
The chairman may with the consent of (and shall if directed by) a meeting adjourn the meeting from time to time and from place to place. Only business which could have been transacted at the original meeting may be transacted at a meeting adjourned in accordance with this paragraph or paragraph 18.
 
21
At least 10 days’ notice of a meeting adjourned through want of a quorum shall be given in the same manner as for an original meeting and that notice shall state the quorum required at the adjourned meeting. No notice need, however, otherwise be given of an adjourned meeting.
 
 
Voting
 
22
Each question submitted to a meeting shall be decided by a show of hands unless a poll is (before, or on the declaration of the result of, the show of hands) demanded by the chairman, the Issuer, the Trustee or one or more persons representing 2 per cent. of the Notes.
 
23
Unless a poll is demanded a declaration by the chairman that a resolution has or has not been passed shall be conclusive evidence of the fact without proof of the number or proportion of the votes cast in favour of or against it.
 
24
If a poll is demanded, it shall be taken in such manner and (subject as provided below) either at once or after such adjournment as the chairman directs. The result of the poll shall be deemed to be the resolution of the meeting at which it was demanded as at the date it was taken. A demand for a poll shall not prevent the meeting continuing for the transaction of business other than the question on which it has been demanded.
 
25
A poll demanded on the election of a chairman or on a question of adjournment shall be taken at once.
 
26
On a show of hands every person who is present in person and who produces a Note or a voting certificate or is a proxy has one vote. On a poll every such person has one vote for each £50,000 nominal amount of Notes so produced or represented by the voting certificate so produced or for which he is a proxy or representative. Without prejudice to the obligations of proxies, a person entitled to more than one vote need not use them all or cast them all in the same way.
 
27
In case of equality of votes the chairman shall both on a show of hands and on a poll have a casting vote in addition to any other votes which he may have.
 
 
Effect and Publication of an Extraordinary Resolution
 
28
An Extraordinary Resolution shall be binding on all the Noteholders, whether or not present at the meeting, and on all the Couponholders and each of them shall be bound to give effect to it accordingly. The passing of such a resolution shall be conclusive evidence that the circumstances justify its being passed. The Issuer shall give notice of the passing of an Extraordinary Resolution to Noteholders within 14 days but failure to do so shall not invalidate the resolution.
 
 
Minutes
 
29
Minutes shall be made of all resolutions and proceedings at every meeting and, if purporting to be signed by the chairman of that meeting or of the next succeeding meeting, shall be conclusive evidence of the matters in them. Until the contrary is proved every meeting for which minutes have been so made and signed shall be deemed to have been duly convened and held and all resolutions passed or proceedings transacted at it to have been duly passed and transacted.
 
 
Trustee’s Power to Prescribe Regulations
 
30
Subject to all other provisions in this Trust Deed the Trustee may without the consent of the Noteholders prescribe such further regulations regarding the holding of meetings and attendance and voting at them as it in its sole discretion determines including (without limitation) such requirements as the Trustee thinks reasonable to satisfy itself that the persons who purport to make any requisition in accordance with this Trust Deed are entitled to do so and as to the form of voting certificates or block voting instructions so as to satisfy itself that persons who purport to attend or vote at a meeting are entitled to do so.
 


This Trust Deed is delivered on the date stated at the beginning.
WESTERN POWER DISTRIBUTION (SOUTH WALES) PLC 
By:        D. C. S. OOSTHUIZEN           By:      SALLY A. JONES


Title:     FINANCE DIRECTOR            Title:     COMPANY SECRETARY



HSBC TRUSTEE (C.I.) LIMITED
By:   KAREN SHERIDAN


Title:   TRANSACTION MANAGER
 EX-10.N2 7 ppl10-k2006exhibit10n2.htm EXHIBIT 10(N)-2 Exhibit 10(n)-2

Exhibit 10(n)-2
 
Execution Version


FIRST AMENDMENT AND LIMITED WAIVER
TO CREDIT AND SECURITY AGREEMENT


THIS FIRST AMENDMENT AND LIMITED WAIVER TO CREDIT AND SECURITY AGREEMENT, dated as of October 10, 2004 (this “Amendment”), is entered into by and among PPL RECEIVABLES CORPORATION (“Borrower”), PPL Electric Utilities Corporation (“PPL Electric”), Blue Ridge Asset Funding Corporation (“Blue Ridge”), and Wachovia Bank, National Association (together with its successors and assigns, the “Agent”). Capitalized terms used and not otherwise defined herein are used as defined in the Agreement (as defined below and amended hereby).
 

WHEREAS, the Borrower, PPL Electric, Blue Ridge and the Agent have entered into that certain Credit and Security Agreement, dated as of August 1, 2004 (as amended, supplemented or otherwise modified from time to time, the "Agreement");

WHEREAS, the parties to the Agreement wish to amend the Agreement in certain respects as hereinafter described;

NOW THEREFORE, in consideration of the premises and the other mutual covenants contained herein, the parties hereto agree as follows:

SECTION 1. Limited Waiver. Pursuant to Section 9.1(i) of the Agreement (prior to giving effect to the amendment in Section 2 hereof), an Amortization Event shall occur if as at the end of any Calculation Period the three-month rolling average Dilution Ratio shall exceed 2.25% (the “Dilution Ratio Event”). The Borrower hereby informs the Agent that the Dilution Ratio Event occurred as of August 31, 2004 and is continuing (prior to giving effect to the amendment in Section 2 hereof) and requests that the Agent waive the Amortization Event occurring as a result of the Dilution Ratio Event. The Agent hereby waives such Amortization Event.
 
SECTION 2. Amendment. From the date hereof Section 9.1(i) of the Agreement is hereby amended and restated in its entirety to read as follows:
 
“(i) As at the end of any Calculation Period:

(i) the three-month rolling average Delinquency Ratio shall exceed 6.00%,

(ii) the three-month rolling average Default Ratio shall exceed 1.75%, or

(iii)  the three-month rolling average Dilution Ratio shall exceed 2.75% for the period from the date hereof to October 29, 2004 and 2.25% thereafter;”
 
SECTION 3. Reservation of Rights.
 
(a) Forbearance. In reliance upon the representations, warranties and covenants of the Borrower contained in this Amendment and any documents or instruments executed in connection herewith, the Agent agrees to forbear from exercising its rights and remedies under the Transaction Documents or applicable law in respect of or arising out of the Dilution Ratio Event, subject to the conditions contained herein.
 
(b) Reservation of Rights. Other than as provided in Section 2 above, the Agent has not waived, is not by this Amendment waiving, and has no intention of waiving, any Amortization Event which may be continuing on the date hereof (whether the same or similar to the Dilution Ratio Event or otherwise) and, other than as provided in Section 2 above, the Agent has not agreed to forbear with respect to any of its rights or remedies concerning any Amortization Event which may have occurred or are continuing as of the date hereof or which may occur after the date hereof. The Agent reserves the right, in its sole discretion, to exercise any or all of its rights and remedies under the Agreement and the other Transaction Documents as a result of any Amortization Event (other than as provided in Section 2 above) which may be continuing on the date hereof or any Amortization Event which may occur after the date hereof, and Agent has not waived any of such rights or remedies, and nothing in this Amendment, and no delay on its part in exercising any such rights or remedies, should, or shall, be construed as a waiver of any such rights or remedies.
 
SECTION 4. Reference to and Effect on the Agreement and the Related Documents. Upon the effectiveness of this Amendment, (i) each of the Borrower and PPL Electric hereby reaffirms all representations and warranties made by it in the Agreement (other than as discussed herein) and agrees that all such representations and warranties shall be deemed to have been remade as of the effective date of this Amendment, (ii) each of the Borrower and PPL Electric hereby represents and warrants that no Amortization Event or Unmatured Amortization Event shall have occurred and be continuing (other than as discussed herein) and (iii) each reference in the Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import shall mean and be, and any references to the Agreement in any other document, instrument or agreement executed and/or delivered in connection with the Agreement shall mean and be, a reference to the Agreement as amended hereby.
 
SECTION 5. Effect. Except as otherwise amended by this Amendment, the Agreement shall continue in full force and effect and is hereby ratified and confirmed.
 
SECTION 6. Governing Law. This Amendment will be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws principles thereof (other than Section 5-1401 of the New York General Obligations Law).
 
SECTION 7. Severability. Each provision of this Amendment shall be severable from every other provision of this Amendment for the purpose of determining the legal enforceability of any provision hereof, and the unenforceability of one or more provisions of this Amendment in one jurisdiction shall not have the effect of rendering such provision or provisions unenforceable in any other jurisdiction.
 
SECTION 8. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page by facsimile shall be effective as delivery of a manually executed counterpart of this Amendment.
 

[remainder of page intentionally left blank]


 


IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written.


PPL RECEIVABLES CORPORATION


By: ___________________________ 
Name: _________________________
Title: __________________________

PPL ELECTRIC UTILITIES CORPORATION

By: ___________________________ 
Name: _________________________
Title: __________________________

BLUE RIDGE ASSET FUNDING CORPORATION
By: Wachovia Capital Markets, LLC,
        as Attorney-In-Fact


By: ___________________________ 
Name: _________________________
Title: __________________________

WACHOVIA BANK,
NATIONAL ASSOCIATION,
as a Liquidity Bank and as Agent

By: ___________________________ 
Name: _________________________
Title: __________________________



 EX-10.N3 8 ppl10-k2006exhibit10n3.htm EXHIBIT 10(N)-3 Exhibit 10(n)-3
Exhibit 10(n)-3

EXECUTION COPY
 
SECOND AMENDMENT
TO CREDIT AND SECURITY AGREEMENT


THIS SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT, dated as of August 1, 2005 (this “Amendment”), is entered into by and among PPL Receivables Corporation (“Borrower”), PPL Electric Utilities Corporation (“PPL Electric”), Blue Ridge Asset Funding Corporation (“Blue Ridge”), and Wachovia Bank, National Association (together with its successors and assigns, the “Agent”). Capitalized terms used and not otherwise defined herein are used as defined in the Agreement (as defined below and amended hereby).
 
WHEREAS, the Borrower, PPL Electric, Blue Ridge and the Agent have entered into that certain Credit and Security Agreement, dated as of August 1, 2004 (as amended, supplemented or otherwise modified prior to the date hereof and as may be further amended, restated, supplemented or otherwise modified from time to time, the “Agreement”);

WHEREAS, the parties to the Agreement wish to amend the Agreement in certain respects as hereinafter described;

NOW THEREFORE, in consideration of the premises and the other mutual covenants contained herein, the parties hereto agree as follows:

SECTION 1. Amendments. The Agreement is hereby amended as follows:
 
(a)  Exhibit I to the Agreement is hereby amended by deleting the definition of “Dilution Horizon Ratio” in its entirety and substituting in lieu thereof the following definition:
 
“Dilution Horizon Ratio: As of any Cut-off Date, a ratio (expressed as a decimal), computed by dividing (1) the sum of (i) the aggregate sales generated by the Originators during the Calculation Period ending on such Cut-Off Date and (ii) the aggregate sales generated by the Originators during the Calculation Period immediately preceding the Calculation Period ending on such Cut-Off Date, by (2) the Net Pool Balance as of such Cut-Off Date.”
 
(b)  Exhibit I to the Agreement is hereby amended by deleting the definition of “Dilution Ratio” in its entirety and substituting in lieu thereof the following definition:
 
“Dilution Ratio:  As of any Cut-Off Date, a ratio (expressed as a percentage), computed by dividing (1) the total amount of decreases in Outstanding Balances due to Dilutions during the Calculation Period ending on such Cut-Off Date, by (2) the aggregate sales generated by the Originators during the Calculation Period that ended two months prior to the commencement of the Calculation Period ending on such Cut-Off Date (for example with respect to the July 31, 2005 Cut-Off Date the ratio would be calculated using aggregate sales generated during the April 2005 Calculation Period).”
 
(c) Exhibit I to the Agreement is hereby amended by deleting the definition of “Facility Termination Date” in its entirety and substituting in lieu thereof the following definition:
 
“Facility Termination Date: The earlier of (i) the Liquidity Termination Date, (ii) the Amortization Date and (iii) July 31, 2006.”
 
SECTION 2. Reference to and Effect on the Agreement and the Related Documents. Upon the effectiveness of this Amendment, (i) each of the Borrower and PPL Electric hereby reaffirms all representations and warranties made by it in the Agreement (other than as discussed herein) and agrees that all such representations and warranties shall be deemed to have been remade as of the effective date of this Amendment, (ii) each of the Borrower and PPL Electric hereby represents and warrants that no Amortization Event or Unmatured Amortization Event shall have occurred and be continuing (other than as discussed herein) and (iii) each reference in the Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import shall mean and be, and any references to the Agreement in any other document, instrument or agreement executed and/or delivered in connection with the Agreement shall mean and be, a reference to the Agreement as amended hereby. Except as otherwise amended by this Amendment, the Agreement shall continue in full force and effect and is hereby ratified and confirmed.
 
SECTION 3. Effectiveness. This Amendment shall become effective as of August 1, 2005 (the “Effective Date”); provided, that each of the following conditions precedent shall have been satisfied:
 
(a) This Amendment; the First Amendment to the Liquidity Asset Purchase Agreement, dated as of the date hereof, and the Second Amended and Restated fee Letter, dated as of the date hereof (the “Fee Letter”), shall have been executed and delivered by a duly authorized officer of each party thereto; and

(b) The Agent shall have received payment from the Borrower by a method acceptable to both parties, in the amount of $25,000 pursuant to the Fee Letter.

SECTION 4. Governing Law. THIS AMENDMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
 
SECTION 5. Severability. Each provision of this Amendment shall be severable from every other provision of this Amendment for the purpose of determining the legal enforceability of any provision hereof, and the unenforceability of one or more provisions of this Amendment in one jurisdiction shall not have the effect of rendering such provision or provisions unenforceable in any other jurisdiction.
 
SECTION 6. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page by facsimile shall be effective as delivery of a manually executed counterpart of this Amendment.
 

[remainder of page intentionally left blank]


IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written.


PPL RECEIVABLES CORPORATION


By: _________________________
Name: _______________________
Title: ________________________

PPL ELECTRIC UTILITIES CORPORATION

 
By: _________________________ 
Name:_______________________
Title: ________________________  





[signatures continued of following page]



BLUE RIDGE ASSET FUNDING CORPORATION
By: Wachovia Capital Markets, LLC,
        as Attorney-In-Fact


By: _________________________
Name: _______________________  
Title: ________________________  


WACHOVIA BANK,
NATIONAL ASSOCIATION,
as a Liquidity Bank and as Agent

By: _________________________
Name: _______________________  
Title: ________________________ 


[end of signatures]
 EX-10.N4 9 ppl10-k2006exhibit10n4.htm EXHBIT 10(N)-4 Exhbit 10(n)-4
Exhibit 10(n)-4

Execution Version

THIRD AMENDMENT
TO
CREDIT AND SECURITY AGREEMENT


THIS THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT, dated as of March 15, 2006 (this “Amendment”), is entered into by and among PPL RECEIVABLES CORPORATION (“Borrower”), PPL Electric Utilities Corporation (“PPL Electric”), Variable Funding Capital Company, LLC (successor to Blue Ridge Asset Funding Corporation) (“VFCC”), and Wachovia Bank, National Association (together with its successors and assigns, the “Agent”). Capitalized terms used and not otherwise defined herein are used as defined in the Agreement (as defined below and amended hereby).
 
WHEREAS, the Borrower, PPL Electric, VFCC and the Agent are parties to that certain Credit and Security Agreement, dated as of August 1, 2004 (as amended, supplemented or otherwise modified from time to time, the "Agreement");
 
WHEREAS, the parties to the Agreement wish to amend the Agreement in certain respects as hereinafter described;
 
NOW THEREFORE, in consideration of the premises and the other mutual covenants contained herein, the parties hereto agree as follows:
 
SECTION 1. Amendment. Clause (ii) of Section 9.1(i) of the Agreement is hereby amended and restated in its entirety to read as follows:
 
“(ii)  the three-month rolling average Default Ratio shall exceed 2.50%;”
 
SECTION 2. Reference to and Effect on the Agreement and the Related Documents. Upon the effectiveness of this Amendment, (i) each of the Borrower and PPL Electric hereby reaffirms all representations and warranties made by it in the Agreement and agrees that all such representations and warranties shall be deemed to have been remade as of the effective date of this Amendment, (ii) each of the Borrower and PPL Electric hereby represents and warrants that no Amortization Event or Unmatured Amortization Event shall have occurred and be continuing and (iii) each reference in the Agreement to “this Agreement”, “hereunder”, “hereof”, “herein” or words of like import shall mean and be, and any references to the Agreement in any other document, instrument or agreement executed and/or delivered in connection with the Agreement shall mean and be, a reference to the Agreement as amended hereby.
 
SECTION 3. Effect. Upon the execution and delivery of counterparts of this Amendment by each of the parties hereto, this Amendment shall be effective as of February 28, 2006. Except as otherwise amended by this Amendment, the Agreement shall continue in full force and effect and is hereby ratified and confirmed.
 
SECTION 4. Governing Law. This Amendment will be governed by and construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws principles thereof (other than Section 5-1401 of the New York General Obligations Law).
 
SECTION 5. Severability. Each provision of this Amendment shall be severable from every other provision of this Amendment for the purpose of determining the legal enforceability of any provision hereof, and the unenforceability of one or more provisions of this Amendment in one jurisdiction shall not have the effect of rendering such provision or provisions unenforceable in any other jurisdiction.
 
SECTION 6. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page by facsimile shall be effective as delivery of a manually executed counterpart of this Amendment.
 

[remainder of page intentionally left blank]




IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written.


PPL RECEIVABLES CORPORATION


By: __________________________ 
Name: ________________________
Title: _________________________ 


PPL ELECTRIC UTILITIES CORPORATION

By: __________________________ 
Name: ________________________
Title: _________________________ 
 

VARIABLE FUNDING CAPITAL COMPANY, LLC
By: Wachovia Capital Markets, LLC,
as Attorney-In-Fact


By: __________________________ 
Name:________________________
Title:_________________________ 


WACHOVIA BANK,
NATIONAL ASSOCIATION,
as a Liquidity Bank and as Agent

By:__________________________ 
Name:________________________
Title:_________________________ 



 EX-10.Q6 10 ppl10-k2006exhibit10q6.htm EXHIBIT 10(Q)-6 Exhibit 10(q)-6
Exhibit 10(q)-6



FIFTH AMENDMENT TO REIMBURSEMENT AGREEMENT

THIS FIFTH AMENDMENT TO REIMBURSEMENT AGREEMENT, dated as of November 1, 2006 (this “Amendment”), to the Existing Reimbursement Agreement (as defined below) is made by PPL ENERGY SUPPLY, LLC, a Delaware limited liability company (the “Account Party”), and certain of the Lenders (such capitalized term and other capitalized terms used in this preamble and the recitals below to have the meanings set forth in, or are defined by reference in, Article I below).
 
 
W I T N E S S E T H:
 
WHEREAS, the Account Party, the Lenders and The Bank of Nova Scotia, as the Issuer and as Administrative Agent, are all parties to the Reimbursement Agreement, dated as of March 31, 2005 (as amended or otherwise modified prior to the date hereof, the “Existing Reimbursement Agreement”, and as amended by this Amendment and as the same may be further amended, supplemented, amended and restated or otherwise modified from time to time, the “Reimbursement Agreement”);
 
WHEREAS, the Account Party has requested that the Lenders amend the definition of “Incorporated Agreement” under the Existing Reimbursement Agreement and the Lenders are willing, on the terms and subject to the conditions hereinafter set forth, to modify such definition as set forth below;
 
NOW, THEREFORE, the parties hereto hereby covenant and agree as follows:
 
ARTICLE I
DEFINITIONS
 
SECTION 1.1.   Certain Definitions. The following terms when used in this Amendment shall have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof):
 
“Account Party” is defined in the preamble.
 
“Amendment” is defined in the preamble.
 
“Amendment Effective Date” is defined in Article III.
 
“Existing Reimbursement Agreement” is defined in the first recital.
 
“Reimbursement Agreement” is defined in the first recital.
 
SECTION 1.2.   Other Definitions. Terms for which meanings are provided in the Reimbursement Agreement are, unless otherwise defined herein or the context otherwise requires, used in this Amendment with such meanings.
 
ARTICLE II
AMENDMENTS TO REIMBURSEMENT AGREEMENT
 
Effective as of June 9, 2006, but subject to the occurrence of the satisfaction of the conditions in Article III, the provisions of the Existing Reimbursement Agreement referred to below are hereby amended in accordance with this Article II. Except as expressly so amended, the Existing Reimbursement Agreement shall continue in full force and effect in accordance with its terms.
 
SECTION 2.1.   Amendment to Section 1.1. Section 1.1 of the Existing Reimbursement Agreement is hereby amended by inserting the following definitions in the appropriate alphabetical order:
 
“Fifth Amendment” means the Fifth Amendment to Reimbursement Agreement, dated as of November 1, 2006, among the Account Party and the Lenders party thereto.
 
SECTION 2.2.   Amendment to Definition of “Incorporated Agreement”. The definition of “Incorporated Agreement” in Section 1.1 of the Existing Reimbursement Agreement is hereby amended and restated in its entirety as follows:
 
“Incorporated Agreement” means the $1,900,000,000 Amended and Restated Five-Year Credit Agreement, dated as of June 9, 2006, among the Account Party, the lenders from time to time party thereto, Wachovia Bank, National Association, as administrative agent and issuing lender, certain financial institutions, as syndication agents, certain financial institutions, as lead arrangers, and certain financial institutions (including Scotia Capital), as documentation agents as in effect on the date hereof and without giving effect to any subsequent modification, supplement, amendment or waiver by the lenders under, or by other parties to, the Incorporated Agreement, unless the Required Lenders agree in writing that such modification, supplement, amendment or waiver shall apply to such provisions or schedules incorporated herein.
 
SECTION 2.3.   Amendment to Section 7.1. Section 7.1 of the Existing Reimbursement Agreement is hereby amended and restated in its entirety as follows:
 
“Incorporation of Covenants from the Incorporated Agreement. The Account Party agrees with each Lender, the Issuer and the Administrative Agent that until the Termination Date has occurred, the Account Party will perform or cause to be performed each covenant of the “Borrower” contained in Article VI of the Incorporated Agreement, with each definition and related term, as in effect on the Effective Date (and thereafter as in effect to the extent modified by the Required Lenders) being incorporated in this Agreement by this reference as though specifically set forth herein, subject in all cases to the terms of Section 1.5.”
 
   ARTICLE III  
CONDITIONS TO EFFECTIVENESS
 
This Amendment and the amendments contained herein shall be effective as of June 9, 2006 when each of the conditions set forth in this Article III shall have been fulfilled to the satisfaction of the Administrative Agent.
 
SECTION 3.1.   Counterparts. The Administrative Agent shall have received counterparts hereof executed on behalf of the Account Party and the Required Lenders.
 
SECTION 3.2.   Costs and Expenses, etc. The Administrative Agent shall have received for the account of each Lender, all fees, costs and expenses due and payable pursuant to Section 10.3 of the Reimbursement Agreement, if then invoiced.
 
SECTION 3.3.   Satisfactory Legal Form. The Administrative Agent and its counsel shall have received all information, and such counterpart originals or such certified or other copies of such materials, as the Administrative Agent or its counsel may reasonably request, and all legal matters incident to the effectiveness of this Amendment shall be satisfactory to the Administrative Agent and its counsel. All documents executed or submitted pursuant hereto or in connection herewith shall be reasonably satisfactory in form and substance to the Administrative Agent and its counsel.
 
  ARTICLE IV  
MISCELLANEOUS
 
SECTION 4.1.   Cross-References. References in this Amendment to any Article or Section are, unless otherwise specified, to such Article or Section of this Amendment.
 
SECTION 4.2.   Loan Document Pursuant to Existing Reimbursement Agreement. This Amendment is a Loan Document executed pursuant to the Existing Reimbursement Agreement and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with all of the terms and provisions of the Existing Reimbursement Agreement, as amended hereby, including Article X thereof.
 
SECTION 4.3.   Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.
 
SECTION 4.4.   Counterparts. This Amendment may be executed by the parties hereto in several counterparts, each of which when executed and delivered shall be an original and all of which shall constitute together but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by facsimile shall be effective as delivery of a manually executed counterpart of this Amendment.
 
SECTION 4.5.   Governing Law. THIS AMENDMENT WILL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK).
 
SECTION 4.6.   Full Force and Effect; Limited Amendment. Except as expressly amended hereby, all of the representations, warranties, terms, covenants, conditions and other provisions of the Existing Reimbursement Agreement and the Loan Documents shall remain unchanged and shall continue to be, and shall remain, in full force and effect in accordance with their respective terms. The amendments set forth herein shall be limited precisely as provided for herein to the provisions expressly amended herein and shall not be deemed to be an amendment to, waiver of, consent to or modification of any other term or provision of the Existing Reimbursement Agreement or any other Loan Document or of any transaction or further or future action on the part of any Obligor which would require the consent of the Lenders under the Existing Reimbursement Agreement or any of the Loan Documents.
 
SECTION 4.7.   Representations and Warranties. In order to induce the Lenders to execute and deliver this Amendment, the Account Party hereby represents and warrants to the Lenders, on June 9, 2006 and the date this Amendment becomes effective pursuant to Article III, both before and after giving effect to this Amendment, all statements set forth in Section 5.2.1 of the Reimbursement Agreement are true and correct as of such date, except to the extent that any such statement expressly relates to an earlier date (in which case such statement was true and correct on and as of such earlier date).
 
  IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written.
 
 
PPL ENERGY SUPPLY, LLC


By:__________________________
Title:
 

THE BANK OF NOVA SCOTIA


By:__________________________
Title: Managing Director

 EX-10.S 11 ppl10-k2006exhibit10s.htm EXHIBIT 10(S) Exhibit 10(s)

Exhibit 10(s)


AGREEMENT


DATED 18th October, 2002


£400,000,000


CREDIT FACILITY


FOR


WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC


ARRANGED BY



BAYERISCHE LANDESBANK acting through its London Branch
BNP PARIBAS
FORTIS BANK S.A./N.V.
LLOYDS TSB BANK plc
WESTLB AG, LONDON BRANCH
as Mandated Lead Arrangers

WITH


LLOYDS TSB BANK plc
as Facility Agent



 
INDEX

Clause
Page
     
1.
Interpretation
1
2.
Facilities
12
3.
Purpose
13
4.
Conditions Precedent
14
5.
Utilisation
14
6.
Optional Currencies
15
7.
Repayment
19
8.
Prepayment and Cancellation
19
9.
Interest
22
10.
Terms
24
11.
Market Disruption
25
12.
Taxes
26
13.
Increased Costs
28
14.
Mitigation
29
15.
Payments
31
16.
Representations
33
17.
Information Covenants
35
18.
Financial Covenants
37
19.
General Covenants
39
20.
Default
42
21.
The Administrative Parties
44
22.
Evidence and Calculations
49
23.
Fees
50
24.
Indemnities and Break Costs
51
25.
Expenses
52
26.
Amendments and Waivers
53
27.
Changes to the Parties
54
28.
Disclosure of Information
56
29.
Set-off
57
30.
Pro rata sharing
57
31.
Severability
58
32.
Counterparts
59
33.
Notices
59
34.
Language
60
35.
Governing law
60
36.
Enforcement
61




Schedules
  
1.
Original Parties
62
2.
Conditions precedent documents
64
3.
Form of Request
65
4.
Calculation of the Mandatory Cost
66
5.
Form of Transfer Certificate
68
6.
Intentionally left blank
70
7.
Form of Compliance Certificate
71
 

 
THIS AGREEMENT is dated 18th October, 2002 (as amended on 29th October, 2002, 20th June, 2003, 17th October, 2003, 12th October, 2004 and 14th October, 2005)
 
BETWEEN:
 
(1)
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC (registered number 02366894) (the Company);
 
(2)
BAYERISCHE LANDESBANK acting through its London Branch, BNP PARIBAS, FORTIS BANK S.A./N.V., LLOYDS TSB BANK plc and WESTLB AG,LONDON BRANCH each in this capacity as a Mandated Lead Arranger and together in this capacity, the Mandated Lead Arrangers;
 
(3)
THE FINANCIAL INSTITUTIONS listed in Schedule 1 (Original Parties) as original lenders (the Original Lenders);
 
(4)
LLOYDS TSB BANK plc as facility agent (in this capacity the Facility Agent);
 
(5)
WESTLB AG, LONDON BRANCH as co-ordinating bank (in this capacity, the Co-ordinating Bank)
 
IT IS AGREED as follows:
 
1.
INTERPRETATION
 
1.1
Definitions
 
In this Agreement:
 
Act means the Electricity Act 1989 and, unless the context otherwise requires, all subordinate legislation made pursuant thereto.
 
Administrative Party means a Mandated Lead Arranger, the Co-ordinating Bank or the Facility Agent.
 
Affiliate means a Subsidiary or a Holding Company of a person or any other Subsidiary of that Holding Company.
 
Applicable Accounting Principles means those accounting principles, standards and practices generally accepted in the United Kingdom and the accounting and reporting requirements of the Companies Act 1985, in each case as used in the Original Financial Statements.
 
Authority means The Gas and Electricity Markets Authority established under Section 1 of the Utilities Act 2000.
 
Availability Period means the period from and including the date of this Agreement to and including:
 
 
(a)
for a Tranche A Loan, the date that is the Final Maturity Date in relation to the Tranche A Facility;
 
 
(b)
for a Tranche B Loan, the Final Maturity Date in relation to the Tranche B Facility; and
 
 
(c)
for a Tranche C Loan, the Final Maturity Date in relation to the Tranche C Facility.
 
Balancing and Settlement Code means the document, as modified from time to time, setting out the electricity balancing and settlement arrangements designated by the Secretary of State and adopted by The National Grid Company plc (Registered No. 2366977) or its successor pursuant to its transmission licence.
 
Balancing and Settlement Code Framework means the agreement of that title, in the form approved by the Secretary of State, as amended from time to time, to which the Company is a party and by which the Balancing and Settlement Code is made binding upon the Company.
 
Break Costs means the amount (if any) which a Lender is entitled to receive under this Agreement as compensation if any part of a Loan or overdue amount is prepaid.
 
Business Day means a day (other than a Saturday or a Sunday) on which commercial banks are open in London and:
 
if on that day a payment in or a purchase of a currency (other than euro) is to be made, the principal financial centre of the country of that currency; or
 
if on that day a payment in or purchase of euro is to be made, which is also a TARGET Day.
 
Commitment means a Tranche A Commitment or a Tranche B Commitment or a Tranche C Commitment (as the case may be).
 
Compliance Certificate means a certificate substantially in the form of Schedule 7 (Form of Compliance Certificate) setting out, among other things, calculations of the financial covenants.
 
Default means:
 
an Event of Default; or
 
an event which would be (with the lapse of time, the expiry of a grace period, the giving of notice or the making of any determination under the Finance Documents or any combination of them) an Event of Default.
 
Environmental Law means all regulations and other laws concerning the protection of human health or the environment;
 
euro or euros or € means the single currency of the Participating Member States.
 
Event of Default means an event specified as such in this Agreement.
 
Existing Credit Agreement means the U.S.$500,000,000 Revolving Credit Agreement dated 30th October, 2001 between, inter alia, the Company, J.P. Morgan plc as Arranger and Chase Manhattan International Limited as Facility Agent and as Swingline Agent.
 
Extended Final Maturity Date means the date specified as such in the notice exercising the Term-Out Option provided by the Company under Clause 2.5 (Term-Out Option), being a date falling no later than the day falling 364 days after the Final Maturity Date relating to the Tranche A Facility.
 
Facility means the Tranche A Facility or Tranche B Facility or Tranche C Facility (as the case may be) made available under this Agreement and Facilities shall mean each of them.
 
Facility Office means the office(s) notified by a Lender to the Facility Agent:
 
on or before the date it becomes a Lender; or
 
by not less than five Business Days' notice,
 
as the office(s) through which it will perform its obligations under this Agreement.
 
Fee Letter means any letter entered into by reference to this Agreement between one or more Administrative Parties and the Company setting out the amount of certain fees referred to in the Agreement.
 
Final Maturity Date means
 
in relation to the Tranche A Facility, the date which falls 364 days after (and including) 14th October, 2005 (unless extended in accordance with Clause 2.5 (Term-out Option));
 
in relation to the Tranche B Facility, the seventh anniversary of the date of this Agreement; and
 
in relation to the Tranche C Facility, 12th October, 2008.
 
Finance Document means:
 
this Agreement;
 
a Fee Letter;
 
a Transfer Certificate; or
 
any other document designated as such by the Facility Agent and the Company.
 
Finance Party means a Lender or an Administrative Party.
 
Financial Indebtedness means any indebtedness for or in respect of:
 
(a) moneys borrowed;
 
(b) any acceptance credit;
 
(c) any bond, note, debenture, loan stock or other similar instrument;
 
(d) any redeemable preference share;
 
(e) any finance or capital lease;
 
(f) receivables sold or discounted (otherwise than on a non-recourse basis);
 
(g) the acquisition cost of any asset to the extent payable after its acquisition or possession by the party liable where the deferred payment is arranged primarily as a method of raising finance or financing the acquisition of that asset;
 
(h) any derivative transaction protecting against or benefiting from fluctuations in any rate or price (and, except for non-payment of an amount, the then mark to market value of the derivative transaction will be used to calculate its amount);
 
(i) any other transaction (including any forward sale or purchase agreement) which has the commercial effect of a borrowing;
 
(j) any counter-indemnity obligation in respect of any guarantee, indemnity, bond, letter of credit or any other instrument issued by a bank or financial institution; or
 
any guarantee, indemnity or similar assurance against financial loss of any person in respect of any item referred to in paragraphs (a) to (j) above.
 
Group means the Company and its Subsidiaries.
 
Holding Company means a holding company within the meaning of section 736 of the Companies Act 1985.
 
Increased Cost means:
 
an additional or increased cost;
 
a reduction in the rate of return under a Finance Document or on its overall capital; or
 
a reduction of an amount due and payable under any Finance Document,
 
which is incurred or suffered by a Finance Party or any of its Affiliates but only to the extent attributable to that Finance Party having entered into any Finance Document or funding or performing its obligations under any Finance Document.
 
Lender means:
 
an Original Lender; or
 
any person which becomes a Lender after the date of this Agreement.
 
LIBOR means for a Term of any Loan or overdue amount:
 
the applicable Screen Rate; or
 
if no Screen Rate is available for the relevant currency or Term of that Loan or overdue amount, the arithmetic mean (rounded upward to four decimal places) of the rates, as supplied to the Facility Agent at its request, quoted by the Reference Banks to leading banks in the London interbank market,
 
as of 11.00 a.m. on the Rate Fixing Day for the offering of deposits in the currency of that Loan or overdue amount for a period comparable to that Term.
 
Licence means:
 
the electricity distribution licence made and treated as granted to the Company under Section 6(1)(c) of the Act pursuant to a licensing scheme made by the Secretary of State under Part II of Schedule 7 to the Utilities Act 2000 on 28th September, 2001; or
 
by any statutory amendment or replacement licence or licences granted pursuant to the Utilities Act 2000 which permit the Company to distribute electricity in the Authorised Area;
 
Loan means, unless otherwise stated in this Agreement, the principal amount of each borrowing under this Agreement or the principal amount outstanding of that borrowing.
 
Majority Lenders means, at any time, Lenders:
 
whose share in the outstanding Loans and whose undrawn Commitments then aggregate 662/3 per cent. or more of the aggregate of all the outstanding Loans and the undrawn Commitments of all the Lenders;
 
if there is no Loan then outstanding, whose undrawn Commitments then aggregate 662/3 per cent. or more of the Total Commitments; or
 
if there is no Loan then outstanding and the Total Commitments have been reduced to zero, whose Commitments aggregated 662/3 per cent. or more of the Total Commitments immediately before the reduction.
 
Mandatory Cost means the cost of complying with certain regulatory requirements, expressed as a percentage rate per annum and calculated by the Facility Agent under Schedule 4 (Calculation of the Mandatory Cost).
 
Margin means the percentage rate per annum determined to be the Margin in accordance with Clause 9.5(a)(Margin), as adjusted from time to time in accordance with Clauses 9.5(b) to 9.5(d) (Margin).
 
Material Adverse Effect means something having a material adverse effect on the Company's ability to perform its payment obligations under this Agreement.
 
Material Subsidiary means, at any time, a Subsidiary of the Company whose gross assets or gross revenues (excluding intra-Group items) then equal or exceed 15 per cent. of the gross assets or gross revenues of the Group.
 
For this purpose:
 
the gross assets or gross revenues of a Subsidiary of the Company will be determined from its financial statements (unconsolidated if it has Subsidiaries) upon which the latest audited financial statements of the Group have been based;
 
if a Subsidiary of the Company becomes a member of the Group after the date on which the latest audited financial statements of the Group have been prepared, the gross assets or gross revenues of that Subsidiary will be determined from its latest financial statements;
 
the gross assets or gross revenues of the Group will be determined from its latest audited financial statements, adjusted (where appropriate) to reflect the gross assets or gross revenues of any company or business subsequently acquired or disposed of; and
 
if a Material Subsidiary disposes of all or substantially all of its assets to another Subsidiary of the Company, it will immediately cease to be a Material Subsidiary and the other Subsidiary (if it is not already) will immediately become a Material Subsidiary; the subsequent financial statements of those Subsidiaries and the Group will be used to determine whether those Subsidiaries are Material Subsidiaries or not.
 
If there is a dispute as to whether or not a company is a Material Subsidiary, a certificate of the auditors of the Company will be, in the absence of manifest error, conclusive.
 
Maturity Date means the last day of the Term of a Loan (other than a Term-Out Loan) and in the case of a Term-Out Loan the date specified as such in the Request for that Term-Out Loan.
 
Moody's means Moody's Investors' Services, Inc. (or any successor to its ratings business).
 
OFGEM means the Office of Gas and Electricity Markets.
 
Original Financial Statements means the audited consolidated financial statements of the Company for the year ended 31st March, 2002.
 
Participating Member States means a member state of the European Community that adopts the euro as its lawful currency under the legislation of the European Union for European Monetary Union.
 
Party means a party to this Agreement.
 
Pro Rata Share means:
 
for the purpose of determining a Lender's share in a utilisation of a Facility, the proportion which its Commitment under that Facility bears to all the Commitments under that Facility; and
 
for any other purpose on a particular date:
 
the proportion which a Lender's share of the Loans (if any) bears to all the Loans;
 
if there is no Loan outstanding on that date, the proportion which its Commitment bears to the Total Commitments on that date;
 
if the Total Commitments have been cancelled, the proportion which its Commitments bore to the Total Commitments immediately before being cancelled; or
 
when the term is used in relation to a particular Facility, the above proportions but applied only to the Loans and Commitments for that Facility.
 
For the purpose of sub-paragraph (iv) above, the Facility Agent will determine, in the case of a dispute whether the term in any case relates to a particular Facility.
 
PUHCA means the Public Utility Holding Company Act of 1935, as amended, of the United States of America.
 
Rate Fixing Day means:
 
the first day of a Term for a Loan denominated in Sterling; or
 
the second Business Day before the first day of a Term for a Loan denominated in any other currency;
 
or such other day as the Facility Agent determines is generally treated as the rate fixing day by market practice in the relevant interbank market.
 
Reference Banks means the Facility Agent, Bayerische Landesbank acting through its London branch and WestLB AG, London Branch and any other bank or financial institution appointed as such by the Facility Agent under this Agreement.
 
Repeating Representations means the representations which are deemed to be repeated under this Agreement.
 
Request means a request for a Loan, substantially in the form of Schedule 3 (Form of Request).
 
Restatement Date means 12th October, 2004.
 
Rollover Loan means one or more Loans (other than a Term-Out Loan):
 
to be made on the same day that a maturing Loan is due to be repaid;
 
the aggregate amount of which is equal to or less than the maturing Loan;
 
in the same currency as the maturing Loan; and
 
to be made for the purpose of refinancing a maturing Loan.
 
S&P means Standard & Poor's Corporation (a division of the McGraw-Hill Companies, Inc) (or any successor to its ratings business).
 
Screen Rate means the British Bankers Association Interest Settlement Rate (if any) for the relevant currency and Term displayed on the appropriate page of the Telerate screen selected by the Facility Agent. If the relevant page is replaced or the service ceases to be available, the Facility Agent (after consultation with the Company and the Lenders) may specify another page or service displaying the appropriate rate.
 
Secretary of State means the Secretary of State for Trade and Industry.
 
Security Interest means any mortgage, pledge, lien, charge, assignment, hypothecation or security interest or any other agreement or arrangement having a similar effect.
 
Sterling and £ mean the lawful currency of the United Kingdom.
 
Subsidiary means:
 
a subsidiary within the meaning of section 736 of the Companies Act 1985; and
 
unless the context otherwise requires, a subsidiary undertaking within the meaning of section 258 of the Companies Act 1985.
 
TARGET Day means a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer payment system is open for the settlement of payments in euro.
 
Tax means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any related penalty or interest).
 
Tax Deduction means a deduction or withholding for or on account of Tax from a payment under a Finance Document.
 
Tax Payment means a payment made by the Company to a Finance Party in any way relating to a Tax Deduction or under any indemnity given by the Company in respect of Tax under any Finance Document.
 
Term means each period determined under this Agreement by reference to which interest on a Loan or an overdue amount is calculated.
 
Term-Out Loans means the Loans (if any) drawn under Clause 2.5 (Term-Out Option).
 
Term-Out Option means the option of the Company in Clause 2.5 (Term-Out Option) to draw Tranche A Loans as Term-Out Loans.
 
Total Commitments means the Total Tranche A Commitments, Total Tranche B Commitments and Total Tranche C Commitments of all the Lenders.
 
Total Tranche A Commitments means the aggregate of the Tranche A Commitments of all the Lenders, being the total amount specified as such in Schedule 1 (Original Parties) at the date of this Agreement.
 
Total Tranche B Commitments means the aggregate of the Tranche B Commitments of all the Lenders, being the total amount specified as such in Schedule 1 (Original Parties) at the date of this Agreement.
 
Total Tranche C Commitments means the aggregate of the Tranche C Commitments of all the Lenders, being the total amount specified as such in Schedule 1 (Original Parties) at the Restatement Date.
 
Tranche A Commitment means:
 
(a) for an Original Lender, the amount set opposite its name in Schedule 1 (Original Parties) under the heading "Tranche A Commitments" and the amount of any other Tranche A Commitment it acquires; and
 
(b) for any other Lender, the amount of any Tranche A Commitment it acquires, to the extent not cancelled, transferred or reduced under this Agreement.
 
Tranche A Facility means the revolving credit facility (incorporating a term-out option) made available under this Agreement and described in Clause 2.1 (Tranche A Facility).
 
Tranche A Loan means a Loan under the Tranche A Facility and identified as such in its Request.
 
Tranche B Commitment means:
 
for an Original Lender, the amount set opposite its name in Schedule 1 (Original Parties) under the heading "Tranche B Commitments" and the amount of any other Tranche B Commitment it acquires; and
 
for any other Lender, the amount of any other Tranche B Commitment it acquires,
 
to the extent not cancelled, transferred or reduced under this Agreement.
 
Tranche B Facility means the revolving credit facility made available under this Agreement and described in Clause 2.2 (Tranche B Facility).
 
Tranche B Loan means a Loan under the Tranche B Facility and identified as such in its Request.
 
Tranche C Commitment means:
 
for an Original Lender, the amount set opposite its name in Schedule 1 (Original Parties) under the heading "Tranche C Commitments" and the amount of any other Tranche C Commitment it acquires; and
 
for any other Lender, the amount of any other Tranche C Commitment it acquires,
 
to the extent not cancelled, transferred or reduced under this Agreement.
 
Tranche C Facility means the revolving credit facility made available under this Agreement and described in Clause 2.3 (Tranche C Facility).
 
Tranche C Loan means a Loan under the Tranche C Facility and identified as such in its Request.
 
Transfer Certificate means a certificate, substantially in the form of Schedule 5 (Form of Transfer Certificate), with such amendments as the Facility Agent may approve or reasonably require or any other form agreed between the Facility Agent and the Company.
 
U.K. means the United Kingdom.
 
U.S. Dollars and U.S.$ means the lawful currency for the time being of the United States of America.
 
Utilisation Date means each date on which a Facility is utilised.
 
1.2
Construction
 
(a)
The following definitions have the meanings given to them in Clause 18.1 (Financial covenants):
 
(i) Consolidated EBITDA;
 
 
(ii)
Interest Payable;
 
 
(iii)
Measurement Period;
 
 
(iv)
Regulatory Asset Base; and
 
 
(v)
Total Gross Debt.
 
(b)
In this Agreement, unless the contrary intention appears, a reference to:
 
(i) an amendment includes a supplement, novation, restatement or re-enactment and amended will be construed accordingly;
 
assets includes present and future properties, revenues and rights of every description;
 
an authorisation includes an authorisation, consent, approval, resolution, licence, exemption, filing, registration or notarisation;
 
disposal means a sale, transfer, grant, lease or other disposal, whether voluntary or involuntary, and dispose will be construed accordingly;
 
indebtedness includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money;
 
know your customer requirements are the identification checks that a Finance Party requests in order to meet its obligations under any applicable law or regulation to identify a person who is (or is to become) its customer;
 
a person includes any individual, company, corporation, unincorporated association or body (including a partnership, trust, joint venture or consortium), government, state, agency, organisation or other entity whether or not having separate legal personality;
 
a regulation includes any regulation, rule, official directive, request or guideline (whether or not having the force of law but, if not having the force of law, being of a type with which any person to which it applies is accustomed to comply) of any governmental, inter-governmental or supranational body, agency, department or regulatory, self-regulatory or other authority or organisation;
 
the Winding-up of a person also includes the administration, dissolution or liquidation or other like process of that person, any composition or arrangement with the creditors, amalgamation, reconstruction, reorganisation or consolidation pursuant to Part XIII of the Companies Act 1985 proposed or carried out in respect of that person or a company voluntary arrangement pursuant to the Insolvency Act 1986 carried out or proposed in respect of that person;
 
(ii) a currency is a reference to the lawful currency for the time being of the relevant country;
 
(iii) a Default being outstanding means that it has not been remedied or waived;
 
(iv) a provision of law is a reference to that provision as extended, applied, amended or re-enacted and includes any subordinate legislation;
 
(v) a Clause, a Subclause or a Schedule is a reference to a clause or subclause of, or a schedule to, this Agreement;
 
(vi) a person includes its successors in title, permitted assigns and permitted transferees;
 
(vii) a Finance Document or another document is a reference to that Finance Document or other document as amended; and
 
(viii) a time of day is a reference to London time.
 
(c)
Unless the contrary intention appears, a reference to a month or months is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month or the calendar month in which it is to end, except that:
 
(i) if the numerically corresponding day is not a Business Day, the period will end on the next Business Day in that month (if there is one) or the preceding Business Day (if there is not);
 
(ii) if there is no numerically corresponding day in that month, that period will end on the last Business Day in that month; and
 
(iii) notwithstanding sub-paragraph (i) above, a period which commences on the last Business Day of a month will end on the last Business Day in the next month or the calendar month in which it is to end, as appropriate.
 
(d)
Unless expressly provided to the contrary in a Finance Document, a person who is not a party to a Finance Document may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999 and notwithstanding any term of any Finance Document, the consent of any third party is not required for any variation (including any release or compromise of any liability) or termination of that Finance Document.
 
(e)
Unless the contrary intention appears:
 
(i) a reference to a Party will not include that Party if it has ceased to be a Party under this Agreement;
 
(ii) a word or expression used in any other Finance Document or in any notice given in connection with any Finance Document has the same meaning in that Finance Document or notice as in this Agreement; and
 
(iii) any obligation of the Company under the Finance Documents which is not a payment obligation remains in force for so long as any payment obligation of the Company is or may be outstanding under the Finance Documents.
 
(f)
The headings in this Agreement do not affect its interpretation.
 
2.
FACILITIES
 
2.1
Tranche A Facility
 
Subject to the terms of this Agreement, the Lenders make available to the Company a revolving loan facility with a term-out option denominated in Sterling in an aggregate amount equal to the Total Tranche A Commitments.
 
2.2
Tranche B Facility
 
Subject to the terms of this Agreement, the Lenders make available to the Company a revolving credit facility denominated in Sterling in an aggregate amount equal to the Total Tranche B Commitments.
 
2.3
Tranche C Facility
 
Subject to the terms of this Agreement, the Lenders make available to the Company a revolving credit facility denominated in Sterling in an aggregate amount equal to the Total Tranche C Commitments.
 
2.4
Nature of a Finance Party's rights and obligations
 
Unless otherwise agreed by all the Finance Parties:
 
 
(a)
the obligations of a Finance Party under the Finance Documents are several;
 
 
(b)
failure by a Finance Party to perform its obligations does not affect the obligations of any other Party under the Finance Documents;
 
 
(c)
no Finance Party is responsible for the obligations of any other Finance Party under the Finance Documents;
 
 
(d)
the rights of a Finance Party under the Finance Documents are separate and independent rights;
 
 
(e)
a debt arising under the Finance Documents to a Finance Party is a separate and independent debt; and
 
 
(f)
a Finance Party may, except as otherwise stated in the Finance Documents, separately enforce those rights.
 
2.5
Term-out Option
 
(a)
The Company may on one occasion only, by delivery of a notice to the Facility Agent (who shall send a copy of the same to the Lenders) not earlier than 45 days prior to the Final Maturity Date in relation to the Tranche A Facility, elect to draw one or more Tranche A Loans (each a Term-Out Loan) each with the same Utilisation Date falling prior to the Final Maturity Date and each with the same Maturity Date being a date after the initial Final Maturity Date, but no later than the date falling four years after the date of this Agreement (such selected date being the Extended Final Maturity Date). The delivery of this notice constitutes the exercise of the Term-Out Option by the Company.
 
(b)
Any Tranche A Loan outstanding after the date of the exercise of the Term-Out Option must be repaid on its Maturity Date.
 
3.
PURPOSE
 
3.1
Tranche A Loans
 
Each Tranche A Loan may be used for the core working capital requirements of the Company (including the repayment of the Existing Credit Agreement and certain other bilateral facilities) and in compliance with the Licence.
 
3.2
Tranche B Loans
 
Each Tranche B Loan may only be used for general corporate purposes and in compliance with the Licence.
 
3.3
Tranche C Loans
 
Each Tranche C Loan may only be used for general corporate purposes and in compliance with the Licence.
 
3.4
No obligation to monitor
 
No Finance Party is bound to monitor or verify the utilisation of a Facility.
 
4.
CONDITIONS PRECEDENT
 
4.1
Conditions precedent documents
 
A Request may not be given until the Facility Agent has notified the Company and the Lenders that it has received all of the documents and evidence set out in Schedule 2 (Conditions precedent documents) in form and substance satisfactory to the Facility Agent. The Facility Agent must give this notification to the Company and the Lenders promptly upon being so satisfied.
 
4.2
Further conditions precedent
 
The obligations of each Lender to participate in any Loan are subject to the further conditions precedent that on both the date of the Request and the Utilisation Date for that Loan:
 
 
(a)
the Repeating Representations are correct in all material respects; and
 
 
(b)
no Default or, in the case of a Rollover Loan, no Event of Default is outstanding or would result from the Loan.
 
4.3
Maximum number
 
Unless the Facility Agent agrees, a Request may not be given if, as a result, there would be more than 15 Loans outstanding.
 
5.
UTILISATION
 
5.1
Giving of Requests
 
(a)
The Company may borrow a Loan by giving to the Facility Agent a duly completed Request.
 
(b)
Unless the Facility Agent otherwise agrees, the latest time for receipt by the Facility Agent of a duly completed Request is 11.00 a.m. one Business Day before the Rate Fixing Day for the proposed borrowing.
 
(c)
Each Request is irrevocable.
 
5.2
Completion of Requests
 
A Request for a Loan will not be regarded as having been duly completed unless:
 
 
(a)
it identifies the Facility the Loan applies to;
 
 
(b)
the Utilisation Date is a Business Day falling within the Availability Period;
 
 
(c)
The amount of the Loan requested is:
 
 
(i)
a minimum of £5,000,000 or its equivalent in accordance with Clause 6.5 (Optional Currency Equivalents), and an integral multiple of 1,000,000 units of that currency;
 
 
(ii)
the maximum undrawn amount available under this Agreement for Loans under the relevant Facility on the proposed Utilisation Date; or
 
 
(iii)
such other amount as the Facility Agent may agree; and
 
 
(d)
the proposed Term complies with this Agreement.
 
Only one Loan may be requested in a Request.
 
5.3
Advance of Loan
 
(a)
The Facility Agent must promptly notify each Lender of the details of the requested Loan and the amount of its share in that Loan.
 
(b)
The amount of each Lender's share of the Loan will be its Pro Rata Share on the proposed Utilisation Date.
 
(c)
No Lender is obliged to participate in a Loan if as a result:
 
 
(i)
its share in the Loans under a Facility would exceed its Commitment for that Facility; or
 
 
(ii)
the Loans would exceed the Total Commitments.
 
(d)
If the conditions set out in this Agreement have been met, each Lender must make its share in the Loan available to the Facility Agent for the Company on the Utilisation Date.
 
6.
OPTIONAL CURRENCIES
 
6.1
General
 
In this Clause:
 
Agent's Spot Rate of Exchange means the Facility Agent's spot rate of exchange for the purchase of the relevant currency in the London foreign exchange market with Sterling at or about 11.00 a.m. on a particular day.
 
Optional Currency means any currency (other than Sterling) in which a Loan may be denominated under this Agreement.
 
Pre-approved Currency means U.S.$ and euro.
 
Sterling Amount of a Loan or part of a Loan means:
 
if the Loan is denominated in Sterling, its amount; or
 
in the case of any Loan denominated in an Optional Currency, its equivalent in Sterling calculated on the basis of the Agent's Spot Rate of Exchange one Business Day before the Rate Fixing Day for that Term.
 
6.2
Selection
 
(a)
The Company must select the currency of a Loan in its Request. The Company may select Sterling or an Optional Currency for a Loan.
 
(b)
Unless the Facility Agent otherwise agrees, the Loans may not be denominated at any one time in more than three currencies.
 
6.3
Selection of Optional Currencies
 
(a)
A Loan may be denominated in an Optional Currency for a Term if:
 
 
(i)
that Optional Currency is readily available in the amount required and freely convertible into Sterling in the relevant interbank market on the Rate Fixing Day and the first day of that Term; and
 
 
(ii)
that Optional Currency is a Pre-approved Currency or has been previously approved by the Facility Agent (acting on the instruction of all the Lenders).
 
(b)
If the Facility Agent has received a request from the Company for a currency to be approved as an Optional Currency (other than a Pre-approved Currency), the Facility Agent must, within five Business Days, confirm to the Company:
 
 
(i)
whether or not the Lenders have given their approval; and
 
 
(ii)
if approval has been given, the minimum amount (and, if required, integral multiples) for any Loan in that currency.
 
6.4
Revocation of currency
 
(a)
Notwithstanding any other term of this Agreement, if before 9.30 a.m. on any Rate Fixing Day the Facility Agent receives notice from a Lender that:
 
 
(i)
the Optional Currency requested is not readily available to it in the relevant interbank market in the amount and for the period required; or
 
 
(ii)
participating in a Loan in the proposed Optional Currency might contravene any law or regulation applicable to it,
 
the Facility Agent must give notice to the Company to that effect promptly and in any event before 11.00 a.m. on that day.
 
(b)
In this event:
 
 
(i)
that Lender must participate in the Loan in Sterling; and
 
 
(ii)
the share of that Lender in the Loan and any other similarly affected Lender(s) will be treated as a separate Loan denominated in Sterling during that Term.
 
(c)
Any part of a Loan treated as a separate Loan under this Subclause will not be taken into account for the purposes of any limit on the number of Loans or currencies outstanding at any one time.
 
(d)
A Loan will still be treated as a Rollover Loan if it is not denominated in the same currency as the maturing Loan by reason only of the operation of this Subclause.
 
6.5
Optional Currency equivalents
 
(a)
Except as expressly provided in this Agreement, the equivalent in Sterling of a Loan or part of a Loan in an Optional Currency for the purposes of calculating:
 
 
(i)
whether any limit under this Agreement has been exceeded;
 
 
(ii)
the amount of a Loan;
 
 
(iii)
the share of a Lender in a Loan;
 
 
(iv)
the amount of any repayment of a Loan; or
 
 
(v)
the undrawn amount of a Lender's Commitment,
 
is its Sterling Amount.
 
(b)
The rate of exchange to be used for calculating the amount in Sterling of any repayment or prepayment of a Term-Out Loan in an Optional Currency is that last used for determining the amount of the Term-Out Loan in that Optional Currency.
 
6.6
Term-Out Loans - change of currency
 
(a)
A Term-Out Loan will remain denominated in the same currency through successive Terms, unless the currency is changed under paragraph (c) below.
 
(b)
The Company may change the currency of a Term-Out Loan with effect from the start of a Term by giving notice to the Facility Agent by 9.00 a.m. three Business Days before the first day of that Term. The Term-Out Loan will remain denominated in that currency until it is changed again under this Subclause.
 
(c)
If a Term-Out Loan is to be denominated in different currencies during successive Terms:
 
 
(i)
the Company must repay that Term-Out Loan on the last day of its current Term in the currency in which it is then denominated (the old currency); and
 
 
(ii)
the Lenders must, subject to the terms of this Agreement, re-advance the Term-Out Loan in the currency in which the Company requires the Term-Out Loan to be denominated for the next Term (the new currency).
 
The amount of the Loan in the new currency will be calculated by reference to its Sterling Amount.
 
(d)
Alternatively, if the Facility Agent and the Company agree:
 
 
(i)
the Facility Agent may apply the amount (or so much of that amount as is necessary) of the Term-Out Loan in the new currency to purchase an amount of the old currency sufficient to discharge the obligation of the Company to repay the Term-Out Loan in the old currency;
 
 
(ii)
the Facility Agent must apply any amount of the old currency purchased under sub-paragraph (i) above towards repaying the Term-Out Loan in the old currency;
 
 
(iii)
the Facility Agent will promptly notify the Company if there is a shortfall or an excess;
 
 
(iv)
if there is a shortfall, the Company must pay to the Facility Agent on the date the Term-Out Loan is due to be repaid in the old currency an amount in the old currency equal to the shortfall; and
 
 
(v)
if there is an excess, the Facility Agent must pay to the Company on the date the Term-Out Loan is due to be repaid in the old currency an amount in the new currency equal to the excess.
 
If the day on which the old currency is due to be repaid is not also a Business Day for the new currency:
 
 
(vi)
the Facility Agent must notify the Company and the Lenders promptly;
 
 
(vii)
the Term-Out Loan will remain in the old currency until the next day which is a Business Day for both the old and the new currencies; and
 
 
(viii)
during this period, the Term-Out Loan will have Terms running from one Business Day to the next Business Day.
 
The Company must indemnify the Facility Agent against any loss or liability incurred by the Facility Agent as a result of any foreign exchange contract entered into for the purpose of this Clause.
 
6.7
Term-Out Loans - continuing in same Optional Currency
 
(a)
If a Term-Out Loan is to be denominated in the same Optional Currency during two successive Terms, the Facility Agent must calculate the amount of the Term-Out Loan in the Optional Currency for the second of those Terms.
 
(b)
The amount of the Term-Out Loan in the Optional Currency for the second Term will be the amount determined by notionally converting into that Optional Currency the Sterling Amount of the Term-Out Loan on the basis of the Agent's Spot Rate of Exchange one Business Day before the Rate Fixing Day for that Term.
 
(c)
If the amount calculated is less than the existing amount of that Term-Out Loan in the Optional Currency during the first Term, the Company must pay, subject to paragraph (e) below, on the last day of the first Term an amount equal to the difference.
 
(d)
If the amount calculated is more than the existing amount of that Term-Out Loan in the Optional Currency during the first Term, each Lender must pay, subject to paragraph (e) below, on the last day of the first Term its Pro Rata Share of the difference.
 
(e)
If the calculation made by the Facility Agent under paragraph (a) above shows that the amount of the Term-Out Loan in the Optional Currency has increased or decreased by less than five per cent. since it was borrowed or (if later) the most recent adjustment under paragraph (c) or (d) above, no payment is required under paragraph (c) or (d) above.
 
6.8
Notification
 
The Facility Agent must notify the Lenders and the Company of the relevant Sterling Amount (and the applicable Agent's Spot Rate of Exchange) promptly after they are ascertained.
 
7.
REPAYMENT
 
7.1
Repayment of Loans
 
(a)
The Company must repay each Loan (other than a Term-Out Loan) in full on its Maturity Date. No Loan may be outstanding after the applicable Final Maturity Date.
 
(b)
Subject to the other terms of this Agreement, any amounts repaid under paragraph (a) above may be re-borrowed.
 
7.2
Repayment of Term-Out Loans
 
The Company must repay all Term-Out Loans in full on the Extended Final Maturity Date.
 
8.
PREPAYMENT AND CANCELLATION
 
8.1
Mandatory prepayment - illegality
 
(a)
A Lender must notify the Company promptly if it becomes aware that it is unlawful in any jurisdiction for that Lender to perform any of its obligations under a Finance Document or to fund or maintain its share in any Loan.
 
(b)
After notification under paragraph (a) above:
 
 
(i)
the Company must repay or prepay the share of that Lender in each Loan made to it on the date specified in paragraph (c) below; and
 
 
(ii)
the Commitments of that Lender will be immediately cancelled.
 
(c)
The date for repayment or prepayment of a Lender's share in a Loan will be:
 
 
(i)
the Business Day following receipt by the Company of notice from the Lender under paragraph (a) above; or
 
 
(ii)
if later, the latest date allowed by the relevant law.
 
8.2
Mandatory prepayment - change of control
 
If, except in the context of a group reorganisation where the Company continues to be controlled directly or indirectly, by PPL Corporation, the Company becomes aware of any person (whether alone or together with any associated person or persons) gaining control of the Company (for these purposes "associated person" means, in relation to any person, a person who is (i) "acting in concert" (as defined in the City Code on Takeovers and Mergers) with that person or (ii) a "connected person" (as defined in section 839 of the Income and Corporation Taxes Act 1988) of that person and "control" has the meaning given to it in Section 416 of the Income and Corporation Taxes Act 1988):
 
 
(i)
within 5 days of such date, the Company shall give notice of such change of control to the Facility Agent;
 
 
(ii)
the Lenders and the Company shall immediately enter into negotiations for a period of not more than 45 days from the date of the change of control with a view to agreeing whether the Facility shall continue to be made available and on what terms; and
 
 
(iii)
if no such agreement is reached within the said period of 45 days then:
 
 
(A)
any Lender may on 10 days' notice to the Facility Agent and to the Company require the repayment of its share in each Loan and cancel its Commitment; and
 
 
(B)
the Majority Lenders may on 10 days' notice to the Company require repayment in full of all outstanding Loans and cancel the Total Commitments.
 
8.3
Voluntary prepayment
 
(a)
The Company may, by giving not less than three Business Days' prior notice to the Facility Agent, prepay any Loan at any time in whole or in part.
 
(b)
A prepayment of part of a Loan drawn in US Dollars must be in a minimum amount of $5,000,000 and an integral multiple of U.S. $1,000,000.
 
(c)
A prepayment of part of a Loan drawn in Sterling must be in a minimum amount of £5,000,000 and an integral multiple of £1,000,000.
 
8.4
Automatic cancellation
 
The Commitments of each Lender in relation to the Tranche A Facility, the Tranche B Facility and the Tranche C Facility will be automatically cancelled at the close of business on the last day of the relevant Availability Period.
 
8.5
Voluntary cancellation
 
(a)
The Company may, by giving not less than three Business Days' prior notice to the Facility Agent, cancel the unutilised amount of the Total Commitments in whole or in part.
 
(b)
Partial cancellation of the Total Commitments must be in a minimum amount of £5,000,000 and an integral multiple of £1,000,000.
 
(c)
Any cancellation in part will be applied against the relevant Commitment of each Lender pro rata.
 
8.6
Involuntary prepayment and cancellation
 
(a)
If the Company is, or will be, required to pay to a Lender a Tax Payment or an Increased Cost, the Company may, while the requirement continues, give notice to the Facility Agent requesting prepayment and cancellation in respect of that Lender.
 
(b)
After notification under paragraph (a) above:
 
 
(i)
the Company must repay or prepay that Lender's share in each Loan made to it on the date specified in paragraph (c) below; and
 
 
(ii)
the Commitments of that Lender will be immediately cancelled.
 
(c)
The date for repayment or prepayment of a Lender's share in a Loan will be the last day of the current Term for that Loan or, if earlier, the date specified by the Company in its notification.
 
8.7
Partial prepayment of Term-Out Loans
 
No amount of a Term-Out Loan repaid or prepaid under this Agreement may subsequently be re-borrowed.
 
8.8
Re-borrowing of Loans (other than Term-Out Loans)
 
Any voluntary prepayment of a Loan (other than a Term-Out Loan) may be re-borrowed on the terms of this Agreement. Any mandatory or involuntary prepayment of a Loan may not be re-borrowed.
 
8.9
Miscellaneous provisions
 
(a)
Any notice of prepayment and/or cancellation under this Agreement is irrevocable and must specify the relevant date(s) and the affected Loans and Commitments. The Facility Agent must notify the Lenders promptly of receipt of any such notice.
 
(b)
All prepayments under this Agreement must be made with accrued interest on the amount prepaid. No premium or penalty is payable in respect of any prepayment except for Break Costs.
 
(c)
The Majority Lenders may agree a shorter notice period for a voluntary prepayment or a voluntary cancellation.
 
(d)
No prepayment or cancellation is allowed except in accordance with the express terms of this Agreement.
 
(e)
No amount of the Total Commitments cancelled under this Agreement may subsequently be reinstated.
 
9.
INTEREST
 
9.1
Calculation of interest
 
The rate of interest on each Loan for each Term is the percentage rate per annum equal to the aggregate of the applicable:
 
 
(a)
Margin;
 
 
(b)
LIBOR; and
 
 
(c)
Mandatory Cost.
 
9.2
Payment of interest
 
Except where it is provided to the contrary in this Agreement, the Company must pay accrued interest on each Loan made to it on the last day of each Term and also, if the Term is longer than six months, on the dates falling at six-monthly intervals after the first day of that Term.
 
9.3
Interest on overdue amounts
 
(a)
If the Company fails to pay any amount payable by it under the Finance Documents, it must immediately on demand by the Facility Agent pay interest on the overdue amount from its due date up to the date of actual payment, both before, on and after judgment.
 
(b)
Interest on an overdue amount is payable at a rate determined by the Facility Agent to be one per cent. per annum above the rate which would have been payable if the overdue amount had, during the period of non-payment, constituted a Tranche B Loan in the currency of the overdue amount. For this purpose, the Facility Agent may (acting reasonably):
 
 
(i)
select successive Terms of any duration of up to three months; and
 
 
(ii)
determine the appropriate Rate Fixing Day for that Term.
 
(c)
Notwithstanding paragraph (b) above, if the overdue amount is a principal amount of a Loan and becomes due and payable prior to the last day of its current Term, then:
 
 
(i)
the first Term for that overdue amount will be the unexpired portion of that Term; and
 
 
(ii)
the rate of interest on the overdue amount for that first Term will be one per cent. per annum above the rate then payable on that Loan.
 
After the expiry of the first Term for that overdue amount, the rate on the overdue amount will be calculated in accordance with paragraph (b) above.
 
(d)
Interest (if unpaid) on an overdue amount will be compounded with that overdue amount at the end of each of its Terms but will remain immediately due and payable.
 
9.4
Notification of rates of interest
 
The Facility Agent must promptly notify each relevant Party of the determination of a rate of interest under this Agreement.
 
9.5
Margin
 
(a)
The applicable Margin for all Loans will be determined in accordance with the table below, with:
 
 
(i)
the applicable Margin for Tranche A Loans being determined by reference to the percentage rate per annum specified in Column 2 as set out below opposite the long term credit rating assigned to the Company and published by Moody's and/or S&P as specified in Column 1;
 
 
(ii)
the applicable Margin for Tranche B Loans being determined by reference to the percentage rate per annum specified in Column 3 as set out below opposite the long term credit rating assigned to the Company and published by Moody's and/or S&P as specified in Column 1; and
 
 
(iii)
the applicable Margin for Tranche C Loans being determined by reference to the percentage rate per annum specified in Column 4 as set out below opposite the long term credit rating assigned to the Company and published by Moody's and/or S&P as specified in Column 1,
 

Column 1
Credit Rating
(S&P/Moody's)
Column 2
Tranche A Margin
%
Column 3
Tranche B Margin
%
Column 4
Tranche C Margin
%
 
A-/A3 (or higher)
 
0.325
 
0.45
 
0.425
 
BBB+/Baa1
 
0.375
 
0.55
 
0.525
 
BBB/Baa2
 
0.50
 
0.70
 
0.70
 
BBB-/Baa3 (or lower)
 
0.75
 
0.95
 
0.95
 
(b)
During any period in which (i) an Event of Default is outstanding; and/or (ii) there is no long term credit rating assigned to the Company by either S&P or Moody's, the applicable Margin for Tranche A and Tranche B and Tranche C shall, in each case, be 1.00 per cent. per annum.
 
(c)
In the event that the long term credit ratings assigned to the Company by S&P and Moody's would indicate a different Margin under (a) above then the lower of the two credit ratings shall apply to determine the applicable Margin, save that, in the event that there is more than one notch difference between the two credit ratings, then the middle level shall apply to determine the applicable Margin and, in the event that there are an even number of levels between the two credit ratings (and therefore no middle level) the higher of the two middle levels shall be used to determine the applicable Margin.
 
(d)
Any adjustment to the Margin pursuant to paragraphs (a) to (c) above shall be made on the date of publication by S&P and/or Moody's of a long term credit rating of the Company (or an amendment of a previously published rating) or on the date in which no long term credit rating is assigned to the Company, if such publication (or amendment) would result in a change in the Margin as provided above and, for the avoidance of doubt, such adjustment shall apply to Loans currently outstanding at such date of publication and with effect from such date.
 
(e)
Promptly after becoming aware of the same, the Company shall inform the Facility Agent in writing if any of the circumstances contemplated by sub-clauses 9.5(b) through (c) apply.
 
10.
TERMS
 
10.1
Selection - Term-Out Loans
 
(a)
Each Term-Out Loan has successive Terms.
 
(b)
The Company must select the first Term-Out for a Term-Out Loan in the relevant notice under Clause 2.5 (Term-Out Option) and each subsequent Term in an irrevocable notice received by the Facility Agent not later than 11.00 a.m. one Business Day before the Rate Fixing Day for that Term. Each Term for a Term-Out Loan will start on its Utilisation Date or on the expiry of its preceding Term.
 
(c)
If the Company fails to select a Term for an outstanding Term-Out Loan under paragraph (b) above, that Term will, subject to the other provisions of this Clause, be one month.
 
(d)
Subject to the following provisions of this Clause, each Term for a Term-Out Loan will be one, two, three or six months or any other period agreed by the Company and the Lenders.
 
10.2
Selection - Loans
 
(a)
Each Loan (other than a Term-Out Loan) has one Term only.
 
(b)
The Company must select the Term for a Loan in the relevant Request.
 
(c)
Subject to the following provisions of this Clause, each Term for a Loan will be one, two, three or six months or for a period of one to thirty days duration as selected by the Company or any other period agreed by the Company and the Lenders.
 
10.3
Consolidation - Term-Out Loans
 
(a)
Unless the Company otherwise requests, a Term for a Term-Out Loan will end on the same day as the current Term for any other Term-Out Loan denominated in the same currency as that Term-Out Loan. On the last day of those Terms, those Term-Out Loans will be consolidated and treated as one Term-Out Loan.
 
(b)
The Company may select different Terms for any portion of a Term-Out Loan on the last day of the Term of that Term-Out Loan provided such portion is a minimum of £5,000,000 and an integral multiple of £1,000,000. Any such portion shall be treated as a separate Loan.
 
10.4
No overrunning the Final Maturity Date
 
If a Term would otherwise overrun the Final Maturity Date, it will be shortened so that it ends on the Final Maturity Date.
 
10.5
Other adjustments
 
The Facility Agent and the Company may enter into such other arrangements as they may agree for the adjustment of Terms and the consolidation and/or splitting of Loans.
 
10.6
Notification
 
The Facility Agent must notify the Company and the Lenders of the duration of each Term promptly after ascertaining its duration.
 
11.
MARKET DISRUPTION
 
11.1
Failure of a Reference Bank to supply a rate
 
If LIBOR is to be calculated by reference to the Reference Banks but a Reference Bank does not supply a rate by 12.00 noon on a Rate Fixing Day, the applicable LIBOR will, subject as provided below, be calculated on the basis of the rates of the remaining Reference Banks.
 
11.2
Market disruption
 
(a)
In this Clause, each of the following events is a market disruption event:
 
 
(i)
LIBOR is to be calculated by reference to the Reference Banks but no, or only one, Reference Bank supplies a rate by 12.00 noon on the Rate Fixing Day; or
 
 
(ii)
the Facility Agent receives by close of business on the Rate Fixing Day notification from Lenders whose shares in the relevant Loan exceed 50 per cent. of that Loan that such Lenders are unable to obtain matching deposits in the relevant interbank market or the rate at which they can do so is in excess of LIBOR for the relevant Term.
 
(b)
The Facility Agent must promptly notify the Company and the Lenders of a market disruption event.
 
(c)
After notification under paragraph (b) above, the rate of interest on each Lender's share in the affected Loan for the relevant Term will be the aggregate of the applicable:
 
 
(i)
Margin;
 
 
(ii)
rate notified to the Facility Agent by that Lender as soon as practicable, and in any event before interest is due to be paid in respect of that Term, to be that which expresses as a percentage rate per annum the cost to that Lender of funding its share in that Loan from whatever source it may reasonably select; and
 
 
(iii)
Mandatory Cost.
 
11.3
Alternative basis of interest or funding
 
(a)
If a market disruption event occurs and the Facility Agent or the Company so requires, the Company and the Facility Agent must enter into negotiations for a period of not more than 30 days with a view to agreeing an alternative basis for determining the rate of interest and/or funding for the affected Loan and any future Loan.
 
(b)
Any alternative basis agreed will be, with the prior consent of all the Lenders, binding on all the Parties.
 
12.
TAXES
 
12.1
General
 
In this Clause:
 
Tax Credit means a credit against any Tax or any relief or remission for Tax (or its repayment).
 
U.K. Lender means a Lender which is within the charge to U.K. corporation tax in respect of, and beneficially entitled to, a payment of interest on a Loan made by a person that was a bank for the purposes of section 349 of the Income and Corporation Taxes Act 1988 (as currently defined in section 840A of the Income and Corporation Taxes Act 1988) at the time the Loan was made;
 
12.2
Tax gross-up
 
(a)
The Company must make all payments to be made by it under the Finance Documents without any Tax Deduction, unless a Tax Deduction is required by law.
 
(b)
If:
 
 
(i)
a Lender is not, or ceases to be, a U.K. Lender; or
 
 
(ii)
the Company or a Lender is aware that the Company must make a Tax Deduction (or that there is a change in the rate or the basis of a Tax Deduction),
 
it must promptly notify the Facility Agent. The Facility Agent must then promptly notify the affected Parties.
 
(c)
Except as provided below, if a Tax Deduction is required by law to be made by the Company or the Facility Agent, the amount of the payment due from the Company will be increased to an amount which (after making the Tax Deduction) leaves an amount equal to the payment which would have been due if no Tax Deduction had been required.
 
(d)
Except as provided below, the Company is not required to make an increased payment under paragraph (c) above to a Lender that is not, or has ceased to be, a U.K. Lender in excess of the amount that the Company would have had to pay had the Lender been, or not ceased to be, a U.K. Lender.
 
(e)
Paragraph (d) above will not apply if the Lender has ceased to be a U.K. Lender by reason of any change after the date it became a Lender under this Agreement in (or in the interpretation, administration, or application of) any law or double taxation agreement or any published practice or concession of any relevant taxing authority.
 
(f)
Where a Lender fails to give notice under paragraph (b) above within 60 days after it obtains knowledge (or, after reasonable due enquiry, ought to have obtained knowledge) of such event, then such Lender shall, with respect to any claim made by it under this Clause 12.2 (Tax gross-up), only be entitled to claim an increased payment for the period from and after the date that is 60 days prior to the date on which the Lender does give notice.
 
(g)
If the Company is required to make a Tax Deduction, it must make the minimum Tax Deduction and must make any payment required in connection with that Tax Deduction within the time allowed by law.
 
(h)
Within 30 days of making either a Tax Deduction or a payment required in connection with a Tax Deduction, the Company must deliver to the Facility Agent for the relevant Finance Party evidence satisfactory to that Finance Party (acting reasonably) that the Tax Deduction has been made or (as applicable) the appropriate payment has been paid to the relevant taxing authority.
 
12.3
Tax indemnity
 
(a)
Except as provided below, the Company must indemnify a Finance Party against any loss or liability which that Finance Party (in its absolute discretion) determines will be or has been suffered (directly or indirectly) by that Finance Party for or on account of Tax in relation to a payment received or receivable (or any payment deemed to be received or receivable) under a Finance Document.
 
(b)
Paragraph (a) above does not apply to any Tax assessed on a Finance Party under the laws of the jurisdiction in which:
 
 
(i)
that Finance Party is incorporated or, if different, the jurisdiction (or jurisdictions) in which that Finance Party is treated as resident for tax purposes; or
 
 
(ii)
that Finance Party's Facility Office is located in respect of amounts received or receivable in that jurisdiction,
 
if that Tax is imposed on or calculated by reference to the net income received or receivable by that Finance Party. However, any payment deemed to be received or receivable, including any amount treated as income but not actually received by the Finance Party, such as a Tax Deduction, will not be treated as net income received or receivable for this purpose.
 
(c)
A Finance Party making, or intending to make, a claim under paragraph (a) above must promptly notify the Company of the event which will give, or has given, rise to the claim.
 
12.4
Tax Credit
 
If the Company makes a Tax Payment and the relevant Finance Party has obtained and used any Tax Credit that is attributable to that Tax Payment, then, if in its discretion (acting reasonably) it can do so without any further adverse consequences for it, that Finance Party must pay an amount to the Company which that Finance Party determines (in its discretion, acting reasonably) will leave it (after that payment) in the same after-tax position as it would have been in if the Tax Payment had not been required to be made by the Company. The relevant Finance Party shall take those steps it considers reasonable to seek and claim any tax credit.
 
12.5
Tax Warranty of Lenders
 
Each Lender severally warrants to the Company on the date it becomes a Lender that it is a U.K. Lender. A Lender must promptly notify the Company if it ceases to be a U.K. Lender after this Agreement is entered into.
 
12.6
Stamp taxes
 
The Company must pay and indemnify each Finance Party against any stamp duty, registration or other similar Tax payable in connection with the entry into, performance or enforcement of any Finance Document, except for any such Tax payable in connection with the entry into of a Transfer Certificate.
 
12.7
Value added taxes
 
(a)
All costs and expenses payable under a Finance Document by the Company is exclusive of any value added tax or any other Tax of a similar nature which might be chargeable in connection with that amount. If any such Tax is chargeable, the Company must pay to the Finance Party (in addition to and at the same time as paying that amount) an amount equal to the amount of that Tax.
 
(b)
The obligation of the Company under paragraph (a) above will be reduced to the extent that the Finance Party determines (acting reasonably) that it is entitled to repayment or a credit in respect of the relevant Tax.
 
13.
INCREASED COSTS
 
13.1
Increased Costs
 
Except as provided below in this Clause, the Company must pay to a Finance Party the amount of any Increased Cost incurred by that Finance Party or any of its Affiliates as a result of:
 
 
(a)
the introduction of, or any change in, or any change in the interpretation or application of, any law or regulation; or
 
 
(b)
compliance with any law or regulation,
 
made after the date of this Agreement.
 
13.2
Exceptions
 
The Company need not make any payment for an Increased Cost to the extent that the Increased Cost is:
 
 
(a)
compensated for under another Clause or would have been but for an exception to that Clause;
 
 
(b)
a Tax on the overall net income of a Finance Party or any of its Affiliates;
 
 
(c)
attributable to a Finance Party or its Affiliate wilfully failing to comply with any law or regulation; or
 
 
(d)
incurred in any period or periods ending prior to the date falling 60 days before the date any demand in relation to that Increased Cost is made (save where the relevant Finance Party (after due enquiry) was unaware of the existence of such Increased Cost or where such Increased Cost is caused by reason of a change in (or in the interpretation, administration or application of) law with retrospective effect).
 
13.3
Claims
 
A Finance Party intending to make a claim for an Increased Cost must notify the Company promptly of the circumstances giving rise to, and the amount of, the claim.
 
14.
MITIGATION
 
14.1
Mitigation
 
(a)
Each Finance Party must, in consultation with the Company, take all reasonable steps to mitigate any circumstances which arise and which result or would result in:
 
 
(i)
any Tax Payment or Increased Cost being payable to that Finance Party;
 
 
(ii)
that Finance Party being able to exercise any right of prepayment and/or cancellation under this Agreement by reason of any illegality;
 
 
(iii)
that Finance Party incurring any cost of complying with the minimum reserve requirements of the European Central Bank; or
 
 
(iv)
the occurrence of any market disruption event,
 
including transferring its rights and obligations under the Finance Documents to an Affiliate or changing its Facility Office.
 
(b)
A Finance Party is not obliged to take any step under this Subclause if, in the opinion of that Finance Party (acting reasonably), to do so might be prejudicial to it.
 
(c)
Each Finance Party must promptly notify the Company of any circumstances as described in 14.1(a)(i) to (iv).
 
(d)
The Company must indemnify each Finance Party for all costs and expenses reasonably incurred by it as a result of any step taken under this Clause 14.1 (Mitigation).
 
14.2
Substitution
 
Notwithstanding Clauses 14.1, if any circumstances arise which result in:
 
 
(i) 
any Tax Payment or Increased Cost being payable to that Finance Party;
 
 
(ii) 
that Finance Party being able to exercise any right of prepayment and/or cancellation under this Agreement by reason of any illegality;
    
 
(iii)
that Finance Party incurring any cost of complying with the minimum reserve requirements of the European Central Bank; or
    
 
(iv)
the occurrence of any market disruption event,
     
then the Company, at its expense, at any time within 180 days after the occurrence of the relevant event or circumstance, so long as no Default is outstanding, may by notice to such Finance Party require it (and, if applicable, its Affiliate) to novate its rights and obligations hereunder (including its Commitments and its share of any Loans) in accordance with Clause 27 to a bank or financial institution specified by the Company and acceptable to the Facility Agent which is willing to take such a novation as aforesaid provided that:
 
 
(v) 
such novation shall not conflict with or violate any law applicable to or binding on such Finance Party (or, if applicable, its Affiliate); and
 
 
(vi)
the Company shall have paid to the Finance Party (or, if applicable, its Affiliate) all amounts accrued and owing hereunder.
 
Notwithstanding the above, the Company shall not be entitled to require a novation under this Clause 14.2 with respect to any Finance Party if:
 
 
(vii)
the relevant Finance Party shall have mitigated the effect of the relevant event or circumstance as provided in Clause 14.1(a), and the novation would have no greater or further mitigating effect; or
 
 
(viii)
the relevant event or circumstances are applicable to all Finance Parties.
 
14.3
Conduct of business by a Finance Party
 
No term of this Agreement will:
 
 
(a)
interfere with the right of any Finance Party to arrange its affairs (Tax or otherwise) in whatever manner it thinks fit or oblige any Finance Party to investigate or claim any Tax Credit; or
 
 
(b)
oblige any Finance Party to disclose any information relating to its affairs (Tax or otherwise) or any computation in respect of Tax.
 
15.
PAYMENTS
 
15.1
Place
 
Unless a Finance Document specifies that payments under it are to be made in another manner, all payments by a Party (other than the Facility Agent) under the Finance Documents must be made to the Facility Agent to its account at such office or bank:
 
 
(a)
in the principal financial centre of the country of the relevant currency; or
 
 
(b)
in the case of euro, in the principal financial centre of a Participating Member State or London,
 
as it may notify to that Party for this purpose by not less than five Business Days' prior notice.
 
15.2
Funds
 
Payments under the Finance Documents to the Facility Agent must be made for value on the due date at such times and in such funds as the Facility Agent may specify to the Party concerned as being customary at the time for the settlement of transactions in the relevant currency in the place for payment.
 
15.3
Distribution
 
(a)
Each payment received by the Facility Agent under the Finance Documents for another Party must, except as provided below, be made available by the Facility Agent to that Party by payment (as soon as practicable after receipt) to its account with such office or bank:
 
 
(i)
in the principal financial centre of the country of the relevant currency; or
 
 
(ii)
in the case of euro, in the principal financial centre of a Participating Member State or London,
 
as it may notify to the Facility Agent for this purpose by not less than five Business Days' prior notice.
 
(b)
The Facility Agent may apply any amount received by it for the Company in or towards payment (as soon as practicable after receipt) of any amount due from the Company under the Finance Documents or in or towards the purchase of any amount of any currency to be so applied.
 
(c)
Where a sum is paid to the Facility Agent under this Agreement for another Party, the Facility Agent is not obliged to pay that sum to that Party until it has established that it has actually received it. However, the Facility Agent may assume that the sum has been paid to it, and, in reliance on that assumption, make available to that Party a corresponding amount. If it transpires that the sum has not been received by the Facility Agent, that Party must immediately on demand by the Facility Agent refund any corresponding amount made available to it together with interest on that amount from the date of payment to the date of receipt by the Facility Agent at a rate calculated by the Facility Agent to reflect its cost of funds.
 
15.4
Currency
 
(a)
Unless a Finance Document specifies that payments under it are to be made in a different manner, the currency of each amount payable under the Finance Documents is determined under this Clause.
 
(b)
Interest is payable in the currency in which the relevant amount in respect of which it is payable is denominated.
 
(c)
A repayment or prepayment of any principal amount is payable in the currency in which that principal amount is denominated on its due date.
 
(d)
Amounts payable in respect of costs and expenses are payable in the currency in which they are incurred.
 
(e)
Each other amount payable under the Finance Documents is payable in Sterling.
 
15.5
No set-off or counterclaim
 
All payments made by the Company under the Finance Documents must be made without set-off or counterclaim.
 
15.6
Business Days
 
(a)
If a payment under the Finance Documents is due on a day which is not a Business Day, the due date for that payment will instead be the next Business Day in the same calendar month (if there is one) or the preceding Business Day (if there is not) or whatever day the Facility Agent determines is market practice.
 
(b)
During any extension of the due date for payment of any principal under this Agreement interest is payable on that principal at the rate payable on the original due date.
 
15.7
Partial payments
 
(a)
If any Administrative Party receives a payment insufficient to discharge all the amounts then due and payable by the Company under the Finance Documents, the Administrative Party must apply that payment towards the obligations of the Company under the Finance Documents in the following order:
 
 
(i)
first, in or towards payment pro rata of any unpaid fees, costs and expenses of the Administrative Parties under the Finance Documents;
 
 
(ii)
secondly, in or towards payment pro rata of any accrued interest or fee due but unpaid under this Agreement;
 
 
(iii)
thirdly, in or towards payment pro rata of any principal amount due but unpaid under this Agreement; and
 
 
(iv)
fourthly, in or towards payment pro rata of any other sum due but unpaid under the Finance Documents.
 
(b)
The Facility Agent must, if so directed by all the Lenders, vary the order set out in sub-paragraphs (a)(ii) to (iv) above.
 
(c)
This Subclause will override any appropriation made by the Company.
 
15.8
Timing of payments
 
If a Finance Document does not provide for when a particular payment is due, that payment will be due within three Business Days of demand by the relevant Finance Party.
 
16.
REPRESENTATIONS
 
16.1
Representations
 
The representations set out in this Clause are made by the Company to each Finance Party.
 
16.2
Status
 
It is a limited liability company, duly incorporated and validly existing under the Companies Act 1985 in England and Wales.
 
16.3
Powers and authority
 
It has the power to enter into and perform, and has taken all necessary action to authorise the entry into and performance of, the Finance Documents to which it is or will be a party and the transactions contemplated by those Finance Documents.
 
16.4
Legal validity
 
Subject to any general principles of law limiting its obligations and referred to in any legal opinion required under this Agreement, each Finance Document to which it is a party is its legally binding, valid and enforceable obligation.
 
16.5
Non-conflict
 
The entry into and performance by it of, and the transactions contemplated by, the Finance Documents do not conflict with any borrowing or other power or restricted granted or imposed by:
 
 
(a)
any law or regulation applicable to it and violation of which has or is likely to have a Material Adverse Effect; or
 
 
(b)
its constitutional documents.
 
16.6
No Event of Default
 
No Event of Default is outstanding or will result from the execution of, or the performance of any transaction contemplated by, any Finance Document.
 
16.7
Authorisations
 
All authorisations required by it (including any authorisations required under PUHCA or the Act, if any) in connection with the entry into, performance, validity and enforceability of, and the transactions contemplated by, the Finance Documents have been obtained or effected (as appropriate) and are in full force and effect.
 
16.8
Financial statements
 
Its audited consolidated financial statements most recently delivered to the Facility Agent (which, at the date of this Agreement, are the Original Financial Statements):
 
 
(a)
have been prepared in accordance with accounting principles and practices generally accepted in its jurisdiction of incorporation, consistently applied; and
 
 
(b)
fairly represent its consolidated financial condition as at the date to which they were drawn up,
 
except, in each case, as disclosed to the contrary in those financial statements..
 
16.9
No material adverse change
 
Other than as disclosed in writing to the Mandated Lead Arrangers prior to the date of this Agreement there has been no material adverse change in its consolidated financial condition since the date to which the Original Financial Statements were drawn up.
 
16.10
Litigation
 
No litigation, arbitration or administrative proceedings are current or, to its knowledge, pending or threatened, which, if adversely determined, are reasonably likely to have a Material Adverse Effect.
 
16.11
Winding Up
 
No meeting has been convened for its Winding-up and, so far as it is aware, no petition, application or the like is outstanding for its Winding up.
 
16.12
Non-Violation of other Agreements:
 
Its entry into, exercise of its rights and/or performance of or compliance with its obligations under this Agreement do not and will not violate, to an extent or in a manner which has or is likely to have a Material Adverse Effect on it, any agreement to which it is a party or which is binding on it.
 
16.13
Times for making representations
 
(a)
The representations set out in this Clause are made by the Company on the date of this Agreement.
 
(b)
The representations in Clauses 16.2 to 16.7 (inclusive) are deemed to be repeated by the Company on the date of each Request and the first day of each Term.
 
(c)
When a representation is repeated, it is applied to the circumstances existing at the time of repetition.
 
17.
INFORMATION COVENANTS
 
17.1
Financial statements
 
(a)
The Company must supply to the Facility Agent in sufficient copies for all the Lenders:
 
 
(i)
its audited consolidated financial statements for each of its financial years; and
 
 
(ii)
its interim financial statements for the first half-year of each of its financial years.
 
(b)
All financial statements must be supplied as soon as they are available and:
 
 
(i)
in the case of the Company's audited consolidated financial statements, within 180 days; and
 
 
(ii)
in the case of the Company's interim financial statements, within 90 days,
 
(c)
of the end of the relevant financial period.
 
17.2
Form of Financial Statement
 
If any financial statement delivered or to be delivered to the Facility Agent under Clause 17.1 is not to be or, as the case may be, has not been prepared in accordance with Applicable Accounting Principles:
 
 
(a)
The Company and the Facility Agent (on behalf of and after consultation with all the Lenders) shall, on the request of the Facility Agent or the Company, negotiate in good faith with a view to agreeing such amendments to the above financial ratio and/or the definitions of the terms used in it as are necessary to give the Lenders comparable protection to that contemplated at the date of this Agreement;
 
 
(b)
If amendments are agreed by the Company and the Majority Lenders within 25 days, those amendments shall take effect in accordance with the terms of that agreement;
 
 
(c)
If such amendments are not so agreed within 25 days, the Company shall:
 
 
(i)
within 30 days after the end of that 25 day period; and
 
 
(ii)
with all subsequent financial statements to be delivered to the Facility Agent under Clause 17.1,
 
deliver to the Facility Agent details of all such adjustments as need to be made to the relevant financial statements to bring them into line with the Companies Act 1985 (as in effect on the date of this Agreement) and Applicable Accounting Principles.
 
17.3
Compliance Certificate
 
(a)
The Company must supply to the Facility Agent a Compliance Certificate with each set of its financial statements, sent to the Facility Agent under this Agreement.
 
(b)
A Compliance Certificate must be signed by two directors of the Company.
 
17.4
Information - miscellaneous
 
The Company must supply to the Facility Agent, in sufficient copies for all the Lenders if the Facility Agent so requests:
 
 
(a)
copies of all documents despatched by the Company to its creditors generally or any class of them at the same time as they are despatched;
 
 
(b)
promptly upon becoming aware of them, details of any litigation, arbitration or administrative proceedings which are current, threatened or pending and which might, if adversely determined, have a Material Adverse Effect;
 
 
(c)
promptly on request, a list of the then current Material Subsidiaries; and
 
 
(d)
promptly on request, such further information regarding the financial condition and operations of the Group as any Finance Party through the Facility Agent may reasonably request.
 
17.5
Notification of Default
 
(a)
The Company must notify the Facility Agent of any Default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence.
 
(b)
Promptly on request by the Facility Agent, the Company must supply to the Facility Agent a certificate signed by two of its directors on its behalf, certifying that no Default is outstanding or, if a Default is outstanding, specifying the Default and the steps, if any, being taken to remedy it.
 
17.6
Use of websites
 
(a)
Except as provided below, the Company may deliver any information under this Agreement to a Lender by posting it on to an electronic website if:
 
 
(i)
the Facility Agent and the Lender agree;
 
 
(ii)
the Company and the Facility Agent designate an electronic website for this purpose;
 
 
(iii)
the Company notifies the Facility Agent of the address of and password for the website; and
 
 
(iv)
the information posted is in a format agreed between the Company and the Facility Agent.
 
The Facility Agent must supply each relevant Lender with the address of and password for the website.
 
(b)
Notwithstanding the above, the Company must supply to the Facility Agent in paper form a copy of any information posted on the website together with sufficient copies for:
 
 
(i)
any Lender not agreeing to receive information via the website; and
 
 
(ii)
within ten Business Days of request any other Lender, if that Lender so requests.
 
(c)
The Company must promptly upon becoming aware of its occurrence, notify the Facility Agent if:
 
 
(i)
the website cannot be accessed;
 
 
(ii)
the website or any information on the website is infected by any electronic virus or similar software;
 
 
(iii)
the password for the website is changed; or
 
 
(iv)
any information to be supplied under this Agreement is posted on the website or amended after being posted.
 
If the circumstances in paragraphs (i) or (ii) above occur, the Company must supply any information required under this Agreement in paper form.
 
17.7
Know your customer requirements
 
(e)
The Company must promptly on the request of any Finance Party supply to that Finance Party any documentation or other evidence which is reasonably requested by that Finance Party (whether for itself, on behalf of any Finance Party or any prospective new Lender) to enable a Finance Party or prospective new Lender to carry out and be satisfied with the results of all applicable know your customer requirements.
 
(f)
Each Lender must promptly on the request of the Facility Agent supply to the Facility Agent any documentation or other evidence which is reasonably required by the Facility Agent to carry out and be satisfied with the results of all know your customer requirements.
 

 
18.
FINANCIAL COVENANTS
 
18.1
Definitions
 
In this Clause:
 
Consolidated EBITDA means the consolidated net pre-taxation profits of the Group for a Measurement Period as adjusted by:
 
adding back Interest Payable;
 
taking no account of any exceptional or extraordinary item;
 
excluding any amount attributable to minority interests;
 
adding back depreciation and amortisation; and
 
taking no account of any revaluation of an asset or any loss or gain over book value arising on the disposal of an asset (otherwise than in the ordinary course of trading) by a member of the Group during that Measurement Period.
 
Interest Payable means, in relation to any Measurement Period, all interest payable and similar charges of the Group expressed in Sterling and determined on a consolidated basis in accordance with Applicable Accounting Principles.
 
Measurement Period means a half-year of the Company.
 
Regulatory Asset Base means the regulatory asset base of the Company most recently published by OFGEM.
 
Total Gross Debt means, in respect of the Company, at any time the consolidated Financial Indebtedness of the Company which is required to be accounted for as debt in the annual financial statements of the Company.
 
18.2
Interpretation
 
(a)
Except as provided to the contrary in this Agreement, an accounting term used in this Clause is to be construed in accordance with the principles applied in connection with the Original Financial Statements.
 
(b)
Any amount in a currency other than Sterling is to be taken into account at its Sterling equivalent calculated on the basis of:
 
 
(i)
the Facility Agent's spot rate of exchange for the purchase of the relevant currency in the London foreign exchange market with Sterling at or about 11.00 a.m. on the day the relevant amount falls to be calculated; or
 
 
(ii)
if the amount is to be calculated on the last day of a financial period of the Company, the relevant rates of exchange used by the Company in, or in connection with, its financial statements for that period.
 
(c)
No item must be credited or deducted more than once in any calculation under this Clause.
 
18.3
Interest cover
 
The Company must ensure that the ratio of Consolidated EBITDA to Interest Payable is not, at the end of each Measurement Period, less than 3 to 1.
 
18.4
Asset Cover
 
The Company must ensure that the Regulatory Asset Base will exceed Total Gross Debt by at least £150,000,000 at all times.
 
19.
GENERAL COVENANTS
 
19.1
General
 
The Company agrees to be bound by the covenants set out in this Clause relating to it and, where the covenant is expressed to apply to each member of the Group, the Company must ensure that each of its Subsidiaries performs that covenant.
 
19.2
Authorisations
 
The Company must promptly obtain, maintain and comply with the terms of any authorisation required under any law or regulation to enable it to perform its obligations under, or for the validity or enforceability of, any Finance Document.
 
19.3
Compliance with laws
 
Each member of the Group must comply in all respects with all laws to which it is subject where failure to do so is reasonably likely to have a Material Adverse Effect.
 
19.4
Pari passu ranking
 
The Company must ensure that its payment obligations under the Finance Documents rank at least pari passu with all its other present and future unsecured payment obligations, except for obligations mandatorily preferred by law applying to companies generally.
 
19.5
Negative pledge
 
(a)
Except as provided below, neither the Company nor any Material Subsidiary may create or allow to exist any Security Interest on any of its assets.
 
(b)
Paragraph (a) does not apply to:
 
 
(i)
any Security Interest created under or in connection with or arising out of the Balancing and Settlement Code or any transactions or arrangements entered into in connection with the management of risks relating thereto;
 
 
(ii)
in respect of overdue amounts which have not been overdue for more than 30 days and/or are being contested in good faith, liens arising solely by operation of law or by order of a court or tribunal (or by an agreement of similar effect) and/or in the ordinary course of business or operations;
 
 
(iii)
any Security Interest created after the date of this Agreement for the sole purpose of re-financing all or any part of either Facility (at the option of the Company) provided that the monies borrowed or raised on such Security Interest shall, to that extent, be applied reasonably promptly in accordance with this Agreement in or towards repayment of the relevant Facility;
 
 
(iv)
any Security Interest arising out of title retention provisions in a supplier's standard conditions of supply of goods acquired in the ordinary course of business or operations;
 
 
(v)
any Security Interest created on any asset acquired after the date of this Agreement for the sole purpose of financing or re-financing that acquisition and securing a principal, capital or nominal amount not exceeding the cost of that acquisition, provided that the Security Interest is removed or discharged within 6 months of the date of acquisition of such asset;
 
 
(vi)
any Security Interest outstanding on or over any asset acquired after the date of this Agreement and in existence at the date of such acquisition, provided that the Security Interest is removed or discharged within 6 months of the date of acquisition of such asset;
 
 
(vii)
any Security Interest created or outstanding on or over any asset of any company which becomes a Material Subsidiary of the Company after the date of this Agreement where such Security Interest is created prior to the date on which such company becomes a Material Subsidiary of the Company and is not created or increased in contemplation of such Company being acquired and/or becoming a Material Subsidiary of the Company and the Security Interest is removed or discharged within 6 months of the date of such company becoming a Material Subsidiary of the Company;
 
 
(viii)
any Security Interest created on any asset to secure any Financial Indebtedness incurred in connection with the financing of any asset or project in respect of which the repayment of that Financial Indebtedness is to be made from the revenues arising out of, or other proceeds of realisation from, that asset or project, with recourse to those revenues and proceeds and other assets used in connection with, or forming the subject matter of, that asset or project but without recourse (or with such limited recourse as the Majority Banks may from time to time agree) to any other assets of the Group;
 
 
(ix)
any netting arrangements under any swap or other hedging transaction which is on standard market terms;
 
 
(x)
any Security Interest created or outstanding with the prior approval of the Majority Banks; and
 
 
(xi)
any Security Interest created or outstanding on or over assets of the Company or any of its Material Subsidiaries provided that the aggregate outstanding principal or nominal amount secured by all Security Interests created or outstanding under this exception on or over such assets shall not at any time exceed £25,000,000 or its equivalent.
 
19.6
Disposals
 
(a)
Except as provided below, no member of the Group may, either in a single transaction or in a series of transactions and whether related or not, dispose of all or any part of its assets (other than cash) which is substantial in the context of the consolidated total assets of the Group.
 
(b)
Paragraph (a) does not apply to:
 
 
(i)
any disposal made in the ordinary course of business or operations of the disposing entity (including, without limitation, disposals of subsidiaries or lines of business, provided that this shall not include a disposal of the core electricity distribution business);
 
 
(ii)
disposals on normal commercial terms of obsolete assets or assets no longer required for the purpose of the relevant Person's business or operations;
 
 
(iii)
any realisation of investments acquired, purchased or made by the temporary application of funds not immediately required in the relevant Person's business or operations;
 
 
(iv)
the exchange of assets for other assets of a similar or superior nature and value, or the sale of assets on normal commercial terms for cash which is payable in full on the completion of the sale and is to be, and is, applied in or towards the purchase of similar assets within 6 months;
 
 
(v)
the disposal of assets by one wholly-owned Subsidiary of the Company to another or (if the consideration for the disposal does not exceed a normal commercial consideration) to the Company by one of its Subsidiaries;
 
 
(vi)
disposals of any National Grid shares on normal commercial terms;
 
 
(vii)
disposals in connection with sale-and-leaseback or sale and repurchase transactions or any other form of "off balance sheet" financing, provided that the aggregate book value (in the books of the disposing party) of all assets the subject of all such disposals made during the period commencing on the date of this Agreement and ending on the date when no amount remains to be lent or remains payable under this Agreement shall not exceed £50,000,000; and
 
 
(viii)
any disposal which the Majority Banks shall have agreed shall not be taken into account.
 
19.7
Environmental matters
 
The Company will and will ensure that its Material Subsidiaries will comply with all applicable Environmental Law and other regulations, orders or other law applicable to the conduct of the business of the supply or distribution of electricity, in each case, where failure to do so would have a Material Adverse Effect.
 
19.8
Insurance
 
Each member of the Group must insure its business and assets with insurance companies to such an extent and against such risks as that member of the Group reasonably considers to be appropriate, having regard to the insurance arrangements of companies engaged in similar business.
 
20.
DEFAULT
 
20.1
Events of Default
 
Each of the events set out in this Clause is an Event of Default.
 
20.2
Non-payment
 
The Company fails to pay any sum payable under any Finance Document when due unless:
 
 
(a)
its failure to pay is caused by administrative or technical error; and
 
 
(b)
payment is made within 5 Business Days of its due date.
 
20.3
Breach of other obligations
 
(a)
The Company does not perform or comply with its obligations under Clause 18 (Financial covenants), Clause 19.5 (Negative Pledge) or Clause 19.6 (Disposals).
 
(b)
The Company does not perform or comply with any of its other obligations under any Finance Document in any material respect or any representation or warranty by the Company in this Agreement or in any document delivered under it is or proves to have been incorrect when made or deemed repeated, unless the non-compliance or circumstances giving rise to the misrepresentation, as the case may be, is capable of remedy and is not remedied within 45 days of the earlier of the Facility Agent giving notice requiring the same to be remedied and the Company becoming aware of such non-compliance or misrepresentation, as the case may be.
 
20.4
Cross-acceleration
 
Any other Financial Indebtedness or commitment for Financial Indebtedness of the Company is cancelled or terminated or becomes due and payable before its normal maturity (whether by declaration or automatically), in each case, by reason of default on the part of the Company or is not paid when due nor within any applicable grace period, other than in circumstances where such default or liability to pay is being contested in good faith and by appropriate proceedings. However, no Event of Default will occur under this Clause 20.4 unless and until the aggregate amount of such Financial Indebtedness in respect of which one or more of the events mentioned above in this Clause 20.4 has occurred exceeds £20,000,000 or its equivalent.
 
20.5
Insolvency
 
(a)
Any of the following occurs in respect of the Company:
 
 
(i)
it is unable to pay its debts generally as they fall due or it is deemed by a court of competent jurisdiction to be insolvent;
 
 
(ii)
it suspends making payments on all or any class of its debts or publicly announces an intention to do so;
 
 
(iii)
by reason of actual or anticipated financial difficulties, it begins negotiations with all or any class of its creditors for the general rescheduling of its indebtedness; or
 
 
(iv)
a moratorium is declared in respect of any of its indebtedness.
 
(b)
If a moratorium occurs in respect of the Company, the ending of the moratorium will not remedy any Event of Default caused by the moratorium.
 
20.6
Insolvency proceedings
 
(a)
Except as provided below, any of the following occurs in respect of the Company:
 
 
(i)
any person presents a petition for its winding-up, administration or dissolution;
 
 
(ii)
an order for its winding-up, administration or dissolution is made;
 
 
(iii)
any liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer is appointed in respect of it or any of its assets;
 
 
(iv)
its directors or other officers request the appointment of a liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer; or
 
 
(v)
any other analogous step or procedure is taken in any jurisdiction.
 
(b)
Paragraph (a) does not apply to (i) a petition for winding-up presented by a creditor which is being actively contested in good faith and with due diligence and with a reasonable prospect of success or (ii) a voluntary solvent winding-up, amalgamation, reconstruction or reorganisation or otherwise part of a solvent scheme of arrangement, in each case on terms approved by the Majority Lenders.
 
20.7
Creditors' process
 
A distress, attachment, execution or other legal process material in relation to the Company's ability to perform its payment obligations under this Agreement is levied, enforced or sued out on or against the assets of the Company and is not discharged or stayed within 90 days.
 
20.8
Licence
 
Either (1) the Authority gives notice in writing of the revocation of the Licence in accordance with its terms and that notice is not withdrawn or contested in good faith by appropriate proceedings or (2) the Licence is revoked, in either case, other than in circumstances which permit the Company or its Affiliates to carry on the distribution business of the Company either without a licence as a result of any change in the Act or regulatory regime or with a new licence, permitting the distribution of electricity in the authorised areas covered by the Licence, issued under the Act or pursuant to the Utilities Act, 2000.
 
20.9
Balancing and Settlement Code
 
(a)
The Company ceases to be a party to the Balancing and Settlement Code Framework Agreement other than in circumstances where the Company is able to carry its distribution business; or
 
(b)
the Company breaches the Balancing and Settlement Code and such breach has or is reasonably likely to have a Material Adverse Effect other than in circumstances where the Company is able to carry on its distribution business.
 
20.10
Unlawfulness
 
It is or becomes unlawful for the Company to perform any of its obligations under this Agreement in any material respect.
 
20.11
Acceleration
 
If an Event of Default is outstanding, the Facility Agent may, and must if so instructed by the Majority Lenders, by notice to the Company:
 
 
(a)
cancel the Total Commitments; and/or
 
 
(b)
declare that all or part of any amounts outstanding under the Finance Documents are:
 
 
(i)
immediately due and payable; and/or
 
 
(ii)
payable on demand by the Facility Agent acting on the instructions of the Majority Lenders.
 
Any notice given under this subclause will take effect in accordance with its terms.
 
21.
THE ADMINISTRATIVE PARTIES
 
21.1
Appointment and duties of the Facility Agent
 
(a)
Each Finance Party (other than the Facility Agent) irrevocably appoints the Facility Agent to act as its agent under the Finance Documents.
 
(b)
Each Finance Party irrevocably authorises the Facility Agent to:
 
 
(i)
perform the duties and to exercise the rights, powers and discretions that are specifically given to it under the Finance Documents, together with any other incidental rights, powers and discretions; and
 
 
(ii)
execute each Finance Document expressed to be executed by the Facility Agent.
 
(c)
The Facility Agent has only those duties which are expressly specified in the Finance Documents. Those duties are solely of a mechanical and administrative nature.
 
21.2
Role of the Mandated Lead Arranger
 
Except as specifically provided in the Finance Documents, no Mandated Lead Arranger has any obligations of any kind to any other Party in connection with any Finance Document.
 
21.3
No fiduciary duties
 
Except as specifically provided in a Finance Document, nothing in the Finance Documents makes an Administrative Party a trustee or fiduciary for any other Party or any other person. No Administrative Party need hold in trust any moneys paid to it for a Party or be liable to account for interest on those moneys.
 
21.4
Individual position of an Administrative Party
 
(a)
If it is also a Lender, each Administrative Party has the same rights and powers under the Finance Documents as any other Lender and may exercise those rights and powers as though it were not an Administrative Party.
 
(b)
Each Administrative Party may:
 
 
(i)
carry on any business with the Company or its related entities (including acting as an agent or a trustee for any other financing); and
 
 
(ii)
retain any profits or remuneration it receives under the Finance Documents or in relation to any other business it carries on with the Company or its related entities.
 
21.5
Reliance
 
The Facility Agent may:
 
 
(a)
rely on any notice or document believed by it to be genuine and correct and to have been signed by, or with the authority of, the proper person;
 
 
(b)
rely on any statement made by any person regarding any matters which may reasonably be assumed to be within his knowledge or within his power to verify;
 
 
(c)
engage, pay for and rely on professional advisers selected by it (including those representing a Party other than the Facility Agent); and
 
 
(d)
act under the Finance Documents through its personnel and agents.
 
21.6
Majority Lenders' instructions
 
(a)
The Facility Agent is fully protected if it acts on the instructions of the Majority Lenders in the exercise of any right, power or discretion or any matter not expressly provided for in the Finance Documents. Any such instructions given by the Majority Lenders will be binding on all the Lenders. In the absence of instructions, the Facility Agent may act as it considers to be in the best interests of all the Lenders.
 
(b)
The Facility Agent is not authorised to act on behalf of a Lender (without first obtaining that Lender's consent) in any legal or arbitration proceedings in connection with any Finance Document.
 
(c)
The Facility Agent may require the receipt of security satisfactory to it, whether by way of payment in advance or otherwise, against any liability or loss which it may incur in complying with the instructions of the Majority Lenders.
 
21.7
Responsibility
 
(a)
No Administrative Party is responsible to any other Finance Party for the adequacy, accuracy or completeness of:
 
 
(i)
any Finance Document or any other document; or
 
 
(ii)
any statement or information (whether written or oral) made in or supplied in connection with any Finance Document.
 
(b)
Without affecting the responsibility of the Company for information supplied by it or on its behalf in connection with any Finance Document, each Lender confirms that it:
 
 
(i)
has made, and will continue to make, its own independent appraisal of all risks arising under or in connection with the Finance Documents (including the financial condition and affairs of the Company and its related entities and the nature and extent of any recourse against any Party or its assets); and
 
 
(ii)
has not relied exclusively on any information provided to it by any Administrative Party in connection with any Finance Document.
 
(c)
(i)
Nothing in this Agreement will oblige the Facility Agent to satisfy any know your customer requirement in relation to the identity of any person on behalf of any Finance Party.
 
 
(ii)
Each Finance Party confirms to the Facility Agent that it is solely responsible for any know your customer requirements it is required to carry out and that it may not rely on any statement in relation to those requirements made by any other person.
 
21.8
Exclusion of liability
 
(a)
The Facility Agent is not liable or responsible to any other Finance Party for any action taken or not taken by it in connection with any Finance Document, unless directly caused by its gross negligence or wilful misconduct.
 
(b)
No Party may take any proceedings against any officer, employee or agent of the Facility Agent in respect of any claim it might have against the Facility Agent or in respect of any act or omission of any kind by that officer, employee or agent in connection with any Finance Document. Any officer, employee or agent of the Facility Agent may rely on this Subclause and enforce its terms under the Contracts (Rights of Third Parties) Act 1999.
 
21.9
Default
 
(a)
The Facility Agent is not obliged to monitor or enquire whether a Default has occurred. The Facility Agent is not deemed to have knowledge of the occurrence of a Default.
 
(b)
If the Facility Agent:
 
 
(i)
receives notice from a Party referring to this Agreement, describing a Default and stating that the event is a Default; or
 
 
(ii)
is aware of the non-payment of any principal or interest or any fee payable to a Lender under this Agreement,
 
it must promptly notify the Lenders.
 
21.10
Information
 
(a)
The Facility Agent must promptly forward to the person concerned the original or a copy of any document which is delivered to the Facility Agent by a Party for that person.
 
(b)
Except where a Finance Document specifically provides otherwise, the Facility Agent is not obliged to review or check the adequacy, accuracy or completeness of any document it forwards to another Party.
 
(c)
Except as provided above, the Facility Agent has no duty:
 
 
(i)
either initially or on a continuing basis to provide any Lender with any credit or other information concerning the risks arising under or in connection with the Finance Documents (including any information relating to the financial condition or affairs of the Company or its related entities or the nature or extent of recourse against any Party or its assets) whether coming into its possession before, on or after the date of this Agreement; or
 
 
(ii)
unless specifically requested to do so by a Lender in accordance with a Finance Document, to request any certificate or other document from the Company.
 
(d)
In acting as the Facility Agent, the agency division of the Facility Agent is treated as a separate entity from its other divisions and departments. Any information acquired by the Facility Agent which, in its opinion, is acquired by it otherwise than in its capacity as the Facility Agent may be treated as confidential by the Facility Agent and will not be treated as information possessed by the Facility Agent in its capacity as such.
 
(e)
The Facility Agent is not obliged to disclose to any person any confidential information supplied to it by a member of the Group solely for the purpose of evaluating whether any waiver or amendment is required to any term of the Finance Documents.
 
(f)
The Company irrevocably authorises the Facility Agent to disclose to the other Finance Parties any information which, in its opinion, is received by it in its capacity as the Facility Agent.
 
21.11
Indemnities
 
(a)
Without limiting the liability of the Company under the Finance Documents, each Lender must indemnify the Facility Agent for that Lender's Pro Rata Share of any loss or liability incurred by the Facility Agent in acting as the Facility Agent, except to the extent that the loss or liability is caused by the Facility Agent's gross negligence or wilful misconduct.
 
(b)
The Facility Agent may deduct from any amount received by it for a Lender any amount due to the Facility Agent from that Lender under a Finance Document but unpaid.
 
(c)
The Company must indemnify the Facility Agent against any loss or liability properly incurred by the Facility Agent as a result of:
 
 
(i)
investigating any event which the Facility Agent reasonably believes to be a Default; or
 
 
(ii)
acting or relying on any notice which the Facility Agent reasonably believes to be genuine, correct and appropriately authorised.
 
21.12
Compliance
 
The Facility Agent may refrain from doing anything (including disclosing any information) which might, in its opinion, constitute a breach of any law or regulation or be otherwise actionable at the suit of any person, and may do anything which, in its opinion, is necessary or desirable to comply with any law or regulation.
 
21.13
Resignation of the Facility Agent
 
(a)
The Facility Agent may resign and appoint any of its Affiliates as successor Facility Agent by giving notice to the Lenders and the Company.
 
(b)
Alternatively, the Facility Agent may resign by giving notice to the Lenders and the Company, in which case the Majority Lenders may appoint a successor Facility Agent.
 
(c)
If no successor Facility Agent has been appointed under paragraph (b) above within 30 days after notice of resignation was given, the Facility Agent may appoint a successor Facility Agent.
 
(d)
The person(s) appointing a successor Facility Agent must, if practicable, consult with the Company prior to the appointment. Any successor Facility Agent must have an office in the U.K.
 
(e)
The resignation of the Facility Agent and the appointment of any successor Facility Agent will both become effective only when the successor Facility Agent notifies all the Parties that it accepts its appointment. On giving the notification, the successor Facility Agent will succeed to the position of the Facility Agent and the term "Facility Agent" will mean the successor Facility Agent.
 
(f)
The retiring Facility Agent must, at its own cost, make available to the successor Facility Agent such documents and records and provide such assistance as the successor Facility Agent may reasonably request for the purposes of performing its functions as the Facility Agent under the Finance Documents.
 
(g)
Upon its resignation becoming effective, this Clause will continue to benefit the retiring Facility Agent in respect of any action taken or not taken by it in connection with the Finance Documents while it was the Facility Agent, and, subject to paragraph (f) above, it will have no further obligations under any Finance Document.
 
(h)
The Majority Lenders may, by notice to the Facility Agent, require it to resign under paragraph (b) above.
 
21.14
Relationship with Lenders
 
(a)
The Facility Agent may treat each Lender as a Lender, entitled to payments under this Agreement and as acting through its Facility Office(s) until it has received not less than five Business Days' prior notice from that Lender to the contrary.
 
(b)
The Facility Agent may at any time, and must if requested to do so by the Majority Lenders, convene a meeting of the Lenders.
 
(c)
The Facility Agent must keep a register of all the Parties and supply any other Party with a copy of the register on request. The register will include each Lender's Facility Office(s) and contact details for the purposes of this Agreement.
 
21.15
Facility Agent's management time
 
If the Facility Agent requires, any amount payable to the Facility Agent by any Party under any indemnity or in respect of any costs or expenses incurred by the Facility Agent under the Finance Documents after the date of this Agreement may include the cost of using its management time or other resources and will be calculated on the basis of such reasonable daily or hourly rates as the Facility Agent may notify to the relevant Party. This is in addition to any amount in respect of fees or expenses paid or payable to the Facility Agent under any other term of the Finance Documents.
 
21.16
Notice period
 
Where this Agreement specifies a minimum period of notice to be given to the Facility Agent, the Facility Agent may, at its discretion, accept a shorter notice period.
 
22.
EVIDENCE AND CALCULATIONS
 
22.1
Accounts
 
Accounts maintained by a Finance Party in connection with this Agreement are prima facie evidence of the matters to which they relate for the purpose of any litigation or arbitration proceedings.
 
22.2
Certificates and determinations
 
Any certification or determination by a Finance Party of a rate or amount under the Finance Documents will be, in the absence of manifest error, conclusive evidence of the matters to which it relates.
 
22.3
Calculations
 
Any interest or fee accruing under this Agreement accrues from day to day and is calculated on the basis of the actual number of days elapsed and a year of 360 or 365 days or otherwise, depending on what the Facility Agent determines is market practice.
 
23.
FEES
 
23.1
Facility Agent's fee
 
The Company must pay to the Facility Agent for its own account an agency fee in the manner agreed between the Facility Agent and the Company.
 
23.2
Arrangement fee
 
The Company must pay an arrangement and participation fee in the manner agreed between the Mandated Lead Arrangers and the Company.
 
23.3
Tranche A commitment fee
 
(a)
The Company must pay a commitment fee computed at the rate of 45 per cent. of the Margin from time to time on the undrawn, uncancelled amount of each Lender's Tranche A Commitment calculated from the later of:
 
 
(i)
the date of this Agreement; and
 
 
(ii)
the date on which the Existing Credit Agreement is irrevocably repaid in full.
 
(b)
Accrued commitment fee is payable quarterly in arrear. Accrued commitment fee is also payable to the Facility Agent for a Lender on the date its Tranche A Commitment is cancelled in full.
 
23.4
Tranche B commitment fee
 
(a)
The Company must pay a commitment fee computed at the rate of 45 per cent. of the Margin from time to time on the undrawn, uncancelled amount of each Lender's Tranche B Commitment calculated from the later of:
 
 
(i)
the date of this Agreement; and
 
 
(ii)
the date on which the Existing Credit Agreement is irrevocably repaid in full.
 
(b)
Accrued commitment fee is payable quarterly in arrear. Accrued commitment fee is also payable to the Facility Agent for a Lender on the date its Tranche B Commitment is cancelled in full.
 
23.5
Tranche C commitment fee
 
(a)
The Company must pay a commitment fee computed at the rate of 45 per cent. of the Margin from time to time on the undrawn, uncancelled amount of each Lender's Tranche C Commitment calculated from Restatement Date.
 
(b)
Accrued commitment fee is payable quarterly in arrear. Accrued commitment fee is also payable to the Facility Agent for a Lender on the date its Tranche C Commitment is cancelled in full.
 
23.6
Term-Out Fee
 
The Company shall pay to the Facility Agent for the Lenders a term-out fee in an amount equal to 0.1 per cent. flat of the amount of the Term-Out Loans termed-out under Clause 2.5 (Term-Out Option) as calculated on the Final Maturity Date in relation to the Tranche A Facility (not taking into account any extension under Clause 2.4). The term-out fee shall be payable within 5 Business days after the initial Final Maturity Date in relation to Tranche A.
 
24.
INDEMNITIES AND BREAK COSTS
 
24.1
Currency indemnity
 
(a)
The Company must, as an independent obligation, indemnify each Finance Party against any loss or liability which that Finance Party incurs as a consequence of:
 
 
(i)
that Finance Party receiving an amount in respect of the Company's liability under the Finance Documents; or
 
 
(ii)
that liability being converted into a claim, proof, judgment or order,
 
in a currency other than the currency in which the amount is expressed to be payable under the relevant Finance Document.
 
(b)
Unless otherwise required by law, the Company waives any right it may have in any jurisdiction to pay any amount under the Finance Documents in a currency other than that in which it is expressed to be payable.
 
24.2
Other indemnities
 
The Company shall within 15 days of demand indemnify the Facility Agent and each Lender against any funding or other cost, loss, expense or liability in an amount certified by it in reasonable detail (together with documentation in support) sustained or incurred by it as a direct result of:
 
 
(i)
the occurrence of any Event of Default;
 
 
(ii)
(other than by reason of negligence or default by a Finance Party) a Loan not being made after a Request has been delivered for that Loan; or
 
 
(iii)
the receipt or recovery by any party (or the Facility Agent on its behalf) of all or any part of a Loan or overdue sum due from the Company otherwise than on the Final Maturity Date or Maturity Date (as relevant) of that Loan or, in the case of an overdue sum, the last day of an interest period relating to that overdue sum, as the case may be or a Loan or any part thereof not being prepaid in accordance with a notice of prepayment.
 
24.3
Break Costs
 
(a)
The Company must pay to each Lender its Break Costs.
 
(b)
Break Costs are the amount (if any) determined by the relevant Lender by which:
 
 
(i)
the interest which that Lender would have received for the period from the date of receipt of any part of its share in a Loan or an overdue amount to the last day of the applicable Term for that Loan or overdue amount if the principal or overdue amount received had been paid on the last day of that Term;
 
exceeds
 
 
(ii)
the amount which that Lender would be able to obtain by placing an amount equal to the amount received by it on deposit with a leading bank in the appropriate interbank market for a period starting on the Business Day following receipt and ending on the last day of the applicable Term.
 
(c)
Each Lender must supply to the Facility Agent for the Company details of the amount of any Break Costs claimed by it under this Subclause.
 
25.
EXPENSES
 
25.1
Initial costs
 
The Company must pay to each Administrative Party the amount of all costs and expenses (including legal fees) reasonably incurred by it in connection with the negotiation, preparation, printing, execution and syndication of the Finance Documents.
 
25.2
Subsequent costs
 
The Company must pay to the Facility Agent the amount of all costs and expenses (including legal fees) reasonably incurred by it in connection with:
 
 
(a)
the negotiation, preparation, printing and execution of any Finance Document (other than a Transfer Certificate) executed after the date of this Agreement; and
 
 
(b)
any amendment, waiver or consent requested by or on behalf of the Company or specifically allowed by this Agreement.
 
25.3
Enforcement costs
 
The Company must pay to each Finance Party the amount of all costs and expenses (including legal fees) incurred by it in connection with the enforcement of, or the preservation of any rights under, any Finance Document.
 
26.
AMENDMENTS AND WAIVERS
 
26.1
Procedure
 
(a)
Except as provided in this Clause, any term of the Finance Documents may be amended or waived with the agreement of the Company and the Majority Lenders. The Facility Agent may effect, on behalf of any Finance Party, an amendment or waiver allowed under this Clause.
 
(b)
The Facility Agent must promptly notify the other Parties of any amendment or waiver effected by it under paragraph (a) above. Any such amendment or waiver is binding on all the Parties.
 
26.2
Exceptions
 
(a)
An amendment or waiver which relates to:
 
 
(i)
the definition of Majority Lenders in Clause 1.1 (Definitions);
 
 
(ii)
an extension of the date of payment of any amount to a Lender under the Finance Documents;
 
 
(iii)
a reduction in the Margin or a reduction in the amount of any payment of principal, interest, fee or other amount payable to a Lender under the Finance Documents;
 
 
(iv)
an increase in, or an extension of, a Commitment or the Total Commitments;
 
 
(v)
a term of a Finance Document which expressly requires the consent of each Lender;
 
 
(vi)
the right of a Lender to assign or transfer its rights or obligations under the Finance Documents; or
 
 
(vii)
this Clause,
 
may only be made with the consent of all the Lenders.
 
(b)
An amendment or waiver which relates to the rights or obligations of an Administrative Party may only be made with the consent of that Administrative Party.
 
26.3
Change of currency
 
If a change in any currency of a country occurs (including where there is more than one currency or currency unit recognised at the same time as the lawful currency of a country), the Finance Documents will be amended to the extent the Facility Agent (acting reasonably and after consultation with the Company) determines is necessary to reflect the change.
 
26.4
Waivers and remedies cumulative
 
The rights of each Finance Party under the Finance Documents:
 
 
(a)
may be exercised as often as necessary;
 
 
(b)
are cumulative and not exclusive of its rights under the general law; and
 
 
(c)
may be waived only in writing and specifically.
 
Delay in exercising or non-exercise of any right is not a waiver of that right.
 
27.
CHANGES TO THE PARTIES
 
27.1
Assignments and transfers by the Company
 
The Company may not assign or transfer any of its rights and obligations under the Finance Documents without the prior consent of all the Lenders.
 
27.2
Assignments and transfers by Lenders
 
(a)
A Lender (the Existing Lender) may, subject to the following provisions of this Subclause, at any time assign or transfer (including by way of novation) any of its rights and obligations under this Agreement to any other person (the New Lender).
 
(b)
Unless the Company and the Facility Agent otherwise agree, a transfer of part of a Commitment or rights and obligations under this Agreement by the Existing Lender must be in a minimum amount of £5,000,000.
 
(c)
The consent of the Company is required for any assignment or transfer unless the New Lender is another Lender or an Affiliate of a Lender. The consent of the Company must not be unreasonably withheld or delayed. The Company will be deemed to have given its consent five Business Days after the Lender has requested it unless consent is expressly refused by the Company within that time.
 
(d)
The Facility Agent is not obliged to execute a Transfer Certificate until it has completed all know your customer requirements to its satisfaction. The Facility Agent must promptly notify the Existing Lender and the New Lender if there are any such requirements.
 
(e)
The Company may not withhold its consent solely because the assignment or transfer might increase the Mandatory Cost
 
(f)
A transfer of obligations will be effective only if either:
 
 
(i)
the obligations are novated in accordance with the following provisions of this Clause; or
 
 
(ii)
the New Lender confirms to the Facility Agent and the Company in form and substance satisfactory to the Facility Agent that it is bound by the terms of this Agreement as a Lender. On the transfer becoming effective in this manner the Existing Lender will be released from its obligations under this Agreement to the extent that they are transferred to the New Lender.
 
(g)
Unless the Facility Agent otherwise agrees, the New Lender must pay to the Facility Agent for its own account, on or before the date any assignment or transfer occurs, a fee of £750.
 
(h)
Any reference in this Agreement to a Lender includes a New Lender but excludes a Lender if no amount is or may be owed to or by it under this Agreement.
 
27.3
Procedure for transfer by way of novations
 
(a)
In this Subclause:
 
Transfer Date means, for a Transfer Certificate, the later of:
 
the proposed Transfer Date specified in that Transfer Certificate; and
 
the date on which the Facility Agent executes that Transfer Certificate.
 
(b)
A novation is effected if:
 
 
(i)
the Existing Lender and the New Lender deliver to the Facility Agent a duly completed Transfer Certificate; and
 
 
(ii)
the Facility Agent executes it.
 
The Facility Agent must execute as soon as reasonably practicable a Transfer Certificate delivered to it and which appears on its face to be in order.
 
(c)
Each Party (other than the Existing Lender and the New Lender) irrevocably authorises the Facility Agent to execute any duly completed Transfer Certificate on its behalf.
 
(d)
On the Transfer Date:
 
 
(i)
the New Lender will assume the rights and obligations of the Existing Lender expressed to be the subject of the novation in the Transfer Certificate in substitution for the Existing Lender; and
 
 
(ii)
the Existing Lender will be released from those obligations and cease to have those rights.
 
27.4
Limitation of responsibility of Existing Lender
 
(a)
Unless expressly agreed to the contrary, an Existing Lender is not responsible to a New Lender for the legality, validity, adequacy, accuracy, completeness or performance of:
 
 
(i)
any Finance Document or any other document; or
 
 
(ii)
any statement or information (whether written or oral) made in or supplied in connection with any Finance Document,
 
and any representations or warranties implied by law are excluded.
 
(b)
Each New Lender confirms to the Existing Lender and the other Finance Parties that it:
 
 
(i)
has made, and will continue to make, its own independent appraisal of all risks arising under or in connection with the Finance Documents (including the financial condition and affairs of the Company and its related entities and the nature and extent of any recourse against any Party or its assets) in connection with its participation in this Agreement; and
 
 
(ii)
has not relied exclusively on any information supplied to it by the Existing Lender in connection with any Finance Document.
 
(c)
Nothing in any Finance Document requires an Existing Lender to:
 
 
(i)
accept a re-transfer from a New Lender of any of the rights and obligations assigned or transferred under this Clause; or
 
 
(ii)
support any losses incurred by the New Lender by reason of the non-performance by the Company of its obligations under any Finance Document or otherwise.
 
27.5
Costs resulting from change of Lender or Facility Office
 
If:
 
 
(a)
a Lender assigns or transfers any of its rights and obligations under the Finance Documents or changes its Facility Office; and
 
 
(b)
as a result of circumstances existing at the date the assignment, transfer or change occurs, the Company would be obliged to pay a Tax Payment or an Increased Cost,
 
the Company need only pay that Tax Payment or Increased Cost to the same extent that it would have been obliged to if no assignment, transfer or change had occurred.
 
27.6
Changes to the Reference Banks
 
(a)
If a Reference Bank (or, if a Reference Bank is not a Lender, the Lender of which it is an Affiliate) ceases to be a Lender, the Facility Agent must (in consultation with the Company) appoint another Lender or an Affiliate of a Lender to replace that Reference Bank.
 
(b)
If a Reference Bank ceases to have a London office or novates or assigns all its rights and obligations under this Agreement or if any Commitments of any Reference Bank are cancelled or if Loans it has advanced are prepaid it shall be replaced as a Reference Bank by such other Bank with an office in London as the Facility Agent (after consultation with the Company) shall designate by notice to the Company and the Banks.
 
28.
DISCLOSURE OF INFORMATION
 
(a)
Each Finance Party must keep confidential any information supplied to it by or on behalf of the Company in connection with the Finance Documents. However, a Finance Party is entitled to disclose information:
 
 
(i)
which is publicly available, other than as a result of a breach by that Finance Party of this Clause;
 
 
(ii)
in connection with any legal or arbitration proceedings;
 
 
(iii)
if required to do so under any law or regulation;
 
 
(iv)
to a governmental, banking, taxation or other regulatory authority;
 
 
(v)
to its professional advisers;
 
 
(vi)
to the extent allowed under paragraph (b) below; or
 
 
(vii)
with the agreement of the Company.
 
(b)
A Finance Party may disclose to an Affiliate or any person with whom it may enter, or has entered into, any kind of transfer, participation or other agreement in relation to this Agreement (a participant):
 
 
(i)
a copy of any Finance Document; and
 
 
(ii)
any information which that Finance Party has acquired under or in connection with any Finance Document.
 
However, before a participant may receive any confidential information, it must agree with the relevant Finance Party to keep that information confidential on the terms of paragraph (a) above.
 
This Clause supersedes any previous confidentiality undertaking given by a Finance Party in connection with this Agreement prior to it becoming a Party.
 
29.
SET-OFF
 
A Finance Party may set off any matured obligation owed to it by the Company under the Finance Documents (to the extent beneficially owned by that Finance Party) against any obligation (whether or not matured) owed by that Finance Party to the Company, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Finance Party may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.
 
30.
PRO RATA SHARING
 
30.1
Redistribution
 
If any amount owing by the Company under this Agreement to a Lender (the recovering Lender) is discharged by payment, set-off or any other manner other than through the Facility Agent under this Agreement (a recovery), then:
 
 
(a)
the recovering Lender must, within three Business Days, supply details of the recovery to the Facility Agent;
 
 
(b)
the Facility Agent must calculate whether the recovery is in excess of the amount which the recovering Lender would have received if the recovery had been received by the Facility Agent under this Agreement; and
 
 
(c)
the recovering Lender must pay to the Facility Agent an amount equal to the excess (the redistribution).
 
30.2
Effect of redistribution
 
(a)
The Facility Agent must treat a redistribution as if it were a payment by the Company under this Agreement and distribute it among the Lenders, other than the recovering Lender, accordingly.
 
(b)
When the Facility Agent makes a distribution under paragraph (a) above, the recovering Lender will be subrogated to the rights of the Finance Parties which have shared in that redistribution.
 
(c)
If and to the extent that the recovering Lender is not able to rely on any rights of subrogation under paragraph (b) above, the Company will owe the recovering Lender a debt which is equal to the redistribution, immediately payable and of the type originally discharged.
 
(d)
If:
 
 
(i)
a recovering Lender must subsequently return a recovery, or an amount measured by reference to a recovery, to the Company; and
 
 
(ii)
the recovering Lender has paid a redistribution in relation to that recovery,
 
each Finance Party must reimburse the recovering Lender all or the appropriate portion of the redistribution paid to that Finance Party, together with interest for the period while it held the re-distribution. In this event, the subrogation in paragraph (b) above will operate in reverse to the extent of the reimbursement.
 
30.3
Exceptions
 
Notwithstanding any other term of this Clause, a recovering Lender need not pay a redistribution to the extent that:
 
 
(a)
it would not, after the payment, have a valid claim against the Company in the amount of the redistribution; or
 
 
(b)
it would be sharing with another Finance Party any amount which the recovering Lender has received or recovered as a result of legal or arbitration proceedings, where:
 
 
(c)
the recovering Lender notified the Facility Agent of those proceedings; and
 
 
(d)
the other Finance Party had an opportunity to participate in those proceedings but did not do so or did not take separate legal or arbitration proceedings as soon as reasonably practicable after receiving notice of them.
 
31.
SEVERABILITY
 
If a term of a Finance Document is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect:
 
 
(a)
the legality, validity or enforceability in that jurisdiction of any other term of the Finance Documents; or
 
 
(b)
the legality, validity or enforceability in other jurisdictions of that or any other term of the Finance Documents.
 
32.
COUNTERPARTS
 
Each Finance Document may be executed in any number of counterparts. This has the same effect as if the signatures on the counterparts were on a single copy of the Finance Document.
 
33.
NOTICES
 
33.1
In writing
 
(a)
Any communication in connection with a Finance Document must be in writing and, unless otherwise stated, may be given:
 
 
(i)
in person, by post, or fax or any other electronic communication approved by the Facility Agent; or
 
 
(ii)
if between the Facility Agent and a Lender and the Facility Agent and the Lender agree, by e-mail or other electronic communication.
 
(b)
For the purpose of the Finance Documents, an electronic communication will be treated as being in writing.
 
(c)
Unless it is agreed to the contrary, any consent or agreement required under a Finance Document must be given in writing.
 
33.2
Contact details
 
(a)
Except as provided below, the contact details of each Party for all communications in connection with the Finance Documents are those notified by that Party for this purpose to the Facility Agent on or before the date it becomes a Party.
 
(b)
The contact details of the Company for this purpose are:

Address: Avonbank,
Feeder Road,
Bristol,
BS2 0TB
Fax number: 01179 332108
E-mail: icutter@westernpower.co.uk
Attention: Ian Cutter.
 
(c)
The contact details of the Facility Agent for this purpose are:

Address: Loans Administration
     
Lloyds TSB Bank plc
     
Bank House
     
Wine Street
     
Bristol
     
BS1 2AN
Fax number: 0117 923 3367

Attention: Martin Clancy.
 
(d)
Any Party may change its contact details by giving five Business Days' notice to the Facility Agent or (in the case of the Facility Agent) to the other Parties.
 
(e)
Where a Party nominates a particular department or officer to receive a communication, a communication will not be effective if it fails to specify that department or officer.
 
33.3
Effectiveness
 
(a)
Except as provided below, any communication in connection with a Finance Document will be deemed to be given as follows:
 
 
(i)
if delivered in person, at the time of delivery;
 
 
(ii)
if posted, five days after being deposited in the post, postage prepaid, in a correctly addressed envelope; and
 
 
(iii)
if by fax, when received in legible form.
 
(b)
A communication given under paragraph (a) above but received on a non-working day or after business hours in the place of receipt will only be deemed to be given on the next working day in that place.
 
(c)
A communication to the Facility Agent will only be effective on actual receipt by it.
 
33.4
The Company
 
All formal communication under the Finance Documents to or from the Company must be sent through the Facility Agent.
 
34.
LANGUAGE
 
(a)
Any notice given in connection with a Finance Document must be in English.
 
(b)
Any other document provided in connection with a Finance Document must be:
 
 
(i)
in English; or
 
 
(ii)
(unless the Facility Agent otherwise agrees) accompanied by a certified English translation. In this case, the English translation prevails unless the document is a statutory or other official document.
 
35.
GOVERNING LAW
 
This Agreement is governed by English law.
 
36.
ENFORCEMENT
 
36.1
Jurisdiction
 
(a)
The English courts have exclusive jurisdiction to settle any dispute in connection with any Finance Document.
 
(b)
The English courts are the most appropriate and convenient courts to settle any such dispute and the Company waives objection to those courts on the grounds of inconvenient forum or otherwise in relation to proceedings in connection with any Finance Document.
 
(c)
This Clause is for the benefit of the Finance Parties only. To the extent allowed by law, a Finance Party may take:
 
 
(i)
proceedings in any other court; and
 
 
(ii)
concurrent proceedings in any number of jurisdictions.
 
This Agreement has been entered into on the date stated at the beginning of this Agreement.


 
SCHEDULE 1¹
 
ORIGINAL PARTIES
 
Name of Original Lender
 
Tranche A Commitments
 
Bayerische Landesbank acting through its London branch
 
£33,333,333
 
Lloyds TSB Bank plc
 
£33,333,333
 
WestLB AG, London Branch
 
£33,333,334
 
Total Tranche A Commitments
___________
 
£100,000,000
___________
 

 
Name of Original Lender
 
Tranche B Commitments
 
Bayersiche Landesbank acting through its London branch
 
£33,177,489.14
 
BNP Paribas
 
£37,000,000.00
 
Fortis Bank S.A./N.V.
 
£25,467,532.29
 
Lloyds TSB Bank plc
 
£46,666,667.00
 
WestLB AG, London Branch 
 
£7,688,311.57
 
Total Tranche B Commitments
___________
 
£150,000,000
___________
 
 
 
 
 

____________________
1
For information purposes, the lenders and commitments listed in this Schedule 1 are shown as of 14th October, 2005.


 

 
Name of Original Lender
 
Tranche C Commitments
 
Bayersiche Landesbank acting through its London branch
 
£46,655,843.86
 
BNP Paribas
 
£12,500,000.00
 
Fortis Bank N.A./S.V.
 
£30,032,467.71
 
Lloyds TSB Bank plc
 
£50,000,000.00
 
WestLB AG, London Branch 
 
£10,811,688.43
 
Total Tranche C Commitments
___________
 
£150,000,000
___________

SCHEDULE 2
 
CONDITIONS PRECEDENT DOCUMENTS
 
 
Company
 
1. A certified copy of the constitutional documents of the Company.
 
2.
A certified copy of a resolution of the board of directors or a committee of the board of directors of the Company approving the terms of, and the transactions contemplated by, the Finance Documents.
 
3.
A specimen of the signature of each person authorised on behalf of the Company to execute or witness the execution of any Finance Document or to sign or send any document or notice in connection with any Finance Document.
 
4.
A certificate of the Company (signed by a director) confirming that borrowing the Total Commitments would not cause any borrowing limit binding on the Company to be exceeded.
 
Legal opinions
 
A legal opinion of Allen & Overy, legal advisers to the Mandated Lead Arranger and the Facility Agent addressed to the Finance Parties.
 
Other documents and evidence
 
1.
Evidence that all fees and expenses then due and payable from the Company under this Agreement have been or will be paid no later than the first Utilisation Date.
 
2.
The Original Financial Statements.
 
3.
Evidence that the following credit facilities have expired or will be prepaid and cancelled in full on or by the first Utilisation Date:
 
(i) the Existing Credit Facility;
 
(ii) the £23,500,000 bilateral credit agreement between the Company and WestLB AG dated 27th February, 2002;
 
(iii) the £50,000,000 bilateral credit agreement between the Company and Danske Bank A/S dated 26th February, 2002; and
 
(iv) the £20,000,000 bilateral credit agreement between the Company and Bayerische Landesbank dated 31st May, 2002.
 


SCHEDULE 3
 
FORM OF REQUEST
 
To:
LLOYDS TSB BANK PLC as Facility Agent
 
From:
[                               ]
 
Date:
[                               ]
 
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC - £400,000,000 Credit Agreement
dated 18th October, 2002 (as amended and restated from time to time) (the "Agreement")
 
 
1.
We refer to the Agreement. This is a Request.
 
2.
We wish to borrow a [Tranche A/B/C Loan] on the following terms:
 
(a) Utilisation Date: [                               ]
 
(b) Amount/currency: [                                         ]
 
(c) Term: [                                         ].
 
3.
Our payment instructions are: [                                    ].
 
4.
We confirm that each condition precedent under the Agreement which must be satisfied on the date of this Request is so satisfied.
 
5
We confirm that as at [relevant testing date] Consolidated EBITDA was [            ] and Interest Payable was [           ]; therefore, the ratio of Consolidated EBITDA to Interest Payable was [    ] to 1.
 
 6.
We confirm that as at [relevant testing date] Regulatory Asset Base was [  ] and Total Gross Debt was [ ]; therefore, Regulatory Asset Base exceeded Total Gross Debt by [       ].
 
7.
This Request is irrevocable.
 
By:
 
[                               ]

SCHEDULE 4
 
CALCULATION OF THE MANDATORY COST
 
1. General
 
The Mandatory Cost is the weighted average of the rates calculated below by the Facility Agent on the first day of a Term. The Facility Agent must distribute each amount of Mandatory Cost among the Lenders on the basis of the rate for each Lender.
 
2. For a Lender lending from a Facility Office in the U.K.
 
(a)
The relevant rate for a Lender lending from a Facility Office in the U.K. is the arithmetic mean of the rates notified by that Lender to the Facility Agent and calculated in accordance with the following formulae:
 
for a Loan in Sterling:
 

AB + C(B - D) + E x 0.01
per cent. per annum
100 - (A + C)
 
for any other Loan:
 

E x 0.01
per cent. per annum
300
 
where on the day of application of the formula:
 
 
A
is the percentage of the Lender's eligible liabilities (in excess of any stated minimum) which the Bank of England requires it to hold on a non-interest-bearing deposit account in accordance with its cash ratio requirements;
 
B
is LIBOR for that Term;
 
 
C
is the percentage of the Lender's eligible liabilities which the Bank of England requires it to place as a special deposit;
 
 
D
is the interest rate per annum allowed by the Bank of England on a special deposit; and
 
 
E
is the charge payable by the Lender to the Financial Services Authority under the fees rules (but, for this purpose, calculated by the Facility Agent on a notional basis as being the average of the fee tariffs within fee-block Category A1 (Deposit acceptors) of the fees rules, applying any applicable discount and ignoring any minimum fee required under the fees rules) and expressed in pounds per £1 million of the tariff base of that Lender.
 
(b)
For the purposes of this paragraph 2:
 
(i)  
eligible liabilities and special deposit have the meanings given to them at the time of application of the formula by the Bank of England;
 
(ii)  
fees rules means the then current rules on periodic fees in the Supervision Manual of the FSA Handbook; and
 
(iii)  
tariff base has the meaning given to it in the fees rules.
 
(c)
(i)
In the application of the formulae, A, B, C and D are included as figures and not as percentages, e.g. if A = 0.5% and B = 15%, AB is calculated as 0.5 x 15. A negative result obtained by subtracting D from B is taken as zero.
 
 
(ii)
Each rate calculated in accordance with a formula is, if necessary, rounded upward to four decimal places.
 
(d) 
(i)
Each Lender must supply to the Facility Agent the information required by it to make a calculation of the rate for that Lender. The Facility Agent may assume that this information is correct in all respects.
 
 
(ii)
If a Lender fails to do so, the Facility Agent may assume that the Lender's obligations in respect of cash ratio deposits, special deposits and the fees rules are the same as those of a typical bank from its jurisdiction of incorporation with a Facility Office in the same jurisdiction as its Facility Office.
 
 
(iii)
The Facility Agent has no liability to any Party if its calculation over or under compensates any Lender.
 
3. For a Lender lending from a Facility Office in a Participating Member State
 
(a)
The relevant rate for a Lender lending from a Facility Office in a Participating Member State is the percentage rate per annum notified by that Lender to the Facility Agent as its cost of complying with the minimum reserve requirements of the European Central Bank.
 
(b)
If a Lender fails to specify a rate under paragraph (a) above, the Facility Agent will assume that the Lender has not incurred any such cost.
 
4. Changes
 
The Facility Agent may, after consultation with the Company and the Lenders, notify all the Parties of any amendment to this Schedule which is required to reflect:
 
(a)
any change in law or regulation; or
 
 
(b)
any requirement imposed by the Bank of England, the Financial Services Authority or the European Central Bank (or, in any case, any successor authority).
 
Any notification will be, in the absence of manifest error, conclusive and binding on all the Parties.


 
SCHEDULE 5
 
FORM OF TRANSFER CERTIFICATE
 

 
To:
LLOYDS TSB BANK PLC as Facility Agent
 
From:
[THE EXISTING LENDER] (the Existing Lender) and [THE NEW LENDER] (the New Lender)
 
Date:
[                                     ]
 

 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC - £400,000,000 Credit Agreement
dated 18th October, 2002 (as amended and restated from time to time) (the Agreement)
 
We refer to the Agreement. This is a Transfer Certificate.
 
1.
The Existing Lender transfers by novation to the New Lender the Existing Lender's rights and obligations referred to in the Schedule below in accordance with the terms of the Agreement.
 
2.
The proposed Transfer Date is [     ].
 
3.
The administrative details of the New Lender for the purposes of the Agreement are set out in the Schedule.
 
4.
This Transfer Certificate is governed by English law.
 


 
THE SCHEDULE
 
Rights and obligations to be transferred by novation
[insert relevant details, including applicable Commitment (or part)]
 
Administrative details of the New Lender
[insert details of Facility Office, address for notices and payment details etc.]
 

 

[EXISTING LENDER]
[NEW LENDER]
 
By:
By:
 
 
The Transfer Date is confirmed by the Facility Agent as [ ].
 
[ ]
 
By:


 
SCHEDULE 6
 
Intentionally left blank

SCHEDULE 7
 
FORM OF COMPLIANCE CERTIFICATE
 
To: LLOYDS TSB BANK PLC as Facility Agent
 
From: WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
 
Date: [                                   ]
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC - £400,000,000 Credit Agreement
dated 18th October, 2002 (as amended and restated from time to time) (the Agreement)
 
 
1.
 
We refer to the Agreement. This is a Compliance Certificate
 
2.
 
We confirm that as at [relevant testing date], Consolidated EBITDA was [              ] and Interest Payable was [  ], therefore the ratio of Consolidated EBITDA to Interest Payable was [  ] to 1.
 
3.
 
We confirm that as at [relevant testing date], Regulatory Asset Base was [      ] and Total Gross Debt was [        ]; therefore Regulatory Asset Base exceeded Total Gross Debt by [       ].
 
4.
 
We set out below calculations establishing the figures in paragraph 2 above:
 
 
[                        ].
 
5.
 
We confirm that the following companies were Material Subsidiaries at [relevant testing date]:
 
 
[       ].
 
6.
 
[We confirm that no Default is outstanding as at [relevant testing date].]¹
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
 
By:
 
 
 
 
 

____________________
1
If this statement cannot be made, the certificate should identify any Default that is outstanding and the steps, if any, being taken to remedy it.


 
SIGNATORIES

[This section is not restated]


 EX-10.T2 12 ppl10-k2006exhibit10t2.htm EXHIBIT 10(T)-2 Exhibit 10(t)-2

Exhibit 10(t)-2


FIRST AMENDMENT TO FIVE-YEAR
LETTER OF CREDIT AND REVOLVING CREDIT AGREEMENT

THIS FIRST AMENDMENT TO FIVE YEAR LETTER OF CREDIT AND REVOLVING CREDIT AGREEMENT (this “Amendment”) dated as of December 29, 2006 by and among PPL ENERGY SUPPLY, LLC (the “Borrower”), each of the Lenders party hereto from time to time (the “Lenders”), and WACHOVIA BANK, NATIONAL ASSOCIATION, as Administrative Agent and Issuing Lender (the “Administrative Agent”).

WITNESSETH:

WHEREAS, the Borrower, the Lenders and the Administrative Agent have entered into that certain Five-Year Letter of Credit and Revolving Credit Agreement dated as of December 15, 2005 (as in effect immediately prior to the date hereof, the “Credit Agreement”, capitalized terms used and not defined herein shall have the meanings ascribed to them in the Credit Agreement);

WHEREAS, the Borrower, the Lenders and the Administrative Agent desire to amend certain provisions of the Credit Agreement on the terms and conditions contained herein.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereby agree as follows:

Section 1. Modifications to Credit Agreement. Subject to satisfaction of the conditions contained in Section 2, the parties hereto agree that the Credit Agreement is modified as follows:

(a) The Credit Agreement is amended by adding the definitions of “Fitch”, “Lower Mt. Bethel Lease Financing”, “OFAC”, “Rating Agency”, “Regulation X”, “Sanctioned Entity” and “Sanctioned Person” to Section 1.01 thereof in the appropriate alphabetical location:

“‘Fitch’ means Fitch, Inc. and its successors or, absent any such successor, such nationally recognized statistical rating organization as the Borrower and the Administrative Agent may select.”
 
“‘Lower Mt. Bethel Lease Financing’ means the existing lease financing associated with the Lower Mount Bethel project.”
 
“‘OFAC’ means the U.S. Department of the Treasury’s Office of Foreign Assets Control.”
 
“‘Rating Agency’ means any of S&P, Moody’s or Fitch, and “Rating Agencies” means any two or more of them collectively.”
 
“‘Regulation X’ means Regulation X of the Board of Governors of the Federal Reserve System, as amended, or any successor regulation.”

“Sanctioned Entity” shall mean (i) an agency of the government of, (ii) an organization directly or indirectly controlled by, or (iii) a person resident in a country that is subject to a sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/enforcement/ofac/sanctions/index.html, or as otherwise published from time to time as such program may be applicable to such agency, organization or person.
 
“Sanctioned Person” shall mean a person named on the list of Specially Designated Nationals or Blocked Persons maintained by OFAC available at http://www.treas.gov/offices/enforcement/ofac/sdn/index.html, or as otherwise published from time to time.
 
(b) The definitions of “Borrower’s Rating”, “Consolidated Capitalization”, and “Consolidated Debt” in Section 1.01 shall each be deleted in their entirety and respectively replaced with the following:

“‘Borrower’s Rating’ means the senior unsecured long-term debt rating of the Borrower from S&P, Moody’s or Fitch.”

“‘Consolidated Capitalization’ shall mean the sum of, without duplication, (A) the Consolidated Debt of the Borrower, (B) the consolidated member’s equity (determined in accordance with GAAP) of the common, preference and preferred equityholders of the Borrower and minority interests recorded on the Borrower’s consolidated financial statements (excluding from member’s equity the balance of accumulated other comprehensive income/loss of the Borrower on any date of determination solely with respect to (i) the effect of all unrealized gains and losses reported under Financial Accounting Standards Board Statement No. 133 in connection with forward contracts, futures contracts or other derivatives or commodity hedging agreements for the future delivery of electricity or capacity and (ii) the effect of any pension and other post-retirement benefit liability adjustment recorded in accordance with GAAP), (C) up to an aggregate amount of $200,000,000 of Hybrid Preferred Securities and (D) up to an aggregate amount of $200,000,000 of Equity-Linked Securities, except that for purposes of calculating Consolidated Capitalization of the Borrower, Consolidated Debt of the Borrower shall exclude Non-Recourse Debt and Consolidated Capitalization of the Borrower shall exclude that portion of member’s equity attributable to assets securing Non-Recourse Debt.”
 
“‘Consolidated Debt’ means the consolidated Debt of the Borrower and its Consolidated Subsidiaries (determined in accordance with GAAP), except that for purposes of this definition (a) Consolidated Debt shall exclude Non-Recourse Debt of the Borrower and its Consolidated Subsidiaries, and (b) Consolidated Debt shall exclude (i) up to an aggregate amount of $200,000,000 of Hybrid Preferred Securities of the Borrower and its Consolidated Subsidiaries and (ii) up to an aggregate amount of $200,000,000 of Equity-Linked Securities of the Borrower and its Consolidated Subsidiaries.”

(c) The Credit Agreement is amended by deleting the definition of “Existing Synthetic Lease Financing” in Section 1.01 thereof. 

(d) Section 2.03(c) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(c) Funding By the Administrative Agent in Anticipation of Amounts Due from the Lenders. Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing (except in the case of a Base Rate Borrowing, in which case prior to the time of such Borrowing) that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsection (b) of this Section, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such share available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent at (i) a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.05, in the case of the Borrower, and (ii) the Federal Funds Rate, in the case of such Lender. Any payment by the Borrower hereunder shall be without prejudice to any claim the Borrower may have against a Lender that shall have failed to make its share of a Borrowing available to the Administrative Agent. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender’s Loan included in such Borrowing for purposes of this Agreement.”

(e) Section 2.08(a)(ii) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(ii) If on any date the aggregate Revolving Outstandings exceed the aggregate amount of the Revolving Commitments (such excess, a “Revolving Outstandings Excess”), the Borrower shall prepay, and there shall become due and payable (together with accrued interest thereon) on such date, an aggregate principal amount of Loans equal to such Revolving Outstandings Excess. If, at a time when a Revolving Outstandings Excess exists, (x) no Revolving Loans are outstanding or (y) the Termination Date shall have occurred and, in either case, any Letter of Credit Liabilities remain outstanding, then in either case, the Borrower shall cash collateralize any Letter of Credit Liabilities by depositing into a cash collateral account established and maintained (including the investments made pursuant thereto) by the Administrative Agent pursuant to a cash collateral agreement in form and substance satisfactory to the Administrative Agent an amount in cash equal to the then outstanding Letter of Credit Liabilities. In determining Revolving Outstandings for purposes of this clause (ii), Letter of Credit Liabilities shall be reduced to the extent that they are cash collateralized as contemplated by this Section 2.08(a)(ii).”

(f) Section 3.01 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 3.01 Letters of Credit. The Issuing Lender agrees, on the terms and conditions set forth in this Agreement, to issue Letters of Credit from time to time before the fifth day prior to the Termination Date for the account, and upon the request, of the Borrower and in support of such obligations of the Borrower or any Affiliate of the Borrower (other than PPL Electric Utilities Corporation) that are reasonably acceptable to the Issuing Lender (each such letter of credit, a “Standby Letter of Credit” and, collectively, the “Standby Letters of Credit”); provided, that, immediately after each Letter of Credit is issued, (A) the aggregate amount of the Letter of Credit Liabilities shall not exceed the Letter of Credit Commitment and (B) the Revolving Outstandings shall not exceed the aggregate amount of the Revolving Commitments.”
 
(g) Section 3.04 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 3.04 Conditions to Issuance of Letters of Credit. The issuance by the Issuing Lender of each Letter of Credit shall, in addition to the conditions precedent set forth elsewhere in this Agreement, be subject to the conditions precedent that (i) such Letter of Credit shall be satisfactory in form and substance to the Issuing Lender, (ii) the Borrower and, if applicable, any such Affiliate of the Borrower, shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Lender shall have reasonably requested and (iii) the Issuing Lender shall have confirmed on the date of (and after giving effect to) such issuance that (A) the aggregate amount of all Letter of Credit Liabilities will not exceed the Letter of Credit Commitment and (B) the aggregate Revolving Outstandings will not exceed the aggregate amount of the Revolving Commitments. Notwithstanding any other provision of this Section 3.04, the Issuing Lender shall not be under any obligation to issue any Letter of Credit if: any order, judgment or decree of any governmental authority shall by its terms purport to enjoin or restrain the Issuing Lender from issuing such Letter of Credit, or any requirement of law applicable to the Issuing Lender or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over the Issuing Lender shall prohibit, or request that the Issuing Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Lender with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Lender is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the Issuing Lender any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the Issuing Lender in good faith deems material to it.”


(h) Section 4.02(d) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(c) the fact that the representations and warranties of the Borrower contained in this Agreement and the other Loan Documents shall be true and correct on and as of the date of such Credit Event (except for the representations in Section 5.04(c), Section 5.06, Section 5.12 and Section 5.16, which shall be deemed only to relate to the matters referred to therein on and as of the Closing Date).”
 
(i) Section 5.04(a) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(a) Audited Financial Statements. The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 2004 and the related consolidated statements of income and cash flows for the fiscal year then ended, reported on by PricewaterhouseCoopers LLP, copies of which have been delivered to each of the Administrative Agent and the Lenders, fairly present, in conformity with GAAP, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year.”

(j) Section 5.04(b) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(b) Interim Financial Statements. The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 2005 and the related unaudited consolidated statements of income and cash flows for the three months then ended fairly present, in conformity with GAAP applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such three-month period (subject to normal year-end audit adjustments).”

(k) Section 5.11 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 5.11. Reserved.”

(l) Section 5.17 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 5.17. Reserved.”

(m) The following Section 5.19 shall be added to the end of Article V:

“Section 5.19 OFAC. None of the Borrower, any Subsidiary of the Borrower or any Affiliate of the Borrower: (i) is a Sanctioned Person, (ii) has more than 10% of its assets in Sanctioned Entities, or (iii) derives more than 10% of its operating income from investments in, or transactions with Sanctioned Persons or Sanctioned Entities. The proceeds of any Loan will not be used and have not been used to fund any operations in, finance any investments or activities in, or make any payments to, a Sanctioned Person or a Sanctioned Entity.”

(n) Section 6.07 shall be amended by deleting the existing clause (u) and replacing it with the following:

“(u) Liens in addition to those permitted by clauses (a) through (t) on the property or assets of a Special Purpose Subsidiary arising in connection with the Lower Mt. Bethel Lease Financing or the lease of such property or assets through one or more other lease financings;”

(o) Section 6.08 shall be amended by deleting the existing clause (iv) and replacing it with the following:

“(iv) the surviving or resulting person, as the case may be, has senior long-term debt ratings from at least two Rating Agencies that are at least equal to each Borrower’s Rating at the end of the fiscal quarter immediately preceding the effective date of such consolidation or merger. ”

(p) Section 6.09 shall be amended by deleting the existing clause (e) and replacing it with the following:

“(e) if, prior to any such Asset Sale, at least two Rating Agencies confirm the then-current Borrower’s Rating after giving effect to any such Asset Sale.”

(q) Section 6.12 shall be amended by deleting the existing clause (c) and replacing it with the following:

“(c) any Debt incurred in respect of the Lower Mt. Bethel Lease Financing;”

(r) Section 9.01 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 9.01 Notices. Except as otherwise expressly provided herein, all notices and other communications hereunder shall be in writing (for purposes hereof, the term “writing” shall include information in electronic format such as electronic mail and internet web pages) or by telephone subsequently confirmed in writing; provided that the foregoing shall not apply to notices to any Lender or Issuing Lender pursuant to Article II or Article III, as applicable, if such Lender or Issuing Lender, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Article in electronic format. Any notice shall have been duly given and shall be effective if delivered by hand delivery or sent via electronic mail, telecopy, recognized overnight courier service or certified or registered mail, return receipt requested, or posting on an internet web page, and shall be presumed to be received by a party hereto (i) on the date of delivery if delivered by hand or sent by electronic mail, posting on an internet web page, or telecopy, (ii) on the Business Day following the day on which the same has been delivered prepaid (or on an invoice basis) to a reputable national overnight air courier service or (iii) on the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties at the address or telecopy numbers, in the case of the Borrower and the Administrative Agent, set forth below, and, in the case of the Lenders, set forth on signature pages hereto, or at such other address as such party may specify by written notice to the other parties hereto:
 
if to the Borrower:
 
PPL Energy Supply, LLC
Two North Ninth Street (GENTW14)
Allentown, PA 18101-1179
Attention: Russell R. Clelland
Telephone: 610-774-5151
Facsimile: 610-774-5235

with a copy to:
 
Two North Ninth Street (GENTW3)
Allentown, PA 18101-1179
Attention: Thomas D. Salus, Esq.
Telephone: 610-774-7445
Facsimile: 610-774-6726

if to the Administrative Agent:
 
Wachovia Bank, National Association
One Wachovia Center
301 South College Street - NC0760
Charlotte, North Carolina 28288
Attention: Rick Price
Telephone: 704-374-4062
Facsimile: 704-383-6647

with a copy to:
 
Wachovia Bank, National Association
One Wachovia Center
301 South College Street, 6th Floor
Charlotte, North Carolina 28288
Attention: Michael J. Kolosowsky
Telephone: 704-383-8225
Facsimile: 704-383-0661

with a copy to:
 
Wachovia Bank, National Association:
201 South College Street NC0680
Charlotte, North Carolina 28288-0680
Attention: Agency Services/Doug Burnett
Facsimile: 704-383-3612

with a copy to:
 
Alston & Bird LLP
101 South Tryon Street, Suite 4000
Charlotte, North Carolina 28280
Attention: Paul S. Donohue, Esq.
Telephone: 704-444-1039
Facsimile: 704-444-1739”

(s) Section 9.03(b) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(b) Indemnity in Respect of Loan Documents. The Borrower agrees to indemnify the Agents and each Lender, their respective Affiliates and the respective directors, officers, trustees, agents and employees of the foregoing (each an “Indemnitee”) and hold each Indemnitee harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs and expenses or disbursements of any kind whatsoever (including, without limitation, the reasonable fees and disbursements of counsel and any civil penalties or fines assessed by OFAC), which may at any time (including, without limitation, at any time following the payment of the obligations of the Borrower hereunder) be imposed on, incurred by or asserted against such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Loan Documents or any actual or proposed use of proceeds of Loans hereunder; provided, that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee’s own gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final, non-appealable judgment or order.”

(t) Section 9.12 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 9.12 Confidentiality. Each Lender agrees to hold all non-public information obtained pursuant to the requirements of this Agreement in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices; provided, that nothing herein shall prevent any Lender from disclosing such information (i) to any other Lender or to any Agent, (ii) to any other Person if reasonably incidental to the administration of the Loans and Letter of Credit Liabilities, (iii) upon the order of any court or administrative agency, (iv) to the extent requested by, or required to be disclosed to, any rating agency or regulatory agency or similar authority (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (v) which had been publicly disclosed other than as a result of a disclosure by any Agent or any Lender prohibited by this Agreement, (vi) in connection with any litigation to which any Agent, any Lender or any of their respective Subsidiaries or Affiliates may be party, (vii) to the extent necessary in connection with the exercise of any remedy hereunder, (viii) to such Lender’s or Agent’s Affiliates and their respective directors, officers, employees and agents including legal counsel and independent auditors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such information and instructed to keep such information confidential), (ix) with the consent of the Borrower, (x) to Gold Sheets and other similar bank trade publications, such information to consist solely of deal terms and other information customarily found in such publications and (xi) subject to provisions substantially similar to those contained in this Section, to any actual or proposed Participant or Assignee or to any actual or prospective counterparty (or its advisors) to any securitization, swap or derivative transaction relating to the Borrower’s Obligations hereunder. Notwithstanding the foregoing, any Agent, any Lender or Alston & Bird LLP may circulate promotional materials and place advertisements in financial and other newspapers and periodicals or on a home page or similar place for dissemination of information on the Internet or worldwide web, in each case, after the closing of the transactions contemplated by this Agreement in the form of a “tombstone” or other release limited to describing the names of the Borrower or its Affiliates, or any of them, and the amount, type and closing date of such transactions, all at their sole expense.”

(u) Schedule 5.12 to the Credit Agreement is hereby deleted and replaced with Schedule 5.12 attached hereto.

Section 2. Conditions Precedent. The effectiveness of this Amendment is subject to receipt by the Administrative Agent of each of the following, each in form and substance satisfactory to the Administrative Agent:

(a) A counterpart of this Amendment duly executed by the Borrower and the Required Lenders;

(b) Evidence that all fees and expenses payable to the Administrative Agent in connection with this Amendment have been paid; and

(c) Such other documents, instruments and agreements as the Administrative Agent may reasonably request.

Section 3. Representations. The Borrower represents and warrants to the Administrative Agent and the Lenders that:

(a) Authorization. The Borrower has the right and power, and has taken all necessary action to authorize it, to execute and deliver this Amendment and to perform its obligations hereunder and under the Credit Agreement, as amended by this Amendment, in accordance with their respective terms. This Amendment has been duly executed and delivered by a duly authorized officer of the Borrower and each of this Amendment and the Credit Agreement, as amended by this Amendment, is a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its respective terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability.

(b) Compliance with Laws, etc. The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of this Amendment and the Credit Agreement, as amended by this Amendment, in accordance with their respective terms, do not and will not, by the passage of time, the giving of notice or otherwise: (i) require any Government Action or violate any Applicable Law relating to the Borrower; (ii) conflict with, result in a breach of or constitute a default under the organizational documents of the Borrower, or any indenture, agreement or other instrument to which the Borrower is a party or by which it or any of its properties may be bound; or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by the Borrower.

(c) No Default. No Default or Event of Default has occurred and is continuing as of the date hereof or will exist immediately after giving effect to this Amendment.

Section 4. Reaffirmation of Representations by Borrower. The Borrower hereby repeats and reaffirms all representations and warranties made by the Borrower to the Administrative Agent and the Lenders in the Credit Agreement and the other Loan Documents on and as of the date hereof with the same force and effect as if such representations and warranties were set forth in this Amendment in full.

Section 5. Certain References. Each reference to the Credit Agreement in any of the Loan Documents shall be deemed to be a reference to the Credit Agreement as amended by this Amendment.

Section 6. Expenses. The Borrower shall reimburse the Administrative Agent upon demand for all costs and expenses (including attorneys’ fees) incurred by the Administrative Agent in connection with the preparation, negotiation and execution of this Amendment and the other agreements and documents executed and delivered in connection herewith.

Section 7. Benefits. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.

Section 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE.

Section 9. Effect; Ratification. Except as expressly herein amended, the terms and conditions of the Credit Agreement and the other Loan Documents remain unchanged and continue to be in full force and effect. The amendments contained herein shall be deemed to have prospective application only, unless otherwise specifically stated herein. The Credit Agreement is hereby ratified and confirmed in all respects. It is the intention and understanding of the parties hereto that this Amendment shall act as an amendment to the Credit Agreement and shall not act as a novation of the indebtedness evidenced by the Credit Agreement.

Section 10. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon all parties, their successors and assigns.

Section 11.  Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and its respective successors and assigns. The successor and assigns of such entities shall include, without limitation, their respective receivers, trustees or debtors-in-possession.

[Signatures on Next Page]


IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Five-Year Letter of Credit and Revolving Credit Agreement to be executed as of the date first above written.

PPL ENERGY SUPPLY, LLC
 
By: _____________________________
Name: ___________________________
Title: ____________________________
 
 
WACHOVIA BANK, NATIONAL ASSOCIATION,
as Administrative Agent

By: _____________________________
Name: ___________________________
Title: ____________________________
 
 
WACHOVIA BANK, NATIONAL ASSOCIATION,
as Issuing Lender

By: _____________________________
Name: ___________________________
Title: ____________________________
 
 
WACHOVIA BANK, NATIONAL ASSOCIATION,
 as a Lender

By: _____________________________
Name: ___________________________
Title: ____________________________
 

 

SCHEDULE 5.12


Restricted Subsidiaries


Restricted Subsidiary
Jurisdiction of Organization
PPL Generation , LLC
Delaware
PPL Montana Holdings, LLC
Delaware
PPL Montana, LLC
Delaware
PPL Martins Creek, LLC
Delaware
PPL Brunner Island, LLC
Delaware
PPL Montour, LLC
Delaware
PPL Susquehanna, LLC
Delaware
PPL Wallingford LLC
Connecticut
PPL Holtwood, LLC
Delaware
PPL Maine, LLC
Delaware
PPL EnergyPlus, LLC
Pennsylvania
PPL Investment Corporation
Delaware
PPL Shoreham Energy, LLC
Delaware
PPL Edgewood Energy, LLC
Delaware


EX-10.U2 13 ppl10-k2006exhibit10u2.htm EXHIBIT 10(U)-2 Exhibit 10(u)-2
Exhibit 10(u)-2


FIRST AMENDMENT TO FIVE-YEAR
LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT

THIS FIRST AMENDMENT TO FIVE YEAR LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT (this “Amendment”) dated as of December 29, 2006 by and among PPL ENERGY SUPPLY, LLC (the “Borrower”), each of the Lenders party hereto from time to time (the “Lenders”), and WACHOVIA FIXED INCOME STRUCTURED TRADING SOLUTIONS, LLC, as Administrative Agent and Issuing Lender (the “Administrative Agent”).

WITNESSETH:

WHEREAS, the Borrower, the Lenders and the Administrative Agent have entered into that certain Five-Year Letter of Credit and Reimbursement Agreement dated as of December 15, 2005 (as in effect immediately prior to the date hereof, the “Credit Agreement”, capitalized terms used and not defined herein shall have the meanings ascribed to them in the Credit Agreement);

WHEREAS, the Borrower, the Lenders and the Administrative Agent desire to amend certain provisions of the Credit Agreement on the terms and conditions contained herein.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereby agree as follows:

Section 1. Modifications to Credit Agreement. Subject to satisfaction of the conditions contained in Section 2, the parties hereto agree that the Credit Agreement is modified as follows:

(a) The Credit Agreement is amended by adding the definitions of “Fitch”, “Lower Mt. Bethel Lease Financing”, “OFAC”, “Rating Agency”, “Regulation X”, “Sanctioned Entity” and “Sanctioned Person” to Section 1.01 thereof in the appropriate alphabetical location:

“‘Fitch’ means Fitch, Inc. and its successors or, absent any such successor, such nationally recognized statistical rating organization as the Borrower and the Administrative Agent may select.”
 
“‘Lower Mt. Bethel Lease Financing’ means the existing lease financing associated with the Lower Mount Bethel project.”
 
“‘OFAC’ means the U.S. Department of the Treasury’s Office of Foreign Assets Control.”
 
“‘Rating Agency’ means any of S&P, Moody’s or Fitch, and “Rating Agencies” means any two or more of them collectively.”
 
“‘Regulation X’ means Regulation X of the Board of Governors of the Federal Reserve System, as amended, or any successor regulation.”

“Sanctioned Entity” shall mean (i) an agency of the government of, (ii) an organization directly or indirectly controlled by, or (iii) a person resident in a country that is subject to a sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/enforcement/ofac/sanctions/index.html, or as otherwise published from time to time as such program may be applicable to such agency, organization or person.
 
“Sanctioned Person” shall mean a person named on the list of Specially Designated Nationals or Blocked Persons maintained by OFAC available at http://www.treas.gov/offices/enforcement/ofac/sdn/index.html, or as otherwise published from time to time.
 
(b) The definitions of “Borrower’s Rating”, “Consolidated Capitalization”, and “Consolidated Debt” in Section 1.01 shall each be deleted in their entirety and respectively replaced with the following:

“‘Borrower’s Rating’ means the senior unsecured long-term debt rating of the Borrower from S&P, Moody’s or Fitch.”

“‘Consolidated Capitalization’ shall mean the sum of, without duplication, (A) the Consolidated Debt of the Borrower, (B) the consolidated member’s equity (determined in accordance with GAAP) of the common, preference and preferred equityholders of the Borrower and minority interests recorded on the Borrower’s consolidated financial statements (excluding from member’s equity the balance of accumulated other comprehensive income/loss of the Borrower on any date of determination solely with respect to (i) the effect of all unrealized gains and losses reported under Financial Accounting Standards Board Statement No. 133 in connection with forward contracts, futures contracts or other derivatives or commodity hedging agreements for the future delivery of electricity or capacity and (ii) the effect of any pension and other post-retirement benefit liability adjustment recorded in accordance with GAAP), (C) up to an aggregate amount of $200,000,000 of Hybrid Preferred Securities and (D) up to an aggregate amount of $200,000,000 of Equity-Linked Securities, except that for purposes of calculating Consolidated Capitalization of the Borrower, Consolidated Debt of the Borrower shall exclude Non-Recourse Debt and Consolidated Capitalization of the Borrower shall exclude that portion of member’s equity attributable to assets securing Non-Recourse Debt.”
 
“‘Consolidated Debt’ means the consolidated Debt of the Borrower and its Consolidated Subsidiaries (determined in accordance with GAAP), except that for purposes of this definition (a) Consolidated Debt shall exclude Non-Recourse Debt of the Borrower and its Consolidated Subsidiaries, and (b) Consolidated Debt shall exclude (i) up to an aggregate amount of $200,000,000 of Hybrid Preferred Securities of the Borrower and its Consolidated Subsidiaries and (ii) up to an aggregate amount of $200,000,000 of Equity-Linked Securities of the Borrower and its Consolidated Subsidiaries.”

(c) The Credit Agreement is amended by deleting the definition of “Existing Synthetic Lease Financing” in Section 1.01 thereof. 

(d) Section 2.03(a) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(a) Funding By the Administrative Agent in Anticipation of Amounts Due from the Lenders. Unless the Administrative Agent shall have received notice from a Lender prior to the time of any Borrowing (except in the case of a Base Rate Borrowing, in which case prior to the time of such Borrowing) that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available to the Administrative Agent on the date of such Borrowing in accordance with Section 2.02(b), and the Administrative Agent may, in reliance upon such assumption, make available for the purposes of Section 2.02(b) on such date a corresponding amount. If and to the extent that such Lender shall not have so made such share available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent at (i) a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.05, in the case of the Borrower, and (ii) the Federal Funds Rate, in the case of such Lender. Any payment by the Borrower hereunder shall be without prejudice to any claim the Borrower may have against a Lender that shall have failed to make its share of a Borrowing available to the Administrative Agent. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender’s Loan included in such Borrowing for purposes of this Agreement.”

(e) Section 2.08(a)(ii) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(ii) If on any date the aggregate Outstandings exceed the aggregate amount of the Commitments (such excess, a “Outstandings Excess”), the Borrower shall prepay, and there shall become due and payable (together with accrued interest thereon) on such date, an aggregate principal amount of Loans equal to such Outstandings Excess. If, at a time when a Outstandings Excess exists, (x) no Loans are outstanding or (y) the Termination Date shall have occurred and, in either case, any Letter of Credit Liabilities remain outstanding, then in either case, the Borrower shall cash collateralize any Letter of Credit Liabilities by depositing into a cash collateral account established and maintained (including the investments made pursuant thereto) by the Administrative Agent pursuant to a cash collateral agreement in form and substance satisfactory to the Administrative Agent an amount in cash equal to the then outstanding Letter of Credit Liabilities. In determining Outstandings for purposes of this clause (ii), Letter of Credit Liabilities shall be reduced to the extent that they are cash collateralized as contemplated by this Section 2.08(a)(ii).”

(f) Section 5.04(a) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(a) Audited Financial Statements. The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 2004 and the related consolidated statements of income and cash flows for the fiscal year then ended, reported on by PricewaterhouseCoopers LLP, copies of which have been delivered to each of the Administrative Agent and the Lenders, fairly present, in conformity with GAAP, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year.”

(g) Section 5.04(b) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(b) Interim Financial Statements. The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 2005 and the related unaudited consolidated statements of income and cash flows for the three months then ended fairly present, in conformity with GAAP applied on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such three-month period (subject to normal year-end audit adjustments).”

(h) Section 5.11 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 5.11. Reserved.”

(i) Section 5.17 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 5.17. Reserved.”

(j) The following Section 5.19 shall be added to the end of Article V:

“Section 5.19 OFAC. None of the Borrower, any Subsidiary of the Borrower or any Affiliate of the Borrower: (i) is a Sanctioned Person, (ii) has more than 10% of its assets in Sanctioned Entities, or (iii) derives more than 10% of its operating income from investments in, or transactions with Sanctioned Persons or Sanctioned Entities. The proceeds of any Loan will not be used and have not been used to fund any operations in, finance any investments or activities in, or make any payments to, a Sanctioned Person or a Sanctioned Entity.”

(k) Section 6.07 shall be amended by deleting the existing clause (u) and replacing it with the following:

“(u) Liens in addition to those permitted by clauses (a) through (t) on the property or assets of a Special Purpose Subsidiary arising in connection with the Lower Mt. Bethel Lease Financing or the lease of such property or assets through one or more other lease financings;”

(l) Section 6.08 shall be amended by deleting the existing clause (iv) and replacing it with the following:

“(iv) the surviving or resulting person, as the case may be, has senior long-term debt ratings from at least two Rating Agencies that are at least equal to each Borrower’s Rating at the end of the fiscal quarter immediately preceding the effective date of such consolidation or merger. ”

(m) Section 6.09 shall be amended by deleting the existing clause (e) and replacing it with the following:

“(e) if, prior to any such Asset Sale, at least two Rating Agencies confirm the then-current Borrower’s Rating after giving effect to any such Asset Sale.”

(n) Section 6.12 shall be amended by deleting the existing clause (c) and replacing it with the following:

“(c) any Debt incurred in respect of the Lower Mt. Bethel Lease Financing;”

(o) Section 9.01 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 9.01 Notices.  Except as otherwise expressly provided herein, all notices and other communications hereunder shall be in writing (for purposes hereof, the term “writing” shall include information in electronic format such as electronic mail and internet web pages) or by telephone subsequently confirmed in writing; provided that the foregoing shall not apply to notices to any Lender or Issuing Lender pursuant to Article II or Article III, as applicable, if such Lender or Issuing Lender, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Article in electronic format. Any notice shall have been duly given and shall be effective if delivered by hand delivery or sent via electronic mail, telecopy, recognized overnight courier service or certified or registered mail, return receipt requested, or posting on an internet web page, and shall be presumed to be received by a party hereto (i) on the date of delivery if delivered by hand or sent by electronic mail, posting on an internet web page, or telecopy, (ii) on the Business Day following the day on which the same has been delivered prepaid (or on an invoice basis) to a reputable national overnight air courier service or (iii) on the third Business Day following the day on which the same is sent by certified or registered mail, postage prepaid, in each case to the respective parties at the address or telecopy numbers, in the case of the Borrower and the Administrative Agent, set forth below, and, in the case of the Lenders, set forth on signature pages hereto, or at such other address as such party may specify by written notice to the other parties hereto:
 
if to the Borrower:
 
PPL Energy Supply, LLC
Two North Ninth Street (GENTW14)
Allentown, PA 18101-1179
Attention: Russell R. Clelland
Telephone: 610-774-5151
Facsimile: 610-774-5235

with a copy to:
 
Two North Ninth Street (GENTW3)
Allentown, PA 18101-1179
Attention: Thomas D. Salus, Esq.
Telephone: 610-774-7445
Facsimile: 610-774-6726

if to the Administrative Agent:
 
Wachovia Fixed Income Structured Trading Solutions, LLC
One Wachovia Center
301 South College Street - NC0760
Charlotte, North Carolina 28288
Attention: Rick Price
Telephone: 704-374-4062
Facsimile: 704-383-6647

with a copy to:
 
Wachovia Fixed Income Structured Trading Solutions, LLC
One Wachovia Center
301 South College Street, 6th Floor
Charlotte, North Carolina 28288
Attention: Michael J. Kolosowsky
Telephone: 704-383-8225
Facsimile: 704-383-0661

with a copy to:
 
Alston & Bird LLP
101 South Tryon Street, Suite 4000
Charlotte, North Carolina 28280
Attention: Paul S. Donohue, Esq.
Telephone: 704-444-1039
Facsimile: 704-444-1739”

(p) Section 9.03(b) of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“(b) Indemnity in Respect of Loan Documents. The Borrower agrees to indemnify the Agents and each Lender, their respective Affiliates and the respective directors, officers, trustees, agents and employees of the foregoing (each an “Indemnitee”) and hold each Indemnitee harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs and expenses or disbursements of any kind whatsoever (including, without limitation, the reasonable fees and disbursements of counsel and any civil penalties or fines assessed by OFAC), which may at any time (including, without limitation, at any time following the payment of the obligations of the Borrower hereunder) be imposed on, incurred by or asserted against such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Loan Documents or any actual or proposed use of proceeds of Loans hereunder; provided, that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee’s own gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final, non-appealable judgment or order.”

(q) Section 9.12 of the Credit Agreement shall be deleted in its entirety and replaced with the following:

“Section 9.12 Confidentiality. Each Lender agrees to hold all non-public information obtained pursuant to the requirements of this Agreement in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices; provided, that nothing herein shall prevent any Lender from disclosing such information (i) to any other Lender or to any Agent, (ii) to any other Person if reasonably incidental to the administration of the Loans and Letter of Credit Liabilities, (iii) upon the order of any court or administrative agency, (iv) to the extent requested by, or required to be disclosed to, any rating agency or regulatory agency or similar authority (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (v) which had been publicly disclosed other than as a result of a disclosure by any Agent or any Lender prohibited by this Agreement, (vi) in connection with any litigation to which any Agent, any Lender or any of their respective Subsidiaries or Affiliates may be party, (vii) to the extent necessary in connection with the exercise of any remedy hereunder, (viii) to such Lender’s or Agent’s Affiliates and their respective directors, officers, employees and agents including legal counsel and independent auditors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such information and instructed to keep such information confidential), (ix) with the consent of the Borrower, (x) to Gold Sheets and other similar bank trade publications, such information to consist solely of deal terms and other information customarily found in such publications and (xi) subject to provisions substantially similar to those contained in this Section, to any actual or proposed Participant or Assignee or to any actual or prospective counterparty (or its advisors) to any securitization, swap or derivative transaction relating to the Borrower’s Obligations hereunder. Notwithstanding the foregoing, any Agent, any Lender or Alston & Bird LLP may circulate promotional materials and place advertisements in financial and other newspapers and periodicals or on a home page or similar place for dissemination of information on the Internet or worldwide web, in each case, after the closing of the transactions contemplated by this Agreement in the form of a “tombstone” or other release limited to describing the names of the Borrower or its Affiliates, or any of them, and the amount, type and closing date of such transactions, all at their sole expense.”

(r) Schedule 5.12 to the Credit Agreement is hereby deleted and replaced with Schedule 5.12 attached hereto.

Section 2. Conditions Precedent. The effectiveness of this Amendment is subject to receipt by the Administrative Agent of each of the following, each in form and substance satisfactory to the Administrative Agent:

(a) A counterpart of this Amendment duly executed by the Borrower and the Required Lenders;

(b) Evidence that all fees and expenses payable to the Administrative Agent in connection with this Amendment have been paid; and

(c) Such other documents, instruments and agreements as the Administrative Agent may reasonably request.

Section 3. Representations. The Borrower represents and warrants to the Administrative Agent and the Lenders that:

(a) Authorization. The Borrower has the right and power, and has taken all necessary action to authorize it, to execute and deliver this Amendment and to perform its obligations hereunder and under the Credit Agreement, as amended by this Amendment, in accordance with their respective terms. This Amendment has been duly executed and delivered by a duly authorized officer of the Borrower and each of this Amendment and the Credit Agreement, as amended by this Amendment, is a legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its respective terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability.

(b) Compliance with Laws, etc. The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of this Amendment and the Credit Agreement, as amended by this Amendment, in accordance with their respective terms, do not and will not, by the passage of time, the giving of notice or otherwise: (i) require any Government Action or violate any Applicable Law relating to the Borrower; (ii) conflict with, result in a breach of or constitute a default under the organizational documents of the Borrower, or any indenture, agreement or other instrument to which the Borrower is a party or by which it or any of its properties may be bound; or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by the Borrower.

(c) No Default. No Default or Event of Default has occurred and is continuing as of the date hereof or will exist immediately after giving effect to this Amendment.

Section 4. Reaffirmation of Representations by Borrower. The Borrower hereby repeats and reaffirms all representations and warranties made by the Borrower to the Administrative Agent and the Lenders in the Credit Agreement and the other Loan Documents on and as of the date hereof with the same force and effect as if such representations and warranties were set forth in this Amendment in full.

Section 5. Certain References. Each reference to the Credit Agreement in any of the Loan Documents shall be deemed to be a reference to the Credit Agreement as amended by this Amendment.

Section 6. Expenses. The Borrower shall reimburse the Administrative Agent upon demand for all costs and expenses (including attorneys’ fees) incurred by the Administrative Agent in connection with the preparation, negotiation and execution of this Amendment and the other agreements and documents executed and delivered in connection herewith.

Section 7. Benefits. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.

Section 8. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE.

Section 9. Effect; Ratification. Except as expressly herein amended, the terms and conditions of the Credit Agreement and the other Loan Documents remain unchanged and continue to be in full force and effect. The amendments contained herein shall be deemed to have prospective application only, unless otherwise specifically stated herein. The Credit Agreement is hereby ratified and confirmed in all respects. It is the intention and understanding of the parties hereto that this Amendment shall act as an amendment to the Credit Agreement and shall not act as a novation of the indebtedness evidenced by the Credit Agreement.

Section 10. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon all parties, their successors and assigns.

Section 11.  Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and its respective successors and assigns. The successor and assigns of such entities shall include, without limitation, their respective receivers, trustees or debtors-in-possession.

[Signatures on Next Page]


IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Five-Year Letter of Credit and Reimbursement Agreement to be executed as of the date first above written.

PPL ENERGY SUPPLY, LLC

By:  ______________________________
Name:  ____________________________
Title: ______________________________
 

WACHOVIA FIXED INCOME STRUCTURED
 TRADING SOLUTIONS, LLC, as Administrative
 Agent
 
By:  ______________________________
Name:  ____________________________
Title: ______________________________
 
 
WACHOVIA FIXED INCOME STRUCTURED
 TRADING SOLUTIONS, LLC, as Issuing Lender

By:  ______________________________
Name:  ____________________________
Title: ______________________________
 
 
                          WACHOVIA FIXED INCOME STRUCTURED
                           TRADING SOLUTIONS, LLC, as a Lender
 
By:  ______________________________
Name:  ____________________________
Title: ______________________________

 





SCHEDULE 5.12


Restricted Subsidiaries


Restricted Subsidiary
Jurisdiction of Organization
PPL Generation , LLC
Delaware
PPL Montana Holdings, LLC
Delaware
PPL Montana, LLC
Delaware
PPL Martins Creek, LLC
Delaware
PPL Brunner Island, LLC
Delaware
PPL Montour, LLC
Delaware
PPL Susquehanna, LLC
Delaware
PPL Wallingford LLC
Connecticut
PPL Holtwood, LLC
Delaware
PPL Maine, LLC
Delaware
PPL EnergyPlus, LLC
Pennsylvania
PPL Investment Corporation
Delaware
PPL Shoreham Energy, LLC
Delaware
PPL Edgewood Energy, LLC
Delaware


EX-10.X 14 ppl10-k2006exhibit10x.htm EXHIBIT 10(X) Exhibit 10(x)

 
 
Exhibit 10(x)
 
AGREEMENT
NOVEMBER 2006
£100,000,000
 
CREDIT FACILITY
 
FOR
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
 
ARRANGED BY
 
BARCLAYS CAPITAL
BAYERISCHE LANDESBANK acting through its London Branch
LLOYDS TSB BANK plc
as Mandated Lead Arrangers
 
WITH
 
LLOYDS TSB BANK plc
as Facility Agent
 



 
CONTENTS
 
Clause
Page

1.
Interpretation
1
2.
Facilities
10
3.
Purpose
11
4.
Conditions Precedent
11
5.
Utilisation
11
6.
Extension Option
12
7.
Optional Currencies
13
8.
Repayment
16
9.
Prepayment and Cancellation
16
10.
Interest
18
11.
Terms
20
12.
Market Disruption
21
13.
Taxes
22
14.
Increased Costs
24
15.
Mitigation
25
16.
Payments
26
17.
Representations
28
18.
Information Covenants
30
19.
Financial Covenants
32
20.
General Covenants
34
21.
Default
37
22.
The Administrative Parties
39
23.
Evidence and Calculations
44
24.
Fees
44
25.
Indemnities and Break Costs
45
26.
Expenses
46
27.
Amendments and Waivers
46
28.
Changes to the Parties
47
29.
Disclosure of Information
50
30.
Set-off
50
31.
Pro Rata Sharing
51
32.
Severability
52
33.
Counterparts
52
34.
Notices
52
35.
Language
53
36.
Governing Law
54
37.
Enforcement
54
 


 
 

Schedule
Page
 
1.
Original Parties
55
2.
Conditions precedent documents
56
3.
Form of Request
57
4.
Calculation of the Mandatory Cost
58
5.
Form of Transfer Certificate
60
6.
Form of Compliance Certificate
62
 

Signatories
63
THIS AGREEMENT is dated            November 2006
 
BETWEEN:
 
(1)
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC (registered number 02366894) (the Company);
 
(2)
BARCLAYS CAPITAL, BAYERISCHE LANDESBANK acting through its London Branch, and LLOYDS TSB BANK plc each in this capacity as a Mandated Lead Arranger and together in this capacity, the Mandated Lead Arrangers;
 
(3)
THE FINANCIAL INSTITUTIONS listed in Schedule 1 (Original Parties) as original lenders (the Original Lenders); and
 
(4)
LLOYDS TSB BANK plc as facility agent (in this capacity the Facility Agent).
 
IT IS AGREED as follows:
 
1.
INTERPRETATION
 
1.1
Definitions
 
In this Agreement:
 
Act means the Electricity Act 1989 and, unless the context otherwise requires, all subordinate legislation made pursuant thereto.
 
Administrative Party means a Mandated Lead Arranger or the Facility Agent.
 
Affiliate means a Subsidiary or a Holding Company of a person or any other Subsidiary of that Holding Company.
 
Applicable Accounting Principles means those accounting principles, standards and practices generally accepted in the United Kingdom and the accounting and reporting requirements of the Companies Act 1985, in each case as used in the Original Financial Statements.
 
Authority means The Gas and Electricity Markets Authority established under Section 1 of the Utilities Act 2000.
 
Availability Period means the period from and including the date of this Agreement to and including the date that is the Final Maturity Date.
 
Balancing and Settlement Code means the document, as modified from time to time, setting out the electricity balancing and settlement arrangements designated by the Secretary of State and adopted by The National Grid Company plc (Registered No. 2366977) or its successor pursuant to its transmission licence.
 
Balancing and Settlement Code Framework means the agreement of that title, in the form approved by the Secretary of State, as amended from time to time, to which the Company is a party and by which the Balancing and Settlement Code is made binding upon the Company.
 
Break Costs means the amount (if any) which a Lender is entitled to receive under this Agreement as compensation if any part of a Loan or overdue amount is prepaid.
 
Business Day means a day (other than a Saturday or a Sunday) on which commercial banks are open in London and:
 
 
(a)
if on that day a payment in or a purchase of a currency (other than euro) is to be made, the principal financial centre of the country of that currency; or
 
 
(b)
if on that day a payment in or purchase of euro is to be made, which is also a TARGET Day.
 
Commitment means:
 
 
(a)
for an Original Lender, the amount set opposite its name in Schedule 1 (Original Parties) under the heading "Commitments" and the amount of any other Commitment it acquires; and
 
 
(b)
for any other Lender, the amount of any other Commitment it acquires,
 
to the extent not cancelled, transferred or reduced under this Agreement.
 
Compliance Certificate means a certificate substantially in the form of Schedule 6 (Form of Compliance Certificate) setting out, among other things, calculations of the financial covenants.
 
Default means:
 
 
(a)
an Event of Default; or
 
 
(b)
an event which would be (with the lapse of time, the expiry of a grace period, the giving of notice or the making of any determination under the Finance Documents or any combination of them) an Event of Default.
 
Environmental Law means all regulations and other laws concerning the protection of human health or the environment;
 
euro or euros or € means the single currency of the Participating Member States.
 
Event of Default means an event specified as such in this Agreement.
 
Extended Final Maturity Date means the date specified as such in the notice exercising the Extension Option provided by the Company under Clause 6 (Extension Option) , being a date falling no later than the day falling 364 days after the then current Final Maturity Date.
 
Extension Option means the option of the Company under Clause 6 (Extension Option) to extend the Final Maturity Date of the Facility.
 
Facility means the revolving credit facility (incorporating a term-out option and an extension option) made available under this Agreement and described in Clause 2.1 (Facility).
 
Facility Office means the office(s) notified by a Lender to the Facility Agent:
 
 
(a)
on or before the date it becomes a Lender; or
 
 
(b)
by not less than five Business Days' notice,
 
as the office(s) through which it will perform its obligations under this Agreement.
 
Fee Letter means any letter entered into by reference to this Agreement between one or more Administrative Parties and the Company setting out the amount of certain fees referred to in the Agreement.
 
Final Maturity Date means:
 
 
(a)
the date which falls 364 days after (and including) the date of this Agreement (unless extended in accordance with Clause 2.3 (Term-out Option) or Clause 6 (Extension Option));
 
 
(b)
if the Extension Option is exercised, the Extended Final Maturity Date; or
 
 
(c)
if the Term-out Option is exercised, the Term-out Repayment Date.
 
Finance Document means:
 
 
(a)
this Agreement;
 
 
(b)
a Fee Letter;
 
 
(c)
a Transfer Certificate; or
 
 
(d)
any other document designated as such by the Facility Agent and the Company.
 
Finance Party means a Lender or an Administrative Party.
 
Financial Indebtedness means any indebtedness for or in respect of:
 
 
(a)
moneys borrowed;
 
 
(b)
any acceptance credit;
 
 
(c)
any bond, note, debenture, loan stock or other similar instrument;
 
 
(d)
any redeemable preference share;
 
 
(e)
any finance or capital lease;
 
 
(f)
receivables sold or discounted (otherwise than on a non-recourse basis);
 
 
(g)
the acquisition cost of any asset to the extent payable after its acquisition or possession by the party liable where the deferred payment is arranged primarily as a method of raising finance or financing the acquisition of that asset;
 
 
(h)
any derivative transaction protecting against or benefiting from fluctuations in any rate or price (and, except for non-payment of an amount, the then mark to market value of the derivative transaction will be used to calculate its amount);
 
 
(i)
any other transaction (including any forward sale or purchase agreement) which has the commercial effect of a borrowing;
 
 
(j)
any counter-indemnity obligation in respect of any guarantee, indemnity, bond, letter of credit or any other instrument issued by a bank or financial institution; or
 
any guarantee, indemnity or similar assurance against financial loss of any person in respect of any item referred to in paragraphs (a) to (j) above.
 
Group means the Company and its Subsidiaries.
 
Holding Company means a holding company within the meaning of section 736 of the Companies Act 1985.
 
Increased Cost means:
 
 
(a)
an additional or increased cost;
 
 
(b)
a reduction in the rate of return under a Finance Document or on its overall capital; or
 
 
(c)
a reduction of an amount due and payable under any Finance Document,
 
which is incurred or suffered by a Finance Party or any of its Affiliates but only to the extent attributable to that Finance Party having entered into any Finance Document or funding or performing its obligations under any Finance Document.
 
Lender means:
 
 
(a)
an Original Lender; or
 
 
(b)
any person which becomes a Lender after the date of this Agreement.
 
LIBOR means for a Term of any Loan or overdue amount:
 
 
(a)
the applicable Screen Rate; or
 
 
(b)
if no Screen Rate is available for the relevant currency or Term of that Loan or overdue amount, the arithmetic mean (rounded upward to four decimal places) of the rates, as supplied to the Facility Agent at its request, quoted by the Reference Banks to leading banks in the London interbank market,
 
as of 11.00 a.m. on the Rate Fixing Day for the offering of deposits in the currency of that Loan or overdue amount for a period comparable to that Term.
 
Licence means:
 
 
(a)
the electricity distribution licence made and treated as granted to the Company under Section 6(1)(c) of the Act pursuant to a licensing scheme made by the Secretary of State under Part II of Schedule 7 to the Utilities Act 2000 on 28 September 2001; or
 
 
(b)
by any statutory amendment or replacement licence or licences granted pursuant to the Utilities Act 2000 which permit the Company to distribute electricity in the Authorised Area;
 
Loan means, unless otherwise stated in this Agreement, the principal amount of each borrowing under this Agreement or the principal amount outstanding of that borrowing.
 
Majority Lenders means, at any time, Lenders:
 
 
(a)
whose share in the outstanding Loans and whose undrawn Commitments then aggregate 662/3% or more of the aggregate of all the outstanding Loans and the undrawn Commitments of all the Lenders;
 
 
(b)
if there is no Loan then outstanding, whose undrawn Commitments then aggregate 662/3% or more of the Total Commitments; or
 
 
(c)
if there is no Loan then outstanding and the Total Commitments have been reduced to zero, whose Commitments aggregated 662/3% or more of the Total Commitments immediately before the reduction.
 
Mandatory Cost means the cost of complying with certain regulatory requirements, expressed as a percentage rate per annum and calculated by the Facility Agent under Schedule 4 (Calculation of the Mandatory Cost).
 
Margin means the percentage rate per annum determined to be the Margin in accordance with Clause 10.5(a) (Margin), as adjusted from time to time in accordance with Clauses 10.5(b) to 10.5(e) (Margin).
 
Material Adverse Effect means something having a material adverse effect on the Company's ability to perform its payment obligations under this Agreement.
 
Material Subsidiary means, at any time, a Subsidiary of the Company whose gross assets or gross revenues (excluding intra-Group items) then equal or exceed 15% of the gross assets or gross revenues of the Group.
 
For this purpose:
 
 
(a)
the gross assets or gross revenues of a Subsidiary of the Company will be determined from its financial statements (unconsolidated if it has Subsidiaries) upon which the latest audited financial statements of the Group have been based;
 
 
(b)
if a Subsidiary of the Company becomes a member of the Group after the date on which the latest audited financial statements of the Group have been prepared, the gross assets or gross revenues of that Subsidiary will be determined from its latest financial statements;
 
 
(c)
the gross assets or gross revenues of the Group will be determined from its latest audited financial statements, adjusted (where appropriate) to reflect the gross assets or gross revenues of any company or business subsequently acquired or disposed of; and
 
 
(d)
if a Material Subsidiary disposes of all or substantially all of its assets to another Subsidiary of the Company, it will immediately cease to be a Material Subsidiary and the other Subsidiary (if it is not already) will immediately become a Material Subsidiary; the subsequent financial statements of those Subsidiaries and the Group will be used to determine whether those Subsidiaries are Material Subsidiaries or not.
 
If there is a dispute as to whether or not a company is a Material Subsidiary, a certificate of the auditors of the Company will be, in the absence of manifest error, conclusive.
 
Maturity Date means the last day of the Term of a Loan (other than a Term-Out Loan) and in the case of a Term-Out Loan the date specified as such in the Request for that Term-Out Loan.
 
Moody's means Moody's Investors' Services, Inc. (or any successor to its ratings business).
 
OFGEM means the Office of Gas and Electricity Markets.
 
Original Financial Statements means the audited consolidated financial statements of the Company for the year ended 31 March 2006.
 
Participating Member States means a member state of the European Community that adopts the euro as its lawful currency under the legislation of the European Union for European Monetary Union.
 
Party means a party to this Agreement.
 
Pro Rata Share means:
 
   (a)
for the purpose of determining a Lender's share in a utilisation of a Facility, the proportion which its Commitment under that Facility bears to all the Commitments under that Facility; and
 
 
(b)
for any other purpose on a particular date:
 
 
(i)
the proportion which a Lender's share of the Loans (if any) bears to all the Loans;
 
 
(ii)
if there is no Loan outstanding on that date, the proportion which its Commitment bears to the Total Commitments on that date;
 
 
(iii)
if the Total Commitments have been cancelled, the proportion which its Commitments bore to the Total Commitments immediately before being cancelled; or
 
 
(iv)
when the term is used in relation to a particular Facility, the above proportions but applied only to the Loans and Commitments for that Facility.
 
For the purpose of subparagraph (iv) above, the Facility Agent will determine, in the case of a dispute whether the term in any case relates to a particular Facility.
 
PUHCA means the Public Utility Holding Company Act of 1935, as amended, of the United States of America.
 
Rate Fixing Day means:
 
 
(a)
the first day of a Term for a Loan denominated in Sterling; or
 
 
(b)
the second Business Day before the first day of a Term for a Loan denominated in any other currency;
 
or such other day as the Facility Agent determines is generally treated as the rate fixing day by market practice in the relevant interbank market.
 
Reference Banks means the Facility Agent, Barclays Bank PLC and Bayerische Landesbank acting through its London branch and any other bank or financial institution appointed as such by the Facility Agent under this Agreement.
 
Repeating Representations means the representations which are deemed to be repeated under this Agreement.
 
Request means a request for a Loan, substantially in the form of Schedule 3 (Form of Request).
 
Rollover Loan means one or more Loans (other than a Term-Out Loan):
 
 
(a)
to be made on the same day that a maturing Loan is due to be repaid;
 
 
(b)
the aggregate amount of which is equal to or less than the maturing Loan;
 
 
(c)
in the same currency as the maturing Loan; and
 
 
(d)
to be made for the purpose of refinancing a maturing Loan.
 
S&P means Standard & Poor's Corporation (a division of the McGraw-Hill Companies, Inc) (or any successor to its ratings business).
 
Screen Rate means the British Bankers Association Interest Settlement Rate (if any) for the relevant currency and Term displayed on the appropriate page of the Telerate screen selected by the Facility Agent. If the relevant page is replaced or the service ceases to be available, the Facility Agent (after consultation with the Company and the Lenders) may specify another page or service displaying the appropriate rate.
 
Secretary of State means the Secretary of State for Trade and Industry.
 
Security Interest means any mortgage, pledge, lien, charge, assignment, hypothecation or security interest or any other agreement or arrangement having a similar effect.
 
Sterling and £ mean the lawful currency of the United Kingdom.
 
Subsidiary means:
 
 
(a)
a subsidiary within the meaning of section 736 of the Companies Act 1985; and
 
 
(b)
unless the context otherwise requires, a subsidiary undertaking within the meaning of section 258 of the Companies Act 1985.
 
TARGET Day means a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer payment system is open for the settlement of payments in euro.
 
Tax means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any related penalty or interest).
 
Tax Deduction means a deduction or withholding for or on account of Tax from a payment under a Finance Document.
 
Tax Payment means a payment made by the Company to a Finance Party in any way relating to a Tax Deduction or under any indemnity given by the Company in respect of Tax under any Finance Document.
 
Term means each period determined under this Agreement by reference to which interest on a Loan or an overdue amount is calculated.
 
Term-Out Loans means the Loans (if any) drawn under Clause 2.3 (Term-out Option).
 
Term-Out Option means the option of the Company in Clause 2.3 (Term-out Option) to draw Loans as Term-Out Loans.
 
Term-out Repayment Date means the date specified as such in the notice exercising the Term-Out Option provided by the Company under Clause 2.3 (Term-out Option), being a date falling no later than one year after the Final Maturity Date (as determined before the exercise of the Term-out Option).
 
Total Commitments means the aggregate of the Commitments of all the Lenders being the total amount specified as such in Schedule 1 (Original Parties) at the date of this Agreement.
 
Transfer Certificate means a certificate, substantially in the form of Schedule 5 (Form of Transfer Certificate), with such amendments as the Facility Agent may approve or reasonably require or any other form agreed between the Facility Agent and the Company.
 
U.K. means the United Kingdom.
 
U.S. Dollars and U.S.$ means the lawful currency for the time being of the United States of America.
 
Utilisation Date means each date on which a Facility is utilised.
 
1.2
Construction
 
(a)
The following definitions have the meanings given to them in Clause 19.1 (Financial Covenants):
 
 
(i)
Consolidated EBITDA;
 
 
(ii)
Interest Payable;
 
 
(iii)
Measurement Period;
 
 
(iv)
Regulatory Asset Base; and
 
 
(v)
Total Gross Debt.
 
(b)
In this Agreement, unless the contrary intention appears, a reference to:
 
 
(i)
an amendment includes a supplement, novation, restatement or re-enactment and amended will be construed accordingly;
 
assets includes present and future properties, revenues and rights of every description;
 
an authorisation includes an authorisation, consent, approval, resolution, licence, exemption, filing, registration or notarisation;
 
Barclays Capital is a reference to Barclays Capital, the investment banking division of Barclays Bank PLC;
 
disposal means a sale, transfer, grant, lease or other disposal, whether voluntary or involuntary, and dispose will be construed accordingly;
 
indebtedness includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money;
 
know your customer requirements are the identification checks that a Finance Party requests in order to meet its obligations under any applicable law or regulation to identify a person who is (or is to become) its customer;
 
a person includes any individual, company, corporation, unincorporated association or body (including a partnership, trust, joint venture or consortium), government, state, agency, organisation or other entity whether or not having separate legal personality;
 
a regulation includes any regulation, rule, official directive, request or guideline (whether or not having the force of law but, if not having the force of law, being of a type with which any person to which it applies is accustomed to comply) of any governmental, inter-governmental or supranational body, agency, department or regulatory, self-regulatory or other authority or organisation;
 
the Winding-up of a person also includes the administration, dissolution or liquidation or other like process of that person, any composition or arrangement with the creditors, amalgamation, reconstruction, reorganisation or consolidation pursuant to Part XIII of the Companies Act 1985 proposed or carried out in respect of that person or a company voluntary arrangement pursuant to the Insolvency Act 1986 carried out or proposed in respect of that person;
 
 
(ii)
a currency is a reference to the lawful currency for the time being of the relevant country;
 
 
(iii)
a Default being outstanding means that it has not been remedied or waived;
 
 
(iv)
a provision of law is a reference to that provision as extended, applied, amended or re-enacted and includes any subordinate legislation;
 
 
(v)
a Clause, a Subclause or a Schedule is a reference to a clause or subclause of, or a schedule to, this Agreement;
 
 
(vi)
a person includes its successors in title, permitted assigns and permitted transferees;
 
 
(vii)
a Finance Document or another document is a reference to that Finance Document or other document as amended; and
 
 
(viii)
a time of day is a reference to London time.
 
(c)
Unless the contrary intention appears, a reference to a month or months is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month or the calendar month in which it is to end, except that:
 
 
(i)
if the numerically corresponding day is not a Business Day, the period will end on the next Business Day in that month (if there is one) or the preceding Business Day (if there is not);
 
 
(ii)
if there is no numerically corresponding day in that month, that period will end on the last Business Day in that month; and
 
 
(iii)
notwithstanding subparagraph (i) above, a period which commences on the last Business Day of a month will end on the last Business Day in the next month or the calendar month in which it is to end, as appropriate.
 
(d)
Unless expressly provided to the contrary in a Finance Document, a person who is not a party to a Finance Document may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999 and notwithstanding any term of any Finance Document, the consent of any third party is not required for any variation (including any release or compromise of any liability) or termination of that Finance Document.
 
(e)
Unless the contrary intention appears:
 
 
(i)
a reference to a Party will not include that Party if it has ceased to be a Party under this Agreement;
 
 
(ii)
a word or expression used in any other Finance Document or in any notice given in connection with any Finance Document has the same meaning in that Finance Document or notice as in this Agreement; and
 
 
(iii)
any obligation of the Company under the Finance Documents which is not a payment obligation remains in force for so long as any payment obligation of the Company is or may be outstanding under the Finance Documents.
 
(f)
The headings in this Agreement do not affect its interpretation.
 
2.
FACILITIES
 
2.1
Facility
 
Subject to the terms of this Agreement, the Lenders make available to the Company a revolving loan facility with an extension option and a term-out option denominated in Sterling in an aggregate amount equal to the Total Commitments.
 
2.2
Nature of a Finance Party's rights and obligations
 
Unless otherwise agreed by all the Finance Parties:
 
 
(a)
the obligations of a Finance Party under the Finance Documents are several;
 
 
(b)
failure by a Finance Party to perform its obligations does not affect the obligations of any other Party under the Finance Documents;
 
 
(c)
no Finance Party is responsible for the obligations of any other Finance Party under the Finance Documents;
 
 
(d)
the rights of a Finance Party under the Finance Documents are separate and independent rights;
 
 
(e)
a debt arising under the Finance Documents to a Finance Party is a separate and independent debt; and
 
 
(f)
a Finance Party may, except as otherwise stated in the Finance Documents, separately enforce those rights.
 
2.3
Term-out Option
 
(a)
The Company may on one occasion only, by delivery of a notice to the Facility Agent (who shall send a copy of the same to the Lenders) not earlier than 45 days prior to the then applicable Final Maturity Date, elect to draw one or more Loans (each a Term-Out Loan) each with the same Utilisation Date falling prior to the then applicable Final Maturity Date and each with the same Maturity Date being a date after the then current Final Maturity Date, but no later than the date falling one year after the then applicable Final Maturity Date (such selected date being the Term-out Repayment Date). The delivery of this notice constitutes the exercise of the Term-Out Option by the Company.
 
(b)
Any Loan outstanding after the date of the exercise of the Term-Out Option must be repaid on its Maturity Date.
 
3.
PURPOSE
 
3.1
Loans
 
Each Loan may be used for the core working capital requirements of the Company and in compliance with the Licence.
 
3.2
No obligation to monitor
 
No Finance Party is bound to monitor or verify the utilisation of a Facility.
 
4.
CONDITIONS PRECEDENT
 
4.1
Conditions precedent documents
 
A Request may not be given until the Facility Agent has notified the Company and the Lenders that it has received all of the documents and evidence set out in Schedule 2 (Conditions precedent documents) in form and substance satisfactory to the Facility Agent. The Facility Agent must give this notification to the Company and the Lenders promptly upon being so satisfied.
 
4.2
Further conditions precedent
 
The obligations of each Lender to participate in any Loan are subject to the further conditions precedent that on both the date of the Request and the Utilisation Date for that Loan:
 
 
(a)
the Repeating Representations are correct in all material respects; and
 
 
(b)
no Default or, in the case of a Rollover Loan, no Event of Default is outstanding or would result from the Loan.
 
4.3
Maximum number
 
Unless the Facility Agent agrees, a Request may not be given if, as a result, there would be more than 15 Loans outstanding.
 
5.
UTILISATION
 
5.1
Giving of Requests
 
(a)
The Company may borrow a Loan by giving to the Facility Agent a duly completed Request.
 
(b)
Unless the Facility Agent otherwise agrees, the latest time for receipt by the Facility Agent of a duly completed Request is 11.00 a.m. one Business Day before the Rate Fixing Day for the proposed borrowing.
 
(c)
Each Request is irrevocable.
 
5.2
Completion of Requests
 
A Request for a Loan will not be regarded as having been duly completed unless:
 
 
(a)
it identifies the Facility the Loan applies to;
 
 
(b)
the Utilisation Date is a Business Day falling within the Availability Period;
 
 
(c)
The amount of the Loan requested is:
 
 
(i)
a minimum of £5,000,000 or its equivalent in accordance with Clause 7.5 (Optional Currency equivalents), and an integral multiple of 1,000,000 units of that currency;
 
 
(ii)
the maximum undrawn amount available under this Agreement for Loans under the relevant Facility on the proposed Utilisation Date; or
 
 
(iii)
such other amount as the Facility Agent may agree; and
 
 
(d)
the proposed Term complies with this Agreement.
 
Only one Loan may be requested in a Request.
 
5.3
Advance of Loan
 
(a)
The Facility Agent must promptly notify each Lender of the details of the requested Loan and the amount of its share in that Loan.
 
(b)
The amount of each Lender's share of the Loan will be its Pro Rata Share on the proposed Utilisation Date.
 
(c)
No Lender is obliged to participate in a Loan if as a result:
 
 
(i)
its share in the Loans under a Facility would exceed its Commitment for that Facility; or
 
 
(ii)
the Loans would exceed the Total Commitments.
 
(d)
If the conditions set out in this Agreement have been met, each Lender must make its share in the Loan available to the Facility Agent for the Company on the Utilisation Date.
 
6.
EXTENSION OPTION
 
(a)
The Company may request that the Final Maturity Date for all the Lenders be extended for a further period of 364 days by giving notice to the Facility Agent no more than 60 days and not less than 45 days before the Final Maturity Date for all the Lenders. Promptly upon receipt of such notice the Facility Agent shall inform each Lender that the Company has requested the extension of the Final Maturity Date under this Clause.
 
(b)
The Company may only request the extension of the Final Maturity date under paragraph (a) above, if it has not exercised the Term-out Option.
 
(c)
If any Lender agrees to the request by the date falling 30 days before the Final Maturity Date its Final Maturity Date will be extended for a further period of 364 days. However, the Commitment of each Lender which did not agree to the request will be automatically cancelled on its Final Maturity Date. Each Lender will notify the Facility Agent whether it agrees to an extension of its Final Maturity Date under this Clause by the date falling 30 days before the Final Maturity Date.
 
(d)
The Facility Agent will notify the Company of each Lender's decision promptly after it has received notice from each Lender under paragraph (c) above.
 
(e)
Any request for an extension under this Clause is irrevocable.
 
7.
OPTIONAL CURRENCIES
 
7.1
General
 
In this Clause:
 
Agent's Spot Rate of Exchange means the Facility Agent's spot rate of exchange for the purchase of the relevant currency in the London foreign exchange market with Sterling at or about 11.00 a.m. on a particular day.
 
Optional Currency means any currency (other than Sterling) in which a Loan may be denominated under this Agreement.
 
Pre-approved Currency means U.S.$ and euro.
 
Sterling Amount of a Loan or part of a Loan means:
 
 
(a)
if the Loan is denominated in Sterling, its amount; or
 
 
(b)
in the case of any Loan denominated in an Optional Currency, its equivalent in Sterling calculated on the basis of the Agent's Spot Rate of Exchange one Business Day before the Rate Fixing Day for that Term.
 
7.2
Selection
 
(a)
The Company must select the currency of a Loan in its Request. The Company may select Sterling or an Optional Currency for a Loan.
 
(b)
Unless the Facility Agent otherwise agrees, the Loans may not be denominated at any one time in more than three currencies.
 
7.3
Selection of Optional Currencies
 
(a)
A Loan may be denominated in an Optional Currency for a Term if:
 
 
(i)
that Optional Currency is readily available in the amount required and freely convertible into Sterling in the relevant interbank market on the Rate Fixing Day and the first day of that Term; and
 
 
(ii)
that Optional Currency is a Pre-approved Currency or has been previously approved by the Facility Agent (acting on the instruction of all the Lenders).
 
(b)
If the Facility Agent has received a request from the Company for a currency to be approved as an Optional Currency (other than a Pre-approved Currency), the Facility Agent must, within five Business Days, confirm to the Company:
 
 
(i)
whether or not the Lenders have given their approval; and
 
 
(ii)
if approval has been given, the minimum amount (and, if required, integral multiples) for any Loan in that currency.
 
7.4
Revocation of currency
 
(a)
Notwithstanding any other term of this Agreement, if before 9.30 a.m. on any Rate Fixing Day the Facility Agent receives notice from a Lender that:
 
 
(i)
the Optional Currency requested is not readily available to it in the relevant interbank market in the amount and for the period required; or
 
 
(ii)
participating in a Loan in the proposed Optional Currency might contravene any law or regulation applicable to it,
 
the Facility Agent must give notice to the Company to that effect promptly and in any event before 11.00 a.m. on that day.
 
(b)
In this event:
 
 
(i)
that Lender must participate in the Loan in Sterling; and
 
 
(ii)
the share of that Lender in the Loan and any other similarly affected Lender(s) will be treated as a separate Loan denominated in Sterling during that Term.
 
(c)
Any part of a Loan treated as a separate Loan under this Subclause will not be taken into account for the purposes of any limit on the number of Loans or currencies outstanding at any one time.
 
(d)
A Loan will still be treated as a Rollover Loan if it is not denominated in the same currency as the maturing Loan by reason only of the operation of this Subclause.
 
7.5
Optional Currency equivalents
 
(a)
Except as expressly provided in this Agreement, the equivalent in Sterling of a Loan or part of a Loan in an Optional Currency for the purposes of calculating:
 
 
(i)
whether any limit under this Agreement has been exceeded;
 
 
(ii)
the amount of a Loan;
 
 
(iii)
the share of a Lender in a Loan;
 
 
(iv)
the amount of any repayment of a Loan; or
 
 
(v)
the undrawn amount of a Lender's Commitment,
 
is its Sterling Amount.
 
(b)
The rate of exchange to be used for calculating the amount in Sterling of any repayment or prepayment of a Term-Out Loan in an Optional Currency is that last used for determining the amount of the Term-Out Loan in that Optional Currency.
 
7.6
Term-Out Loans - change of currency
 
(a)
A Term-Out Loan will remain denominated in the same currency through successive Terms, unless the currency is changed under paragraph (c) below.
 
(b)
The Company may change the currency of a Term-Out Loan with effect from the start of a Term by giving notice to the Facility Agent by 9.00 a.m. three Business Days before the first day of that Term. The Term-Out Loan will remain denominated in that currency until it is changed again under this Subclause.
 
(c)
If a Term-Out Loan is to be denominated in different currencies during successive Terms:
 
 
(i)
the Company must repay that Term-Out Loan on the last day of its current Term in the currency in which it is then denominated (the old currency); and
 
 
(ii)
the Lenders must, subject to the terms of this Agreement, re-advance the Term-Out Loan in the currency in which the Company requires the Term-Out Loan to be denominated for the next Term (the new currency).
 
The amount of the Loan in the new currency will be calculated by reference to its Sterling Amount.
 
(d)
Alternatively, if the Facility Agent and the Company agree:
 
 
(i)
the Facility Agent may apply the amount (or so much of that amount as is necessary) of the Term-Out Loan in the new currency to purchase an amount of the old currency sufficient to discharge the obligation of the Company to repay the Term-Out Loan in the old currency;
 
 
(ii)
the Facility Agent must apply any amount of the old currency purchased under subparagraph(i) above towards repaying the Term-Out Loan in the old currency;
 
 
(iii)
the Facility Agent will promptly notify the Company if there is a shortfall or an excess;
 
 
(iv)
if there is a shortfall, the Company must pay to the Facility Agent on the date the Term-Out Loan is due to be repaid in the old currency an amount in the old currency equal to the shortfall; and
 
 
(v)
if there is an excess, the Facility Agent must pay to the Company on the date the Term-Out Loan is due to be repaid in the old currency an amount in the new currency equal to the excess.
 
If the day on which the old currency is due to be repaid is not also a Business Day for the new currency:
 
 
(vi)
the Facility Agent must notify the Company and the Lenders promptly;
 
 
(vii)
the Term-Out Loan will remain in the old currency until the next day which is a Business Day for both the old and the new currencies; and
 
 
(viii)
during this period, the Term-Out Loan will have Terms running from one Business Day to the next Business Day.
 
The Company must indemnify the Facility Agent against any loss or liability incurred by the Facility Agent as a result of any foreign exchange contract entered into for the purpose of this Clause.
 
7.7
Term-Out Loans - continuing in same Optional Currency
 
(a)
If a Term-Out Loan is to be denominated in the same Optional Currency during two successive Terms, the Facility Agent must calculate the amount of the Term-Out Loan in the Optional Currency for the second of those Terms.
 
(b)
The amount of the Term-Out Loan in the Optional Currency for the second Term will be the amount determined by notionally converting into that Optional Currency the Sterling Amount of the Term-Out Loan on the basis of the Agent's Spot Rate of Exchange one Business Day before the Rate Fixing Day for that Term.
 
(c)
If the amount calculated is less than the existing amount of that Term-Out Loan in the Optional Currency during the first Term, the Company must pay, subject to paragraph (e) below, on the last day of the first Term an amount equal to the difference.
 
(d)
If the amount calculated is more than the existing amount of that Term-Out Loan in the Optional Currency during the first Term, each Lender must pay, subject to paragraph (e) below, on the last day of the first Term its Pro Rata Share of the difference.
 
(e)
If the calculation made by the Facility Agent under paragraph (a) above shows that the amount of the Term-Out Loan in the Optional Currency has increased or decreased by less than 5% since it was borrowed or (if later) the most recent adjustment under paragraph (c) or (d) above, no payment is required under paragraph (c) or (d) above.
 
7.8
Notification
 
The Facility Agent must notify the Lenders and the Company of the relevant Sterling Amount (and the applicable Agent's Spot Rate of Exchange) promptly after they are ascertained.
 
8.
REPAYMENT
 
8.1
Repayment of Loans
 
(a)
The Company must repay each Loan (other than a Term-Out Loan) in full on its Maturity Date. No Loan may be outstanding after the applicable Final Maturity Date.
 
(b)
Subject to the other terms of this Agreement, any amounts repaid under paragraph (a) above may be re-borrowed.
 
8.2
Repayment of Term-Out Loans
 
The Company must repay all Term-Out Loans in full on the Term-out Repayment Date.
 
9.
PREPAYMENT AND CANCELLATION
 
9.1
Mandatory prepayment - illegality
 
(a)
A Lender must notify the Company promptly if it becomes aware that it is unlawful in any jurisdiction for that Lender to perform any of its obligations under a Finance Document or to fund or maintain its share in any Loan.
 
(b)
After notification under paragraph (a) above:
 
 
(i)
the Company must repay or prepay the share of that Lender in each Loan made to it on the date specified in paragraph (c) below; and
 
 
(ii)
the Commitments of that Lender will be immediately cancelled.
 
(c)
The date for repayment or prepayment of a Lender's share in a Loan will be:
 
 
(i)
the Business Day following receipt by the Company of notice from the Lender under paragraph (a) above; or
 
 
(ii)
if later, the latest date allowed by the relevant law.
 
9.2
Mandatory prepayment - change of control
 
If, except in the context of a group reorganisation where the Company continues to be controlled directly or indirectly, by PPL Corporation, the Company becomes aware of any person (whether alone or together with any associated person or persons) gaining control of the Company (for these purposes associated person means, in relation to any person, a person who is (i) "acting in concert" (as defined in the City Code on Takeovers and Mergers) with that person or (ii) a "connected person" (as defined in section 839 of the Income and Corporation Taxes Act 1988) of that person and control has the meaning given to it in Section 416 of the Income and Corporation Taxes Act 1988):
 
 
(a)
within five days of such date, the Company shall give notice of such change of control to the Facility Agent;
 
 
(b)
the Lenders and the Company shall immediately enter into negotiations for a period of not more than 45 days from the date of the change of control with a view to agreeing whether the Facility shall continue to be made available and on what terms; and
 
 
(c)
if no such agreement is reached within the said period of 45 days then:
 
 
(i)
any Lender may on ten days' notice to the Facility Agent and to the Company require the repayment of its share in each Loan and cancel its Commitment; and
 
 
(ii)
the Majority Lenders may on ten days' notice to the Company require repayment in full of all outstanding Loans and cancel the Total Commitments.
 
9.3
Voluntary prepayment
 
(a)
The Company may, by giving not less than three Business Days' prior notice to the Facility Agent, prepay any Loan at any time in whole or in part.
 
(b)
A prepayment of part of a Loan drawn in US Dollars must be in a minimum amount of $5,000,000 and an integral multiple of U.S. $1,000,000.
 
(c)
A prepayment of part of a Loan drawn in Sterling must be in a minimum amount of £5,000,000 and an integral multiple of £1,000,000.
 
9.4
Automatic cancellation
 
(a)
The Commitments of each Lender in relation to the Facility will be automatically cancelled at the close of business on the last day of the Availability Period.
 
(b)
If a Lender does not agree to an extension requested under Clause 6 (E), the Commitments of this Lender will be automatically cancelled on his Final Maturity Date.
 
9.5
Voluntary cancellation
 
(a)
The Company may, by giving not less than three Business Days' prior notice to the Facility Agent, cancel the unutilised amount of the Total Commitments in whole or in part.
 
(b)
Partial cancellation of the Total Commitments must be in a minimum amount of £5,000,000 and an integral multiple of £1,000,000.
 
(c)
Any cancellation in part will be applied against the relevant Commitment of each Lender pro rata.
 
9.6
Involuntary prepayment and cancellation
 
(a)
If the Company is, or will be, required to pay to a Lender a Tax Payment or an Increased Cost, the Company may, while the requirement continues, give notice to the Facility Agent requesting prepayment and cancellation in respect of that Lender.
 
(b)
After notification under paragraph (a) above:
 
 
(i)
the Company must repay or prepay that Lender's share in each Loan made to it on the date specified in paragraph (c) below; and
 
 
(ii)
the Commitments of that Lender will be immediately cancelled.
 
(c)
The date for repayment or prepayment of a Lender's share in a Loan will be the last day of the current Term for that Loan or, if earlier, the date specified by the Company in its notification.
 
9.7
Partial prepayment of Term-Out Loans
 
No amount of a Term-Out Loan repaid or prepaid under this Agreement may subsequently be re-borrowed.
 
9.8
Re-borrowing of Loans (other than Term-Out Loans)
 
Any voluntary prepayment of a Loan (other than a Term-Out Loan) may be re-borrowed on the terms of this Agreement. Any mandatory or involuntary prepayment of a Loan may not be re-borrowed.
 
9.9
Miscellaneous provisions
 
(a)
Any notice of prepayment and/or cancellation under this Agreement is irrevocable and must specify the relevant date(s) and the affected Loans and Commitments. The Facility Agent must notify the Lenders promptly of receipt of any such notice.
 
(b)
All prepayments under this Agreement must be made with accrued interest on the amount prepaid. No premium or penalty is payable in respect of any prepayment except for Break Costs.
 
(c)
The Majority Lenders may agree a shorter notice period for a voluntary prepayment or a voluntary cancellation.
 
(d)
No prepayment or cancellation is allowed except in accordance with the express terms of this Agreement.
 
(e)
No amount of the Total Commitments cancelled under this Agreement may subsequently be reinstated.
 
10.
INTEREST
 
10.1
Calculation of interest
 
The rate of interest on each Loan for each Term is the percentage rate per annum equal to the aggregate of the applicable:
 
 
(a)
Margin;
 
 
(b)
LIBOR; and
 
 
(c)
Mandatory Cost.
 
10.2
Payment of interest
 
Except where it is provided to the contrary in this Agreement, the Company must pay accrued interest on each Loan made to it on the last day of each Term and also, if the Term is longer than six months, on the dates falling at six-monthly intervals after the first day of that Term.
 
10.3
Interest on overdue amounts
 
(a)
If the Company fails to pay any amount payable by it under the Finance Documents, it must immediately on demand by the Facility Agent pay interest on the overdue amount from its due date up to the date of actual payment, both before, on and after judgment.
 
(b)
Interest on an overdue amount is payable at a rate determined by the Facility Agent to be 1% per annum above the rate which would have been payable if the overdue amount had, during the period of non-payment, constituted a Loan in the currency of the overdue amount. For this purpose, the Facility Agent may (acting reasonably):
 
 
(i)
select successive Terms of any duration of up to three months; and
 
 
(ii)
determine the appropriate Rate Fixing Day for that Term.
 
(c)
Notwithstanding paragraph (b) above, if the overdue amount is a principal amount of a Loan and becomes due and payable prior to the last day of its current Term, then:
 
 
(i)
the first Term for that overdue amount will be the unexpired portion of that Term; and
 
 
(ii)
the rate of interest on the overdue amount for that first Term will be 1% per annum above the rate then payable on that Loan.
 
After the expiry of the first Term for that overdue amount, the rate on the overdue amount will be calculated in accordance with paragraph (b) above.
 
(d)
Interest (if unpaid) on an overdue amount will be compounded with that overdue amount at the end of each of its Terms but will remain immediately due and payable.
 
10.4
Notification of rates of interest
 
The Facility Agent must promptly notify each relevant Party of the determination of a rate of interest under this Agreement.
 
10.5
Margin
 
(a)
The applicable Margin for all Loans will be determined in accordance with the table below, with the applicable Margin for Loans being determined by reference to the percentage rate per annum specified in Column 2 as set out below opposite the long term credit rating assigned to the Company and published by Moody's and/or S&P as specified in Column 1:

 
 
Column 1 Credit Rating (S&P/Moody's)
Column 2 Margin
%
 
A-/A3 (or higher)
0.30
 
BBB+/Baa1
0.35
 
BBB/Baa2
0.45
 
BBB-/Baa3 (or lower)
0.55
 
(b)
Initially the applicable Margin shall be 0.35 per cent.
 
(c)
During any period in which (i) an Event of Default is outstanding; and/or (ii) there is no long term credit rating assigned to the Company by either S&P or Moody's, the applicable Margin shall be 0.55% per annum.
 
(d)
In the event that the long term credit ratings assigned to the Company by S&P and Moody's would indicate a different Margin under (a) above then the lower of the two credit ratings shall apply to determine the applicable Margin, save that, in the event that there is more than one notch difference between the two credit ratings, then the middle level shall apply to determine the applicable Margin and, in the event that there are an even number of levels between the two credit ratings (and therefore no middle level) the higher of the two middle levels shall be used to determine the applicable Margin.
 
(e)
Any adjustment to the Margin pursuant to paragraphs (a) to (d) above shall be made on the date of publication by S&P and/or Moody's of a long term credit rating of the Company (or an amendment of a previously published rating) or on the date in which no long term credit rating is assigned to the Company, if such publication (or amendment) would result in a change in the Margin as provided above and, for the avoidance of doubt, such adjustment shall apply to Loans currently outstanding at such date of publication and with effect from such date.
 
(f)
Promptly after becoming aware of the same, the Company shall inform the Facility Agent in writing if any of the circumstances contemplated by subclauses 10.5(c) through (d) apply.
 
11.
TERMS
 
11.1
Selection - Term-Out Loans
 
(a)
Each Term-Out Loan has successive Terms.
 
(b)
The Company must select the first Term-Out for a Term-Out Loan in the relevant notice under Clause 2.3 (Term-out Option) and each subsequent Term in an irrevocable notice received by the Facility Agent not later than 11.00 a.m. one Business Day before the Rate Fixing Day for that Term. Each Term for a Term-Out Loan will start on its Utilisation Date or on the expiry of its preceding Term.
 
(c)
If the Company fails to select a Term for an outstanding Term-Out Loan under paragraph (b) above, that Term will, subject to the other provisions of this Clause, be one month.
 
(d)
Subject to the following provisions of this Clause, each Term for a Term-Out Loan will be one, two, three or six months or any other period agreed by the Company and the Lenders.
 
11.2
Selection - Loans
 
(a)
Each Loan (other than a Term-Out Loan) has one Term only.
 
(b)
The Company must select the Term for a Loan in the relevant Request.
 
(c)
Subject to the following provisions of this Clause, each Term for a Loan will be one, two, three or six months or for a period of one to thirty days duration as selected by the Company or any other period agreed by the Company and the Lenders.
 
11.3
Consolidation - Term-Out Loans
 
(a)
Unless the Company otherwise requests, a Term for a Term-Out Loan will end on the same day as the current Term for any other Term-Out Loan denominated in the same currency as that Term-Out Loan. On the last day of those Terms, those Term-Out Loans will be consolidated and treated as one Term-Out Loan.
 
(b)
The Company may select different Terms for any portion of a Term-Out Loan on the last day of the Term of that Term-Out Loan provided such portion is a minimum of £5,000,000 and an integral multiple of £1,000,000. Any such portion shall be treated as a separate Loan.
 
11.4
No overrunning the Final Maturity Date
 
If a Term would otherwise overrun the Final Maturity Date, it will be shortened so that it ends on the Final Maturity Date.
 
11.5
Other adjustments
 
The Facility Agent and the Company may enter into such other arrangements as they may agree for the adjustment of Terms and the consolidation and/or splitting of Loans.
 
11.6
Notification
 
The Facility Agent must notify the Company and the Lenders of the duration of each Term promptly after ascertaining its duration.
 
12.
MARKET DISRUPTION
 
12.1
Failure of a Reference Bank to supply a rate
 
If LIBOR is to be calculated by reference to the Reference Banks but a Reference Bank does not supply a rate by 12.00 noon on a Rate Fixing Day, the applicable LIBOR will, subject as provided below, be calculated on the basis of the rates of the remaining Reference Banks.
 
12.2
Market disruption
 
(a)
In this Clause, each of the following events is a market disruption event:
 
 
(i)
LIBOR is to be calculated by reference to the Reference Banks but no, or only one, Reference Bank supplies a rate by 12.00 noon on the Rate Fixing Day; or
 
 
(ii)
the Facility Agent receives by close of business on the Rate Fixing Day notification from Lenders whose shares in the relevant Loan exceed 50% of that Loan that such Lenders are unable to obtain matching deposits in the relevant interbank market or the rate at which they can do so is in excess of LIBOR for the relevant Term.
 
(b)
The Facility Agent must promptly notify the Company and the Lenders of a market disruption event.
 
(c)
After notification under paragraph (b) above, the rate of interest on each Lender's share in the affected Loan for the relevant Term will be the aggregate of the applicable:
 
 
(i)
Margin;
 
 
(ii)
rate notified to the Facility Agent by that Lender as soon as practicable, and in any event before interest is due to be paid in respect of that Term, to be that which expresses as a percentage rate per annum the cost to that Lender of funding its share in that Loan from whatever source it may reasonably select; and
 
 
(iii)
Mandatory Cost.
 
12.3
Alternative basis of interest or funding
 
(a)
If a market disruption event occurs and the Facility Agent or the Company so requires, the Company and the Facility Agent must enter into negotiations for a period of not more than 30 days with a view to agreeing an alternative basis for determining the rate of interest and/or funding for the affected Loan and any future Loan.
 
(b)
Any alternative basis agreed will be, with the prior consent of all the Lenders, binding on all the Parties.
 
13.
TAXES
 
13.1
General
 
In this Clause:
 
Tax Credit means a credit against any Tax or any relief or remission for Tax (or its repayment).
 
U.K. Lender means a Lender which is within the charge to U.K. corporation tax in respect of, and beneficially entitled to, a payment of interest on a Loan made by a person that was a bank for the purposes of section 349 of the Income and Corporation Taxes Act 1988 (as currently defined in section 840A of the Income and Corporation Taxes Act 1988) at the time the Loan was made.
 
13.2
Tax gross-up
 
(a)
The Company must make all payments to be made by it under the Finance Documents without any Tax Deduction, unless a Tax Deduction is required by law.
 
(b)
If:
 
 
(i)
a Lender is not, or ceases to be, a U.K. Lender; or
 
 
(ii)
the Company or a Lender is aware that the Company must make a Tax Deduction (or that there is a change in the rate or the basis of a Tax Deduction),
 
it must promptly notify the Facility Agent. The Facility Agent must then promptly notify the affected Parties.
 
(c)
Except as provided below, if a Tax Deduction is required by law to be made by the Company or the Facility Agent, the amount of the payment due from the Company will be increased to an amount which (after making the Tax Deduction) leaves an amount equal to the payment which would have been due if no Tax Deduction had been required.
 
(d)
Except as provided below, the Company is not required to make an increased payment under paragraph (c) above to a Lender that is not, or has ceased to be, a U.K. Lender in excess of the amount that the Company would have had to pay had the Lender been, or not ceased to be, a U.K. Lender.
 
(e)
Paragraph (d) above will not apply if the Lender has ceased to be a U.K. Lender by reason of any change after the date it became a Lender under this Agreement in (or in the interpretation, administration, or application of) any law or double taxation agreement or any published practice or concession of any relevant taxing authority.
 
(f)
Where a Lender fails to give notice under paragraph (b) above within 60 days after it obtains knowledge (or, after reasonable due enquiry, ought to have obtained knowledge) of such event, then such Lender shall, with respect to any claim made by it under this Clause 13.2 (Tax gross-up), only be entitled to claim an increased payment for the period from and after the date that is 60 days prior to the date on which the Lender does give notice.
 
(g)
If the Company is required to make a Tax Deduction, it must make the minimum Tax Deduction and must make any payment required in connection with that Tax Deduction within the time allowed by law.
 
(h)
Within 30 days of making either a Tax Deduction or a payment required in connection with a Tax Deduction, the Company must deliver to the Facility Agent for the relevant Finance Party evidence satisfactory to that Finance Party (acting reasonably) that the Tax Deduction has been made or (as applicable) the appropriate payment has been paid to the relevant taxing authority.
 
13.3
Tax indemnity
 
(a)
Except as provided below, the Company must indemnify a Finance Party against any loss or liability which that Finance Party (in its absolute discretion) determines will be or has been suffered (directly or indirectly) by that Finance Party for or on account of Tax in relation to a payment received or receivable (or any payment deemed to be received or receivable) under a Finance Document.
 
(b)
Paragraph (a) above does not apply to any Tax assessed on a Finance Party under the laws of the jurisdiction in which:
 
 
(i)
that Finance Party is incorporated or, if different, the jurisdiction (or jurisdictions) in which that Finance Party is treated as resident for tax purposes; or
 
 
(ii)
that Finance Party's Facility Office is located in respect of amounts received or receivable in that jurisdiction,
 
if that Tax is imposed on or calculated by reference to the net income received or receivable by that Finance Party. However, any payment deemed to be received or receivable, including any amount treated as income but not actually received by the Finance Party, such as a Tax Deduction, will not be treated as net income received or receivable for this purpose.
 
(c)
A Finance Party making, or intending to make, a claim under paragraph (a) above must promptly notify the Company of the event which will give, or has given, rise to the claim.
 
13.4
Tax Credit
 
If the Company makes a Tax Payment and the relevant Finance Party has obtained and used any Tax Credit that is attributable to that Tax Payment, then, if in its discretion (acting reasonably) it can do so without any further adverse consequences for it, that Finance Party must pay an amount to the Company which that Finance Party determines (in its discretion, acting reasonably) will leave it (after that payment) in the same after-tax position as it would have been in if the Tax Payment had not been required to be made by the Company. The relevant Finance Party shall take those steps it considers reasonable to seek and claim any tax credit.
 
13.5
Tax Warranty of Lenders
 
Each Lender severally warrants to the Company on the date it becomes a Lender that it is a U.K. Lender. A Lender must promptly notify the Company if it ceases to be a U.K. Lender after this Agreement is entered into.
 
13.6
Stamp taxes
 
The Company must pay and indemnify each Finance Party against any stamp duty, registration or other similar Tax payable in connection with the entry into, performance or enforcement of any Finance Document, except for any such Tax payable in connection with the entry into of a Transfer Certificate.
 
13.7
Value added taxes
 
(a)
All costs and expenses payable under a Finance Document by the Company is exclusive of any value added tax or any other Tax of a similar nature which might be chargeable in connection with that amount. If any such Tax is chargeable, the Company must pay to the Finance Party (in addition to and at the same time as paying that amount) an amount equal to the amount of that Tax.
 
(b)
The obligation of the Company under paragraph (a) above will be reduced to the extent that the Finance Party determines (acting reasonably) that it is entitled to repayment or a credit in respect of the relevant Tax.
 
14.
INCREASED COSTS
 
14.1
Increased Costs
 
Except as provided below in this Clause, the Company must pay to a Finance Party the amount of any Increased Cost incurred by that Finance Party or any of its Affiliates as a result of:
 
 
(a)
the introduction of, or any change in, or any change in the interpretation or application of, any law or regulation; or
 
 
(b)
compliance with any law or regulation,
 
made after the date of this Agreement.
 
14.2
Exceptions
 
The Company need not make any payment for an Increased Cost to the extent that the Increased Cost is:
 
 
(a)
compensated for under another Clause or would have been but for an exception to that Clause;
 
 
(b)
a Tax on the overall net income of a Finance Party or any of its Affiliates;
 
 
(c)
attributable to a Finance Party or its Affiliate wilfully failing to comply with any law or regulation; or
 
 
(d)
attributable to the implementation or application of or compliance with the "International Convergence of Capital Measurement and Capital Standards, a Revised Framework" published by Basel Committee on Banking and Supervision in June 2004 in the form existing on the date of this Agreement (Basel II) or any other law or regulation which implements Basel II (whether such implementation, application or compliance is by a government, regulator, Finance Party or any of its Affiliates); or
 
 
(e)
incurred in any period or periods ending prior to the date falling 60 days before the date any demand in relation to that Increased Cost is made (save where the relevant Finance Party (after due enquiry) was unaware of the existence of such Increased Cost or where such Increased Cost is caused by reason of a change in (or in the interpretation, administration or application of) law with retrospective effect).
 
14.3
Claims
 
A Finance Party intending to make a claim for an Increased Cost must notify the Company promptly of the circumstances giving rise to, and the amount of, the claim.
 
15.
MITIGATION
 
15.1
Mitigation
 
(a)
Each Finance Party must, in consultation with the Company, take all reasonable steps to mitigate any circumstances which arise and which result or would result in:
 
 
(i)
any Tax Payment or Increased Cost being payable to that Finance Party;
 
 
(ii)
that Finance Party being able to exercise any right of prepayment and/or cancellation under this Agreement by reason of any illegality;
 
 
(iii)
that Finance Party incurring any cost of complying with the minimum reserve requirements of the European Central Bank; or
 
 
(iv)
the occurrence of any market disruption event,
 
including transferring its rights and obligations under the Finance Documents to an Affiliate or changing its Facility Office.
 
(b)
A Finance Party is not obliged to take any step under this Subclause if, in the opinion of that Finance Party (acting reasonably), to do so might be prejudicial to it.
 
(c)
Each Finance Party must promptly notify the Company of any circumstances as described in 15.1(a)(i) to (iv).
 
(d)
The Company must indemnify each Finance Party for all costs and expenses reasonably incurred by it as a result of any step taken under this Clause 15.1 (Mitigation).
 
15.2
Substitution
 
Notwithstanding Clauses 15.1, if any circumstances arise which result in:
 
 
(a)
any Tax Payment or Increased Cost being payable to that Finance Party;
 
 
(b)
that Finance Party being able to exercise any right of prepayment and/or cancellation under this Agreement by reason of any illegality;
 
 
(c)
that Finance Party incurring any cost of complying with the minimum reserve requirements of the European Central Bank; or
 
 
(d)
the occurrence of any market disruption event,
 
then the Company, at its expense, at any time within 180 days after the occurrence of the relevant event or circumstance, so long as no Default is outstanding, may by notice to such Finance Party require it (and, if applicable, its Affiliate) to novate its rights and obligations hereunder (including its Commitments and its share of any Loans) in accordance with Clause 28 (Changes to the Parties) to a bank or financial institution specified by the Company and acceptable to the Facility Agent which is willing to take such a novation as aforesaid provided that:
 
 
(e)
such novation shall not conflict with or violate any law applicable to or binding on such Finance Party (or, if applicable, its Affiliate); and
 
 
(f)
the Company shall have paid to the Finance Party (or, if applicable, its Affiliate) all amounts accrued and owing hereunder.
 
 
(g)
Notwithstanding the above, the Company shall not be entitled to require a novation under this Clause 15.2 with respect to any Finance Party if:
 
 
(h)
the relevant Finance Party shall have mitigated the effect of the relevant event or circumstance as provided in Clause 15.1(a), and the novation would have no greater or further mitigating effect; or
 
 
(i)
the relevant event or circumstances are applicable to all Finance Parties.
 
15.3
Conduct of business by a Finance Party
 
No term of this Agreement will:
 
 
(a)
interfere with the right of any Finance Party to arrange its affairs (Tax or otherwise) in whatever manner it thinks fit or oblige any Finance Party to investigate or claim any Tax Credit; or
 
 
(b)
oblige any Finance Party to disclose any information relating to its affairs (Tax or otherwise) or any computation in respect of Tax.
 
16.
PAYMENTS
 
16.1
Place
 
Unless a Finance Document specifies that payments under it are to be made in another manner, all payments by a Party (other than the Facility Agent) under the Finance Documents must be made to the Facility Agent to its account at such office or bank:
 
 
(a)
in the principal financial centre of the country of the relevant currency; or
 
 
(b)
in the case of euro, in the principal financial centre of a Participating Member State or London,
 
as it may notify to that Party for this purpose by not less than five Business Days' prior notice.
 
16.2
Funds
 
Payments under the Finance Documents to the Facility Agent must be made for value on the due date at such times and in such funds as the Facility Agent may specify to the Party concerned as being customary at the time for the settlement of transactions in the relevant currency in the place for payment.
 
16.3
Distribution
 
(a)
Each payment received by the Facility Agent under the Finance Documents for another Party must, except as provided below, be made available by the Facility Agent to that Party by payment (as soon as practicable after receipt) to its account with such office or bank:
 
 
(i)
in the principal financial centre of the country of the relevant currency; or
 
 
(ii)
in the case of euro, in the principal financial centre of a Participating Member State or London,
 
as it may notify to the Facility Agent for this purpose by not less than five Business Days' prior notice.
 
(b)
The Facility Agent may apply any amount received by it for the Company in or towards payment (as soon as practicable after receipt) of any amount due from the Company under the Finance Documents or in or towards the purchase of any amount of any currency to be so applied.
 
(c)
Where a sum is paid to the Facility Agent under this Agreement for another Party, the Facility Agent is not obliged to pay that sum to that Party until it has established that it has actually received it. However, the Facility Agent may assume that the sum has been paid to it, and, in reliance on that assumption, make available to that Party a corresponding amount. If it transpires that the sum has not been received by the Facility Agent, that Party must immediately on demand by the Facility Agent refund any corresponding amount made available to it together with interest on that amount from the date of payment to the date of receipt by the Facility Agent at a rate calculated by the Facility Agent to reflect its cost of funds.
 
16.4
Currency
 
(a)
Unless a Finance Document specifies that payments under it are to be made in a different manner, the currency of each amount payable under the Finance Documents is determined under this Clause.
 
(b)
Interest is payable in the currency in which the relevant amount in respect of which it is payable is denominated.
 
(c)
A repayment or prepayment of any principal amount is payable in the currency in which that principal amount is denominated on its due date.
 
(d)
Amounts payable in respect of costs and expenses are payable in the currency in which they are incurred.
 
(e)
Each other amount payable under the Finance Documents is payable in Sterling.
 
16.5
No set-off or counterclaim
 
All payments made by the Company under the Finance Documents must be made without set-off or counterclaim.
 
16.6
Business Days
 
(a)
If a payment under the Finance Documents is due on a day which is not a Business Day, the due date for that payment will instead be the next Business Day in the same calendar month (if there is one) or the preceding Business Day (if there is not) or whatever day the Facility Agent determines is market practice.
 
(b)
During any extension of the due date for payment of any principal under this Agreement interest is payable on that principal at the rate payable on the original due date.
 
16.7
Partial payments
 
(a)
If any Administrative Party receives a payment insufficient to discharge all the amounts then due and payable by the Company under the Finance Documents, the Administrative Party must apply that payment towards the obligations of the Company under the Finance Documents in the following order:
 
 
(i)
first, in or towards payment pro rata of any unpaid fees, costs and expenses of the Administrative Parties under the Finance Documents;
 
 
(ii)
secondly, in or towards payment pro rata of any accrued interest or fee due but unpaid under this Agreement;
 
 
(iii)
thirdly, in or towards payment pro rata of any principal amount due but unpaid under this Agreement; and
 
 
(iv)
fourthly, in or towards payment pro rata of any other sum due but unpaid under the Finance Documents.
 
(b)
The Facility Agent must, if so directed by all the Lenders, vary the order set out in subparagraphs (a)(ii) to (iv) above.
 
(c)
This Subclause will override any appropriation made by the Company.
 
16.8
Timing of payments
 
If a Finance Document does not provide for when a particular payment is due, that payment will be due within three Business Days of demand by the relevant Finance Party.
 
17.
REPRESENTATIONS
 
17.1
Representations
 
The representations set out in this Clause are made by the Company to each Finance Party.
 
17.2
Status
 
It is a limited liability company, duly incorporated and validly existing under the Companies Act 1985 in England and Wales.
 
17.3
Powers and authority
 
It has the power to enter into and perform, and has taken all necessary action to authorise the entry into and performance of, the Finance Documents to which it is or will be a party and the transactions contemplated by those Finance Documents.
 
17.4
Legal validity
 
Subject to any general principles of law limiting its obligations and referred to in any legal opinion required under this Agreement, each Finance Document to which it is a party is its legally binding, valid and enforceable obligation.
 
17.5
Non-conflict
 
The entry into and performance by it of, and the transactions contemplated by, the Finance Documents do not conflict with any borrowing or other power or restricted granted or imposed by:
 
 
(a)
any law or regulation applicable to it and violation of which has or is likely to have a Material Adverse Effect; or
 
 
(b)
its constitutional documents.
 
17.6
No Event of Default
 
No Event of Default is outstanding or will result from the execution of, or the performance of any transaction contemplated by, any Finance Document.
 
17.7
Authorisations
 
All authorisations required by it (including any authorisations required under PUHCA or the Act, if any) in connection with the entry into, performance, validity and enforceability of, and the transactions contemplated by, the Finance Documents have been obtained or effected (as appropriate) and are in full force and effect.
 
17.8
Financial statements
 
Its audited consolidated financial statements most recently delivered to the Facility Agent (which, at the date of this Agreement, are the Original Financial Statements):
 
 
(a)
have been prepared in accordance with accounting principles and practices generally accepted in its jurisdiction of incorporation, consistently applied; and
 
 
(b)
fairly represent its consolidated financial condition as at the date to which they were drawn up,
 
except, in each case, as disclosed to the contrary in those financial statements.
 
17.9
No material adverse change
 
Other than as disclosed in writing to the Mandated Lead Arrangers prior to the date of this Agreement there has been no material adverse change in its consolidated financial condition since the date to which the Original Financial Statements were drawn up.
 
17.10
Litigation
 
No litigation, arbitration or administrative proceedings are current or, to its knowledge, pending or threatened, which, if adversely determined, are reasonably likely to have a Material Adverse Effect.
 
17.11
Winding Up
 
No meeting has been convened for its Winding-up and, so far as it is aware, no petition, application or the like is outstanding for its Winding up.
 
17.12
Non-Violation of other Agreements:
 
Its entry into, exercise of its rights and/or performance of or compliance with its obligations under this Agreement do not and will not violate, to an extent or in a manner which has or is likely to have a Material Adverse Effect on it, any agreement to which it is a party or which is binding on it.
 
17.13
Times for making representations
 
(a)
The representations set out in this Clause are made by the Company on the date of this Agreement.
 
(b)
The representations in Clauses 17.2 to 17.7 (inclusive) are deemed to be repeated by the Company on the date of each Request and the first day of each Term.
 
(c)
When a representation is repeated, it is applied to the circumstances existing at the time of repetition.
 
18.
INFORMATION COVENANTS
 
18.1
Financial statements
 
(a)
The Company must supply to the Facility Agent in sufficient copies for all the Lenders:
 
 
(i)
its audited consolidated financial statements for each of its financial years; and
 
 
(ii)
its interim financial statements for the first half-year of each of its financial years.
 
(b)
All financial statements must be supplied as soon as they are available and:
 
 
(i)
in the case of the Company's audited consolidated financial statements, within 180 days; and
 
 
(ii)
in the case of the Company's interim financial statements, within 90 days,
 
(c)
of the end of the relevant financial period.
 
18.2
Form of Financial Statement
 
If any financial statement delivered or to be delivered to the Facility Agent under Clause 18.1 is not to be or, as the case may be, has not been prepared in accordance with Applicable Accounting Principles:
 
 
(a)
The Company and the Facility Agent (on behalf of and after consultation with all the Lenders) shall, on the request of the Facility Agent or the Company, negotiate in good faith with a view to agreeing such amendments to the above financial ratio and/or the definitions of the terms used in it as are necessary to give the Lenders comparable protection to that contemplated at the date of this Agreement;
 
 
(b)
If amendments are agreed by the Company and the Majority Lenders within 25 days, those amendments shall take effect in accordance with the terms of that agreement;
 
 
(c)
If such amendments are not so agreed within 25 days, the Company shall:
 
 
(i)
within 30 days after the end of that 25 day period; and
 
 
(ii)
with all subsequent financial statements to be delivered to the Facility Agent under Clause 18.1,
 
deliver to the Facility Agent details of all such adjustments as need to be made to the relevant financial statements to bring them into line with the Companies Act 1985 (as in effect on the date of this Agreement) and Applicable Accounting Principles.
 
18.3
Compliance Certificate
 
(a)
The Company must supply to the Facility Agent a Compliance Certificate with each set of its financial statements, sent to the Facility Agent under this Agreement.
 
(b)
A Compliance Certificate must be signed by two directors of the Company.
 
18.4
Information - miscellaneous
 
The Company must supply to the Facility Agent, in sufficient copies for all the Lenders if the Facility Agent so requests:
 
 
(a)
copies of all documents despatched by the Company to its creditors generally or any class of them at the same time as they are despatched;
 
 
(b)
promptly upon becoming aware of them, details of any litigation, arbitration or administrative proceedings which are current, threatened or pending and which might, if adversely determined, have a Material Adverse Effect;
 
 
(c)
promptly on request, a list of the then current Material Subsidiaries; and
 
 
(d)
promptly on request, such further information regarding the financial condition and operations of the Group as any Finance Party through the Facility Agent may reasonably request.
 
18.5
Notification of Default
 
(a)
The Company must notify the Facility Agent of any Default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence.
 
(b)
Promptly on request by the Facility Agent, the Company must supply to the Facility Agent a certificate signed by two of its directors on its behalf, certifying that no Default is outstanding or, if a Default is outstanding, specifying the Default and the steps, if any, being taken to remedy it.
 
18.6
Use of websites
 
(a)
Except as provided below, the Company may deliver any information under this Agreement to a Lender by posting it on to an electronic website if:
 
 
(i)
the Facility Agent and the Lender agree;
 
 
(ii)
the Company and the Facility Agent designate an electronic website for this purpose;
 
 
(iii)
the Company notifies the Facility Agent of the address of and password for the website; and
 
 
(iv)
the information posted is in a format agreed between the Company and the Facility Agent.
 
The Facility Agent must supply each relevant Lender with the address of and password for the website.
 
(b)
Notwithstanding the above, the Company must supply to the Facility Agent in paper form a copy of any information posted on the website together with sufficient copies for:
 
 
(i)
any Lender not agreeing to receive information via the website; and
 
 
(ii)
within ten Business Days of request any other Lender, if that Lender so requests.
 
(c)
The Company must promptly upon becoming aware of its occurrence, notify the Facility Agent if:
 
 
(i)
the website cannot be accessed;
 
 
(ii)
the website or any information on the website is infected by any electronic virus or similar software;
 
 
(iii)
the password for the website is changed; or
 
 
(iv)
any information to be supplied under this Agreement is posted on the website or amended after being posted.
 
If the circumstances in paragraphs (i) or (ii) above occur, the Company must supply any information required under this Agreement in paper form.
 
18.7
Know your customer requirements
 
(a)
The Company must promptly on the request of any Finance Party supply to that Finance Party any documentation or other evidence which is reasonably requested by that Finance Party (whether for itself, on behalf of any Finance Party or any prospective new Lender) to enable a Finance Party or prospective new Lender to carry out and be satisfied with the results of all applicable know your customer requirements.
 
(b)
Each Lender must promptly on the request of the Facility Agent supply to the Facility Agent any documentation or other evidence which is reasonably required by the Facility Agent to carry out and be satisfied with the results of all know your customer requirements.
 
19.
FINANCIAL COVENANTS
 
19.1
Definitions
 
In this Clause:
 
Consolidated EBITDA means the consolidated net pre-taxation profits of the Group for a Measurement Period as adjusted by:
 
 
(a)
adding back Interest Payable;
 
 
(b)
taking no account of any exceptional or extraordinary item;
 
 
(c)
excluding any amount attributable to minority interests;
 
 
(d)
adding back depreciation and amortisation; and
 
 
(e)
taking no account of any revaluation of an asset or any loss or gain over book value arising on the disposal of an asset (otherwise than in the ordinary course of trading) by a member of the Group during that Measurement Period.
 
Interest Payable means, in relation to any Measurement Period, all interest payable and similar charges of the Group expressed in Sterling and determined on a consolidated basis in accordance with Applicable Accounting Principles.
 
Measurement Period means a half-year of the Company.
 
Regulatory Asset Base means the regulatory asset base of the Company most recently published by OFGEM.
 
Total Gross Debt means, in respect of the Company, at any time the consolidated Financial Indebtedness of the Company which is required to be accounted for as debt in the annual financial statements of the Company.
 
19.2
Interpretation
 
(a)
Except as provided to the contrary in this Agreement, an accounting term used in this Clause is to be construed in accordance with the principles applied in connection with the Original Financial Statements.
 
(b)
Any amount in a currency other than Sterling is to be taken into account at its Sterling equivalent calculated on the basis of:
 
 
(i)
the Facility Agent's spot rate of exchange for the purchase of the relevant currency in the London foreign exchange market with Sterling at or about 11.00 a.m. on the day the relevant amount falls to be calculated; or
 
 
(ii)
if the amount is to be calculated on the last day of a financial period of the Company, the relevant rates of exchange used by the Company in, or in connection with, its financial statements for that period.
 
(c)
No item must be credited or deducted more than once in any calculation under this Clause.
 
19.3
Interest cover
 
The Company must ensure that the ratio of Consolidated EBITDA to Interest Payable is not, at the end of each Measurement Period, less than 3 to 1.
 
19.4
Asset Cover
 
The Company must ensure that the Regulatory Asset Base will exceed Total Gross Debt by at least £150,000,000 at all times.
 
20.
GENERAL COVENANTS
 
20.1
General
 
The Company agrees to be bound by the covenants set out in this Clause relating to it and, where the covenant is expressed to apply to each member of the Group, the Company must ensure that each of its Subsidiaries performs that covenant.
 
20.2
Authorisations
 
The Company must promptly obtain, maintain and comply with the terms of any authorisation required under any law or regulation to enable it to perform its obligations under, or for the validity or enforceability of, any Finance Document.
 
20.3
Compliance with laws
 
Each member of the Group must comply in all respects with all laws to which it is subject where failure to do so is reasonably likely to have a Material Adverse Effect.
 
20.4
Pari passu ranking
 
The Company must ensure that its payment obligations under the Finance Documents rank at least pari passu with all its other present and future unsecured payment obligations, except for obligations mandatorily preferred by law applying to companies generally.
 
20.5
Negative pledge
 
(a)
Except as provided below, neither the Company nor any Material Subsidiary may create or allow to exist any Security Interest on any of its assets.
 
(b)
Paragraph (a) does not apply to:
 
 
(i)
any Security Interest created under or in connection with or arising out of the Balancing and Settlement Code or any transactions or arrangements entered into in connection with the management of risks relating thereto;
 
 
(ii)
in respect of overdue amounts which have not been overdue for more than 30 days and/or are being contested in good faith, liens arising solely by operation of law or by order of a court or tribunal (or by an agreement of similar effect) and/or in the ordinary course of business or operations;
 
 
(iii)
any Security Interest created after the date of this Agreement for the sole purpose of re-financing all or any part of either Facility (at the option of the Company) provided that the monies borrowed or raised on such Security Interest shall, to that extent, be applied reasonably promptly in accordance with this Agreement in or towards repayment of the relevant Facility;
 
 
(iv)
any Security Interest arising out of title retention provisions in a supplier's standard conditions of supply of goods acquired in the ordinary course of business or operations;
 
 
(v)
any Security Interest created on any asset acquired after the date of this Agreement for the sole purpose of financing or re-financing that acquisition and securing a principal, capital or nominal amount not exceeding the cost of that acquisition, provided that the Security Interest is removed or discharged within six months of the date of acquisition of such asset;
 
 
(vi)
any Security Interest outstanding on or over any asset acquired after the date of this Agreement and in existence at the date of such acquisition, provided that the Security Interest is removed or discharged within six months of the date of acquisition of such asset;
 
 
(vii)
any Security Interest created or outstanding on or over any asset of any company which becomes a Material Subsidiary of the Company after the date of this Agreement where such Security Interest is created prior to the date on which such company becomes a Material Subsidiary of the Company and is not created or increased in contemplation of such Company being acquired and/or becoming a Material Subsidiary of the Company and the Security Interest is removed or discharged within six months of the date of such company becoming a Material Subsidiary of the Company;
 
 
(viii)
any Security Interest created on any asset to secure any Financial Indebtedness incurred in connection with the financing of any asset or project in respect of which the repayment of that Financial Indebtedness is to be made from the revenues arising out of, or other proceeds of realisation from, that asset or project, with recourse to those revenues and proceeds and other assets used in connection with, or forming the subject matter of, that asset or project but without recourse (or with such limited recourse as the Majority Banks may from time to time agree) to any other assets of the Group;
 
 
(ix)
any netting arrangements under any swap or other hedging transaction which is on standard market terms;
 
 
(x)
any Security Interest created or outstanding with the prior approval of the Majority Banks; and
 
 
(xi)
any Security Interest created or outstanding on or over assets of the Company or any of its Material Subsidiaries provided that the aggregate outstanding principal or nominal amount secured by all Security Interests created or outstanding under this exception on or over such assets shall not at any time exceed £25,000,000 or its equivalent.
 
20.6
Disposals
 
(a)
Except as provided below, no member of the Group may, either in a single transaction or in a series of transactions and whether related or not, dispose of all or any part of its assets (other than cash) which is substantial in the context of the consolidated total assets of the Group.
 
(b)
Paragraph (a) does not apply to:
 
 
(i)
any disposal made in the ordinary course of business or operations of the disposing entity (including, without limitation, disposals of subsidiaries or lines of business, provided that this shall not include a disposal of the core electricity distribution business);
 
 
(ii)
disposals on normal commercial terms of obsolete assets or assets no longer required for the purpose of the relevant Person's business or operations;
 
 
(iii)
any realisation of investments acquired, purchased or made by the temporary application of funds not immediately required in the relevant Person's business or operations;
 
 
(iv)
the exchange of assets for other assets of a similar or superior nature and value, or the sale of assets on normal commercial terms for cash which is payable in full on the completion of the sale and is to be, and is, applied in or towards the purchase of similar assets within six months;
 
 
(v)
the disposal of assets by one wholly-owned Subsidiary of the Company to another or (if the consideration for the disposal does not exceed a normal commercial consideration) to the Company by one of its Subsidiaries;
 
 
(vi)
disposals of any National Grid shares on normal commercial terms;
 
 
(vii)
disposals in connection with sale-and-leaseback or sale and repurchase transactions or any other form of "off balance sheet" financing, provided that the aggregate book value (in the books of the disposing party) of all assets the subject of all such disposals made during the period commencing on the date of this Agreement and ending on the date when no amount remains to be lent or remains payable under this Agreement shall not exceed £50,000,000; and
 
 
(viii)
any disposal which the Majority Banks shall have agreed shall not be taken into account.
 
20.7
Change of business
 
The Company shall procure that no substantial change is made to the general nature of the business of the Company or the Group.
 
20.8
Environmental matters
 
The Company will and will ensure that its Material Subsidiaries will comply with all applicable Environmental Law and other regulations, orders or other law applicable to the conduct of the business of the supply or distribution of electricity, in each case, where failure to do so would have a Material Adverse Effect.
 
20.9
Insurance
 
Each member of the Group must insure its business and assets with insurance companies to such an extent and against such risks as that member of the Group reasonably considers to be appropriate, having regard to the insurance arrangements of companies engaged in similar business.
 
20.10
Licence
 
The Company will:
 
 
(a)
comply in all respects with the terms of its Licence where failure to comply would have a Material Adverse Effect or would have a material adverse effect on the Company's ability to perform its obligations under the Licence;
 
 
(b)
promptly notify the Facility Agent upon receipt by the Company of any notice from the government, any court or any regulatory authority or agency of a revocation, termination, material adverse amendment, suspension or withdrawal of the Licence unless contemporaneously that Licence is to be replaced, substituted or reissued on the same, or substantially the same or improved terms; and
 
 
(c)
comply with the requirements of all applicable rules, regulations, orders and other requirements of the Secretary of State and/or OFGEM under the Act of any other law applicable to the conduct of the business of the distribution of electricity, where failure to comply would have a Material Adverse Effect or would have a material adverse effect on the Company's ability to perform its obligations under the Licence.
 
20.11
Arm's Length Transactions
 
The Company shall not (and the Company shall ensure that no member of the Group shall) enter into any transactions with any member of the Group, a Holding Company or any Affiliate of such Group or Holding Company except on arm's length terms and for full market value (or on terms which are more favourable to the Group).
 
21.
DEFAULT
 
21.1
Events of Default
 
Each of the events set out in this Clause is an Event of Default.
 
21.2
Non-payment
 
The Company fails to pay any sum payable under any Finance Document when due unless:
 
 
(a)
its failure to pay is caused by administrative or technical error; and
 
 
(b)
payment is made within five Business Days of its due date.
 
21.3
Breach of other obligations
 
(a)
The Company does not perform or comply with its obligations under Clause 19 (Financial Covenants), Clause 20.5 (Negative pledge) or Clause 20.6 (Disposals).
 
(b)
The Company does not perform or comply with any of its other obligations under any Finance Document in any material respect or any representation or warranty by the Company in this Agreement or in any document delivered under it is or proves to have been incorrect when made or deemed repeated, unless the non-compliance or circumstances giving rise to the misrepresentation, as the case may be, is capable of remedy and is not remedied within 45 days of the earlier of the Facility Agent giving notice requiring the same to be remedied and the Company becoming aware of such non-compliance or misrepresentation, as the case may be.
 
21.4
Cross-acceleration
 
Any other Financial Indebtedness or commitment for Financial Indebtedness of the Company is cancelled or terminated or becomes due and payable before its normal maturity (whether by declaration or automatically), in each case, by reason of default on the part of the Company or is not paid when due nor within any applicable grace period, other than in circumstances where such default or liability to pay is being contested in good faith and by appropriate proceedings. However, no Event of Default will occur under this Clause 21.4 unless and until the aggregate amount of such Financial Indebtedness in respect of which one or more of the events mentioned above in this Clause 21.4 has occurred exceeds £20,000,000 or its equivalent.
 
21.5
Insolvency
 
(a)
Any of the following occurs in respect of the Company:
 
 
(i)
it is unable to pay its debts generally as they fall due or it is deemed by a court of competent jurisdiction to be insolvent;
 
 
(ii)
it suspends making payments on all or any class of its debts or publicly announces an intention to do so;
 
 
(iii)
by reason of actual or anticipated financial difficulties, it begins negotiations with all or any class of its creditors for the general rescheduling of its indebtedness; or
 
 
(iv)
a moratorium is declared in respect of any of its indebtedness.
 
(b)
If a moratorium occurs in respect of the Company, the ending of the moratorium will not remedy any Event of Default caused by the moratorium.
 
21.6
Insolvency proceedings
 
(a)
Except as provided below, any of the following occurs in respect of the Company:
 
 
(i)
any person presents a petition for its winding-up, administration or dissolution;
 
 
(ii)
an order for its winding-up, administration or dissolution is made;
 
 
(iii)
any liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer is appointed in respect of it or any of its assets;
 
 
(iv)
its directors or other officers request the appointment of a liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer; or
 
 
(v)
any other analogous step or procedure is taken in any jurisdiction.
 
(b)
Paragraph (a) does not apply to (i) a petition for winding-up presented by a creditor which is being actively contested in good faith and with due diligence and with a reasonable prospect of success or (ii) a voluntary solvent winding-up, amalgamation, reconstruction or reorganisation or otherwise part of a solvent scheme of arrangement, in each case on terms approved by the Majority Lenders.
 
21.7
Creditors' process
 
A distress, attachment, execution or other legal process material in relation to the Company's ability to perform its payment obligations under this Agreement is levied, enforced or sued out on or against the assets of the Company and is not discharged or stayed within 90 days.
 
21.8
Licence
 
(a)
The Licence is revoked or surrendered or ceases to be held by the Company other than in circumstances which permit the Company or its Affiliates to carry on the distribution business of the Company either without a licence as a result of any change in the Act or regulatory regime or with a new licence, permitting the distribution of electricity in the authorised areas covered by the Licence, issued under the Act or pursuant to the Utilities Act, 2000; or
 
(b)
the Licence is amended in a manner that would have a Material Adverse Effect (excluding as a result of a price control review by OFGEM).
 
21.9
Balancing and Settlement Code
 
(a)
The Company ceases to be a party to the Balancing and Settlement Code Framework Agreement other than in circumstances where the Company is able to carry its distribution business; or
 
(b)
the Company breaches the Balancing and Settlement Code and such breach has or is reasonably likely to have a Material Adverse Effect other than in circumstances where the Company is able to carry on its distribution business.
 
21.10
Unlawfulness
 
It is or becomes unlawful for the Company to perform any of its obligations under this Agreement in any material respect.
 
21.11
Repudiation
 
The Company repudiates a Finance Document or evidences an intention to repudiate a Finance Document.
 
21.12
Acceleration
 
If an Event of Default is outstanding, the Facility Agent may, and must if so instructed by the Majority Lenders, by notice to the Company:
 
 
(a)
cancel the Total Commitments; and/or
 
 
(b)
declare that all or part of any amounts outstanding under the Finance Documents are:
 
 
(i)
immediately due and payable; and/or
 
 
(ii)
payable on demand by the Facility Agent acting on the instructions of the Majority Lenders.
 
Any notice given under this subclause will take effect in accordance with its terms.
 
22.
THE ADMINISTRATIVE PARTIES
 
22.1
Appointment and duties of the Facility Agent
 
(a)
Each Finance Party (other than the Facility Agent) irrevocably appoints the Facility Agent to act as its agent under the Finance Documents.
 
(b)
Each Finance Party irrevocably authorises the Facility Agent to:
 
 
(i)
perform the duties and to exercise the rights, powers and discretions that are specifically given to it under the Finance Documents, together with any other incidental rights, powers and discretions; and
 
 
(ii)
execute each Finance Document expressed to be executed by the Facility Agent.
 
(c)
The Facility Agent has only those duties which are expressly specified in the Finance Documents. Those duties are solely of a mechanical and administrative nature.
 
22.2
Role of the Mandated Lead Arranger
 
Except as specifically provided in the Finance Documents, no Mandated Lead Arranger has any obligations of any kind to any other Party in connection with any Finance Document.
 
22.3
No fiduciary duties
 
Except as specifically provided in a Finance Document, nothing in the Finance Documents makes an Administrative Party a trustee or fiduciary for any other Party or any other person. No Administrative Party need hold in trust any moneys paid to it for a Party or be liable to account for interest on those moneys.
 
22.4
Individual position of an Administrative Party
 
(a)
If it is also a Lender, each Administrative Party has the same rights and powers under the Finance Documents as any other Lender and may exercise those rights and powers as though it were not an Administrative Party.
 
(b)
Each Administrative Party may:
 
 
(i)
carry on any business with the Company or its related entities (including acting as an agent or a trustee for any other financing); and
 
 
(ii)
retain any profits or remuneration it receives under the Finance Documents or in relation to any other business it carries on with the Company or its related entities.
 
22.5
Reliance
 
The Facility Agent may:
 
 
(a)
rely on any notice or document believed by it to be genuine and correct and to have been signed by, or with the authority of, the proper person;
 
 
(b)
rely on any statement made by any person regarding any matters which may reasonably be assumed to be within his knowledge or within his power to verify;
 
 
(c)
engage, pay for and rely on professional advisers selected by it (including those representing a Party other than the Facility Agent); and
 
 
(d)
act under the Finance Documents through its personnel and agents.
 
22.6
Majority Lenders' instructions
 
(a)
The Facility Agent is fully protected if it acts on the instructions of the Majority Lenders in the exercise of any right, power or discretion or any matter not expressly provided for in the Finance Documents. Any such instructions given by the Majority Lenders will be binding on all the Lenders. In the absence of instructions, the Facility Agent may act as it considers to be in the best interests of all the Lenders.
 
(b)
The Facility Agent is not authorised to act on behalf of a Lender (without first obtaining that Lender's consent) in any legal or arbitration proceedings in connection with any Finance Document.
 
(c)
The Facility Agent may require the receipt of security satisfactory to it, whether by way of payment in advance or otherwise, against any liability or loss which it may incur in complying with the instructions of the Majority Lenders.
 
22.7
Responsibility
 
(a)
No Administrative Party is responsible to any other Finance Party for the adequacy, accuracy or completeness of:
 
 
(i)
any Finance Document or any other document; or
 
 
(ii)
any statement or information (whether written or oral) made in or supplied in connection with any Finance Document.
 
(b)
Without affecting the responsibility of the Company for information supplied by it or on its behalf in connection with any Finance Document, each Lender confirms that it:
 
 
(i)
has made, and will continue to make, its own independent appraisal of all risks arising under or in connection with the Finance Documents (including the financial condition and affairs of the Company and its related entities and the nature and extent of any recourse against any Party or its assets); and
 
 
(ii)
has not relied exclusively on any information provided to it by any Administrative Party in connection with any Finance Document.
 
(c)
(i)
Nothing in this Agreement will oblige the Facility Agent to satisfy any know your customer requirement in relation to the identity of any person on behalf of any Finance Party.
 
 
(ii)
Each Finance Party confirms to the Facility Agent that it is solely responsible for any know your customer requirements it is required to carry out and that it may not rely on any statement in relation to those requirements made by any other person.
 
22.8
Exclusion of liability
 
(a)
The Facility Agent is not liable or responsible to any other Finance Party for any action taken or not taken by it in connection with any Finance Document, unless directly caused by its gross negligence or wilful misconduct.
 
(b)
No Party may take any proceedings against any officer, employee or agent of the Facility Agent in respect of any claim it might have against the Facility Agent or in respect of any act or omission of any kind by that officer, employee or agent in connection with any Finance Document. Any officer, employee or agent of the Facility Agent may rely on this Subclause and enforce its terms under the Contracts (Rights of Third Parties) Act 1999.
 
22.9
Default
 
(a)
The Facility Agent is not obliged to monitor or enquire whether a Default has occurred. The Facility Agent is not deemed to have knowledge of the occurrence of a Default.
 
(b)
If the Facility Agent:
 
 
(i)
receives notice from a Party referring to this Agreement, describing a Default and stating that the event is a Default; or
 
 
(ii)
is aware of the non-payment of any principal or interest or any fee payable to a Lender under this Agreement,
 
it must promptly notify the Lenders.
 
22.10
Information
 
(a)
The Facility Agent must promptly forward to the person concerned the original or a copy of any document which is delivered to the Facility Agent by a Party for that person.
 
(b)
Except where a Finance Document specifically provides otherwise, the Facility Agent is not obliged to review or check the adequacy, accuracy or completeness of any document it forwards to another Party.
 
(c)
Except as provided above, the Facility Agent has no duty:
 
 
(i)
either initially or on a continuing basis to provide any Lender with any credit or other information concerning the risks arising under or in connection with the Finance Documents (including any information relating to the financial condition or affairs of the Company or its related entities or the nature or extent of recourse against any Party or its assets) whether coming into its possession before, on or after the date of this Agreement; or
 
 
(ii)
unless specifically requested to do so by a Lender in accordance with a Finance Document, to request any certificate or other document from the Company.
 
(d)
In acting as the Facility Agent, the agency division of the Facility Agent is treated as a separate entity from its other divisions and departments. Any information acquired by the Facility Agent which, in its opinion, is acquired by it otherwise than in its capacity as the Facility Agent may be treated as confidential by the Facility Agent and will not be treated as information possessed by the Facility Agent in its capacity as such.
 
(e)
The Facility Agent is not obliged to disclose to any person any confidential information supplied to it by a member of the Group solely for the purpose of evaluating whether any waiver or amendment is required to any term of the Finance Documents.
 
(f)
The Company irrevocably authorises the Facility Agent to disclose to the other Finance Parties any information which, in its opinion, is received by it in its capacity as the Facility Agent.
 
22.11
Indemnities
 
(a)
Without limiting the liability of the Company under the Finance Documents, each Lender must indemnify the Facility Agent for that Lender's Pro Rata Share of any loss or liability incurred by the Facility Agent in acting as the Facility Agent, except to the extent that the loss or liability is caused by the Facility Agent's gross negligence or wilful misconduct.
 
(b)
The Facility Agent may deduct from any amount received by it for a Lender any amount due to the Facility Agent from that Lender under a Finance Document but unpaid.
 
(c)
The Company must indemnify the Facility Agent against any loss or liability properly incurred by the Facility Agent as a result of:
 
 
(i)
investigating any event which the Facility Agent reasonably believes to be a Default; or
 
 
(ii)
acting or relying on any notice which the Facility Agent reasonably believes to be genuine, correct and appropriately authorised.
 
22.12
Compliance
 
The Facility Agent may refrain from doing anything (including disclosing any information) which might, in its opinion, constitute a breach of any law or regulation or be otherwise actionable at the suit of any person, and may do anything which, in its opinion, is necessary or desirable to comply with any law or regulation.
 
22.13
Resignation of the Facility Agent
 
(a)
The Facility Agent may resign and appoint any of its Affiliates as successor Facility Agent by giving notice to the Lenders and the Company.
 
(b)
Alternatively, the Facility Agent may resign by giving notice to the Lenders and the Company, in which case the Majority Lenders may appoint a successor Facility Agent.
 
(c)
If no successor Facility Agent has been appointed under paragraph (b) above within 30 days after notice of resignation was given, the Facility Agent may appoint a successor Facility Agent.
 
(d)
The person(s) appointing a successor Facility Agent must, if practicable, consult with the Company prior to the appointment. Any successor Facility Agent must have an office in the U.K.
 
(e)
The resignation of the Facility Agent and the appointment of any successor Facility Agent will both become effective only when the successor Facility Agent notifies all the Parties that it accepts its appointment. On giving the notification, the successor Facility Agent will succeed to the position of the Facility Agent and the term Facility Agent will mean the successor Facility Agent.
 
(f)
The retiring Facility Agent must, at its own cost, make available to the successor Facility Agent such documents and records and provide such assistance as the successor Facility Agent may reasonably request for the purposes of performing its functions as the Facility Agent under the Finance Documents.
 
(g)
Upon its resignation becoming effective, this Clause will continue to benefit the retiring Facility Agent in respect of any action taken or not taken by it in connection with the Finance Documents while it was the Facility Agent, and, subject to paragraph (f) above, it will have no further obligations under any Finance Document.
 
(h)
The Majority Lenders may, by notice to the Facility Agent, require it to resign under paragraph (b) above.
 
22.14
Relationship with Lenders
 
(a)
The Facility Agent may treat each Lender as a Lender, entitled to payments under this Agreement and as acting through its Facility Office(s) until it has received not less than five Business Days' prior notice from that Lender to the contrary.
 
(b)
The Facility Agent may at any time, and must if requested to do so by the Majority Lenders, convene a meeting of the Lenders.
 
(c)
The Facility Agent must keep a register of all the Parties and supply any other Party with a copy of the register on request. The register will include each Lender's Facility Office(s) and contact details for the purposes of this Agreement.
 
22.15
Facility Agent's management time
 
If the Facility Agent requires, any amount payable to the Facility Agent by any Party under any indemnity or in respect of any costs or expenses incurred by the Facility Agent under the Finance Documents after the date of this Agreement may include the cost of using its management time or other resources and will be calculated on the basis of such reasonable daily or hourly rates as the Facility Agent may notify to the relevant Party. This is in addition to any amount in respect of fees or expenses paid or payable to the Facility Agent under any other term of the Finance Documents.
 
22.16
Notice period
 
Where this Agreement specifies a minimum period of notice to be given to the Facility Agent, the Facility Agent may, at its discretion, accept a shorter notice period.
 
23.
EVIDENCE AND CALCULATIONS
 
23.1
Accounts
 
Accounts maintained by a Finance Party in connection with this Agreement are prima facie evidence of the matters to which they relate for the purpose of any litigation or arbitration proceedings.
 
23.2
Certificates and determinations
 
Any certification or determination by a Finance Party of a rate or amount under the Finance Documents will be, in the absence of manifest error, conclusive evidence of the matters to which it relates.
 
23.3
Calculations
 
Any interest or fee accruing under this Agreement accrues from day to day and is calculated on the basis of the actual number of days elapsed and a year of 360 or 365 days or otherwise, depending on what the Facility Agent determines is market practice.
 
24.
FEES
 
24.1
Facility Agent's fee
 
The Company must pay to the Facility Agent for its own account an agency fee in the manner agreed between the Facility Agent and the Company.
 
24.2
Arrangement fee
 
The Company must pay an arrangement and participation fee in the manner agreed between the Mandated Lead Arrangers and the Company.
 
24.3
Commitment fee
 
(a)
The Company must pay a commitment fee computed at the rate of 40% of the Margin from time to time on the undrawn, uncancelled amount of each Lender's Commitment calculated from the date of this Agreement.
 
(b)
Accrued commitment fee is payable quarterly in arrear. Accrued commitment fee is also payable to the Facility Agent for a Lender on the date its Commitment is cancelled in full.
 
24.4
Term-Out Fee
 
The Company shall pay to the Facility Agent for the Lenders a term-out fee in an amount equal to 0.1% flat of the amount of the Term-Out Loans termed-out under Clause 2.3 (Term-out Option) as calculated on the initial Final Maturity Date . The term-out fee shall be payable within five Business days after the initial Final Maturity Date.
 
24.5
Extension Fee
 
The Company must pay to each Lender whose Commitment is extended under Clause 6 (Extension Option) an extension fee in the manner agreed between the Company and the Facility Agent on behalf of those Lenders.
 
25.
INDEMNITIES AND BREAK COSTS
 
25.1
Currency indemnity
 
(a)
The Company must, as an independent obligation, indemnify each Finance Party against any loss or liability which that Finance Party incurs as a consequence of:
 
 
(i)
that Finance Party receiving an amount in respect of the Company's liability under the Finance Documents; or
 
 
(ii)
that liability being converted into a claim, proof, judgment or order,
 
in a currency other than the currency in which the amount is expressed to be payable under the relevant Finance Document.
 
(b)
Unless otherwise required by law, the Company waives any right it may have in any jurisdiction to pay any amount under the Finance Documents in a currency other than that in which it is expressed to be payable.
 
25.2
Other indemnities
 
The Company shall within 15 days of demand indemnify the Facility Agent and each Lender against any funding or other cost, loss, expense or liability in an amount certified by it in reasonable detail (together with documentation in support) sustained or incurred by it as a direct result of:
 
 
(a)
the occurrence of any Event of Default;
 
 
(b)
(other than by reason of negligence or default by a Finance Party) a Loan not being made after a Request has been delivered for that Loan; or
 
 
(c)
the receipt or recovery by any party (or the Facility Agent on its behalf) of all or any part of a Loan or overdue sum due from the Company otherwise than on the Final Maturity Date or Maturity Date (as relevant) of that Loan or, in the case of an overdue sum, the last day of an interest period relating to that overdue sum, as the case may be or a Loan or any part thereof not being prepaid in accordance with a notice of prepayment.
 
25.3
Break Costs
 
(a)
The Company must pay to each Lender its Break Costs.
 
(b)
Break Costs are the amount (if any) determined by the relevant Lender by which:
 
 
(i)
the interest which that Lender would have received for the period from the date of receipt of any part of its share in a Loan or an overdue amount to the last day of the applicable Term for that Loan or overdue amount if the principal or overdue amount received had been paid on the last day of that Term;
 
exceeds
 
 
(ii)
the amount which that Lender would be able to obtain by placing an amount equal to the amount received by it on deposit with a leading bank in the appropriate interbank market for a period starting on the Business Day following receipt and ending on the last day of the applicable Term.
 
(c)
Each Lender must supply to the Facility Agent for the Company details of the amount of any Break Costs claimed by it under this Subclause.
 
26.
EXPENSES
 
26.1
Initial costs
 
The Company must pay to each Administrative Party the amount of all costs and expenses (including legal fees) reasonably incurred by it in connection with the negotiation, preparation, printing, execution and syndication of the Finance Documents.
 
26.2
Subsequent costs
 
The Company must pay to the Facility Agent the amount of all costs and expenses (including legal fees) reasonably incurred by it in connection with:
 
 
(a)
the negotiation, preparation, printing and execution of any Finance Document (other than a Transfer Certificate) executed after the date of this Agreement; and
 
 
(b)
any amendment, waiver or consent requested by or on behalf of the Company or specifically allowed by this Agreement.
 
26.3
Enforcement costs
 
The Company must pay to each Finance Party the amount of all costs and expenses (including legal fees) incurred by it in connection with the enforcement of, or the preservation of any rights under, any Finance Document.
 
27.
AMENDMENTS AND WAIVERS
 
27.1
Procedure
 
(a)
Except as provided in this Clause, any term of the Finance Documents may be amended or waived with the agreement of the Company and the Majority Lenders. The Facility Agent may effect, on behalf of any Finance Party, an amendment or waiver allowed under this Clause.
 
(b)
The Facility Agent must promptly notify the other Parties of any amendment or waiver effected by it under paragraph (a) above. Any such amendment or waiver is binding on all the Parties.
 
27.2
Exceptions
 
(a)
An amendment or waiver which relates to:
 
 
(i)
the definition of Majority Lenders in Clause 1.1 (Definitions);
 
 
(ii)
an extension of the date of payment of any amount to a Lender under the Finance Documents;
 
 
(iii)
a reduction in the Margin or a reduction in the amount of any payment of principal, interest, fee or other amount payable to a Lender under the Finance Documents;
 
 
(iv)
an increase in, or an extension of, a Commitment or the Total Commitments;
 
 
(v)
a term of a Finance Document which expressly requires the consent of each Lender;
 
 
(vi)
the right of a Lender to assign or transfer its rights or obligations under the Finance Documents; or
 
 
(vii)
this Clause,
 
may only be made with the consent of all the Lenders.
 
(b)
An amendment or waiver which relates to the rights or obligations of an Administrative Party may only be made with the consent of that Administrative Party.
 
27.3
Change of currency
 
If a change in any currency of a country occurs (including where there is more than one currency or currency unit recognised at the same time as the lawful currency of a country), the Finance Documents will be amended to the extent the Facility Agent (acting reasonably and after consultation with the Company) determines is necessary to reflect the change.
 
27.4
Waivers and remedies cumulative
 
The rights of each Finance Party under the Finance Documents:
 
 
(a)
may be exercised as often as necessary;
 
 
(b)
are cumulative and not exclusive of its rights under the general law; and
 
 
(c)
may be waived only in writing and specifically.
 
Delay in exercising or non-exercise of any right is not a waiver of that right.
 
28.
CHANGES TO THE PARTIES
 
28.1
Assignments and transfers by the Company
 
The Company may not assign or transfer any of its rights and obligations under the Finance Documents without the prior consent of all the Lenders.
 
28.2
Assignments and transfers by Lenders
 
(a)
A Lender (the Existing Lender) may, subject to the following provisions of this Subclause, at any time assign or transfer (including by way of novation) any of its rights and obligations under this Agreement to any other person (the New Lender).
 
(b)
Unless the Company and the Facility Agent otherwise agree, a transfer of part of a Commitment or rights and obligations under this Agreement by the Existing Lender must be in a minimum amount of £5,000,000.
 
(c)
The consent of the Company is required for any assignment or transfer unless the New Lender is another Lender or an Affiliate of a Lender. The consent of the Company must not be unreasonably withheld or delayed. The Company will be deemed to have given its consent five Business Days after the Lender has requested it unless consent is expressly refused by the Company within that time.
 
(d)
The Facility Agent is not obliged to execute a Transfer Certificate until it has completed all know your customer requirements to its satisfaction. The Facility Agent must promptly notify the Existing Lender and the New Lender if there are any such requirements.
 
(e)
The Company may not withhold its consent solely because the assignment or transfer might increase the Mandatory Cost.
 
(f)
A transfer of obligations will be effective only if either:
 
 
(i)
the obligations are novated in accordance with the following provisions of this Clause; or
 
 
(ii)
the New Lender confirms to the Facility Agent and the Company in form and substance satisfactory to the Facility Agent that it is bound by the terms of this Agreement as a Lender. On the transfer becoming effective in this manner the Existing Lender will be released from its obligations under this Agreement to the extent that they are transferred to the New Lender.
 
(g)
Unless the Facility Agent otherwise agrees, the New Lender must pay to the Facility Agent for its own account, on or before the date any assignment or transfer occurs, a fee of £2,000.
 
(h)
Any reference in this Agreement to a Lender includes a New Lender but excludes a Lender if no amount is or may be owed to or by it under this Agreement.
 
28.3
Procedure for transfer by way of novations
 
(a)
In this Subclause:
 
Transfer Date means, for a Transfer Certificate, the later of:
 
 
(i)
the proposed Transfer Date specified in that Transfer Certificate; and
 
 
(ii)
the date on which the Facility Agent executes that Transfer Certificate.
 
(b)
A novation is effected if:
 
 
(i)
the Existing Lender and the New Lender deliver to the Facility Agent a duly completed Transfer Certificate; and
 
 
(ii)
the Facility Agent executes it.
 
The Facility Agent must execute as soon as reasonably practicable a Transfer Certificate delivered to it and which appears on its face to be in order.
 
(c)
Each Party (other than the Existing Lender and the New Lender) irrevocably authorises the Facility Agent to execute any duly completed Transfer Certificate on its behalf.
 
(d)
On the Transfer Date:
 
 
(i)
the New Lender will assume the rights and obligations of the Existing Lender expressed to be the subject of the novation in the Transfer Certificate in substitution for the Existing Lender; and
 
 
(ii)
the Existing Lender will be released from those obligations and cease to have those rights.
 
28.4
Limitation of responsibility of Existing Lender
 
(a)
Unless expressly agreed to the contrary, an Existing Lender is not responsible to a New Lender for the legality, validity, adequacy, accuracy, completeness or performance of:
 
 
(i)
any Finance Document or any other document; or
 
 
(ii)
any statement or information (whether written or oral) made in or supplied in connection with any Finance Document,
 
and any representations or warranties implied by law are excluded.
 
(b)
Each New Lender confirms to the Existing Lender and the other Finance Parties that it:
 
 
(i)
has made, and will continue to make, its own independent appraisal of all risks arising under or in connection with the Finance Documents (including the financial condition and affairs of the Company and its related entities and the nature and extent of any recourse against any Party or its assets) in connection with its participation in this Agreement; and
 
 
(ii)
has not relied exclusively on any information supplied to it by the Existing Lender in connection with any Finance Document.
 
(c)
Nothing in any Finance Document requires an Existing Lender to:
 
 
(i)
accept a re-transfer from a New Lender of any of the rights and obligations assigned or transferred under this Clause; or
 
 
(ii)
support any losses incurred by the New Lender by reason of the non-performance by the Company of its obligations under any Finance Document or otherwise.
 
28.5
Costs resulting from change of Lender or Facility Office
 
If:
 
 
(a)
a Lender assigns or transfers any of its rights and obligations under the Finance Documents or changes its Facility Office; and
 
 
(b)
as a result of circumstances existing at the date the assignment, transfer or change occurs, the Company would be obliged to pay a Tax Payment or an Increased Cost,
 
the Company need only pay that Tax Payment or Increased Cost to the same extent that it would have been obliged to if no assignment, transfer or change had occurred.
 
28.6
Changes to the Reference Banks
 
(a)
If a Reference Bank (or, if a Reference Bank is not a Lender, the Lender of which it is an Affiliate) ceases to be a Lender, the Facility Agent must (in consultation with the Company) appoint another Lender or an Affiliate of a Lender to replace that Reference Bank.
 
(b)
If a Reference Bank ceases to have a London office or novates or assigns all its rights and obligations under this Agreement or if any Commitments of any Reference Bank are cancelled or if Loans it has advanced are prepaid it shall be replaced as a Reference Bank by such other Bank with an office in London as the Facility Agent (after consultation with the Company) shall designate by notice to the Company and the Banks.
 
29.
DISCLOSURE OF INFORMATION
 
(a)
Each Finance Party must keep confidential any information supplied to it by or on behalf of the Company in connection with the Finance Documents. However, a Finance Party is entitled to disclose information:
 
 
(i)
which is publicly available, other than as a result of a breach by that Finance Party of this Clause;
 
 
(ii)
in connection with any legal or arbitration proceedings;
 
 
(iii)
if required to do so under any law or regulation;
 
 
(iv)
to a governmental, banking, taxation or other regulatory authority;
 
 
(v)
to its professional advisers;
 
 
(vi)
to the extent allowed under paragraph (b) below; or
 
 
(vii)
with the agreement of the Company.
 
(b)
A Finance Party may disclose to an Affiliate or any person with whom it may enter, or has entered into, any kind of transfer, participation or other agreement in relation to this Agreement (a participant):
 
 
(i)
a copy of any Finance Document; and
 
 
(ii)
any information which that Finance Party has acquired under or in connection with any Finance Document.
 
However, before a participant may receive any confidential information, it must agree with the relevant Finance Party to keep that information confidential on the terms of paragraph (a) above.
 
This Clause supersedes any previous confidentiality undertaking given by a Finance Party in connection with this Agreement prior to it becoming a Party.
 
30.
SET-OFF
 
A Finance Party may set off any matured obligation owed to it by the Company under the Finance Documents (to the extent beneficially owned by that Finance Party) against any obligation (whether or not matured) owed by that Finance Party to the Company, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Finance Party may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.
 
31.
PRO RATA SHARING
 
31.1
Redistribution
 
If any amount owing by the Company under this Agreement to a Lender (the recovering Lender) is discharged by payment, set-off or any other manner other than through the Facility Agent under this Agreement (a recovery), then:
 
 
(a)
the recovering Lender must, within three Business Days, supply details of the recovery to the Facility Agent;
 
 
(b)
the Facility Agent must calculate whether the recovery is in excess of the amount which the recovering Lender would have received if the recovery had been received by the Facility Agent under this Agreement; and
 
 
(c)
the recovering Lender must pay to the Facility Agent an amount equal to the excess (the redistribution).
 
31.2
Effect of redistribution
 
(a)
The Facility Agent must treat a redistribution as if it were a payment by the Company under this Agreement and distribute it among the Lenders, other than the recovering Lender, accordingly.
 
(b)
When the Facility Agent makes a distribution under paragraph (a) above, the recovering Lender will be subrogated to the rights of the Finance Parties which have shared in that redistribution.
 
(c)
If and to the extent that the recovering Lender is not able to rely on any rights of subrogation under paragraph (b) above, the Company will owe the recovering Lender a debt which is equal to the redistribution, immediately payable and of the type originally discharged.
 
(d)
If:
 
 
(i)
a recovering Lender must subsequently return a recovery, or an amount measured by reference to a recovery, to the Company; and
 
 
(ii)
the recovering Lender has paid a redistribution in relation to that recovery,
 
each Finance Party must reimburse the recovering Lender all or the appropriate portion of the redistribution paid to that Finance Party, together with interest for the period while it held the re-distribution. In this event, the subrogation in paragraph (b) above will operate in reverse to the extent of the reimbursement.
 
31.3
Exceptions
 
Notwithstanding any other term of this Clause, a recovering Lender need not pay a redistribution to the extent that:
 
 
(a)
it would not, after the payment, have a valid claim against the Company in the amount of the redistribution; or
 
 
(b)
it would be sharing with another Finance Party any amount which the recovering Lender has received or recovered as a result of legal or arbitration proceedings, where:
 
 
(c)
the recovering Lender notified the Facility Agent of those proceedings; and
 
 
(d)
the other Finance Party had an opportunity to participate in those proceedings but did not do so or did not take separate legal or arbitration proceedings as soon as reasonably practicable after receiving notice of them.
 
32.
SEVERABILITY
 
If a term of a Finance Document is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect:
 
 
(a)
the legality, validity or enforceability in that jurisdiction of any other term of the Finance Documents; or
 
 
(b)
the legality, validity or enforceability in other jurisdictions of that or any other term of the Finance Documents.
 
33.
COUNTERPARTS
 
Each Finance Document may be executed in any number of counterparts. This has the same effect as if the signatures on the counterparts were on a single copy of the Finance Document.
 
34.
NOTICES
 
34.1
In writing
 
(a)
Any communication in connection with a Finance Document must be in writing and, unless otherwise stated, may be given:
 
 
(i)
in person, by post, or fax or any other electronic communication approved by the Facility Agent; or
 
 
(ii)
if between the Facility Agent and a Lender and the Facility Agent and the Lender agree, by e-mail or other electronic communication.
 
(b)
For the purpose of the Finance Documents, an electronic communication will be treated as being in writing.
 
(c)
Unless it is agreed to the contrary, any consent or agreement required under a Finance Document must be given in writing.
 
34.2
Contact details
 
(a)
Except as provided below, the contact details of each Party for all communications in connection with the Finance Documents are those notified by that Party for this purpose to the Facility Agent on or before the date it becomes a Party.
 
(b)
The contact details of the Company for this purpose are:
 
 
Address:
 
Avonbank,
 
Feeder Road,
 
Bristol,
 
BS2 0TB
 
Fax number:
 
+44 (0) 1179 332108
E-mail:
irwilliams@westernpower.co.uk
Attention:
Ian Williams.
 
(c)
The contact details of the Facility Agent for this purpose are:
 
 
Address:
 
Loans Administration Department
 
Lloyds TSB Bank plc
 
Bank House
 
Wine Street
  Bristol
 
S1 2AN
 
Fax number:
 
+44 (0)1179 233367
Attention:
The Manager.
 
(d)
Any Party may change its contact details by giving five Business Days' notice to the Facility Agent or (in the case of the Facility Agent) to the other Parties.
 
(e)
Where a Party nominates a particular department or officer to receive a communication, a communication will not be effective if it fails to specify that department or officer.
 
34.3
Effectiveness
 
(a)
Except as provided below, any communication in connection with a Finance Document will be deemed to be given as follows:
 
 
(i)
if delivered in person, at the time of delivery;
 
 
(ii)
if posted, five days after being deposited in the post, postage prepaid, in a correctly addressed envelope; and
 
 
(iii)
if by fax, when received in legible form.
 
(b)
A communication given under paragraph (a) above but received on a non-working day or after business hours in the place of receipt will only be deemed to be given on the next working day in that place.
 
(c)
A communication to the Facility Agent will only be effective on actual receipt by it.
 
34.4
The Company
 
All formal communication under the Finance Documents to or from the Company must be sent through the Facility Agent.
 
35.
LANGUAGE
 
(a)
Any notice given in connection with a Finance Document must be in English.
 
(b)
Any other document provided in connection with a Finance Document must be:
 
 
(i)
in English; or
 
 
(ii)
(unless the Facility Agent otherwise agrees) accompanied by a certified English translation. In this case, the English translation prevails unless the document is a statutory or other official document.
 
36.
GOVERNING LAW
 
This Agreement is governed by English law.
 
37.
ENFORCEMENT
 
37.1
Jurisdiction
 
(a)
The English courts have exclusive jurisdiction to settle any dispute in connection with any Finance Document.
 
(b)
The English courts are the most appropriate and convenient courts to settle any such dispute and the Company waives objection to those courts on the grounds of inconvenient forum or otherwise in relation to proceedings in connection with any Finance Document.
 
(c)
This Clause is for the benefit of the Finance Parties only. To the extent allowed by law, a Finance Party may take:
 
 
(i)
proceedings in any other court; and
 
 
(ii)
concurrent proceedings in any number of jurisdictions.
 
THIS AGREEMENT has been entered into on the date stated at the beginning of this Agreement.


 
SCHEDULE 1 
 
ORIGINAL PARTIES
 
 
Name of Original Lender
Commitments
   
Barclays Bank PLC
£33,333,333
   
Bayerische Landesbank acting through its London branch
£33,333,333
   
Lloyds TSB Bank plc
£33,333,334
   
   
Total Tranche A Commitments
£100,000,000


 
SCHEDULE 2 
 
CONDITIONS PRECEDENT DOCUMENTS
 
Company
 
1.
A certified copy of the constitutional documents of the Company.
 
2.
A certified copy of a resolution of the board of directors or a committee of the board of directors of the Company approving the terms of, and the transactions contemplated by, the Finance Documents.
 
3.
A specimen of the signature of each person authorised on behalf of the Company to execute or witness the execution of any Finance Document or to sign or send any document or notice in connection with any Finance Document.
 
4.
A certificate of the Company (signed by a director) confirming that borrowing the Total Commitments would not cause any borrowing limit binding on the Company to be exceeded.
 
Legal opinions
 
A legal opinion of Allen & Overy LLP, legal advisers to the Company addressed to the Finance Parties.
 
Other documents and evidence
 
1.
Evidence that all fees and expenses then due and payable from the Company under this Agreement have been or will be paid no later than the first Utilisation Date.
 
2.
The Original Financial Statements.
 



 
SCHEDULE 3 
 
FORM OF REQUEST
 
To: LLOYDS TSB BANK PLC as Facility Agent
 
From: [                 ]
 
Date: [                 ]
 
 
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC - £100,000,000 Credit Agreement
dated [          ] 2006 (as amended and restated from time to time) (the Agreement)
 
1.
We refer to the Agreement. This is a Request.
 
2.
We wish to borrow a Loan on the following terms:
 
 
(a)
Utilisation Date: [                 ]
 
 
(b)
Amount/currency: [                 ]
 
 
(c)
Term: [                 ].
 
3.
Our payment instructions are: [                 ].
 
4.
We confirm that each condition precedent under the Agreement which must be satisfied on the date of this Request is so satisfied.
 
5.
We confirm that as at [relevant testing date] Consolidated EBITDA was [                 ] and Interest Payable was [                 ]; therefore, the ratio of Consolidated EBITDA to Interest Payable was [                 ] to 1.
 
6.
We confirm that as at [relevant testing date] Regulatory Asset Base was [           ] and Total Gross Debt was [                ]; therefore, Regulatory Asset Base exceeded Total Gross Debt by [               ].
 
7.
This Request is irrevocable.
 
By:
 
[                 ]


 
SCHEDULE 4 
 
CALCULATION OF THE MANDATORY COST
 
1.
General
 
The Mandatory Cost is the weighted average of the rates calculated below by the Facility Agent on the first day of a Term. The Facility Agent must distribute each amount of Mandatory Cost among the Lenders on the basis of the rate for each Lender.
 
2.
For a Lender lending from a Facility Office in the U.K.
 
(a)
The relevant rate for a Lender lending from a Facility Office in the U.K. is the arithmetic mean of the rates notified by that Lender to the Facility Agent and calculated in accordance with the following formulae:
 
for a Loan in Sterling: 

AB + C(B-D) + E x 0.01
   100-(A+C)
 % per annum

for any other Loan:

 E x 0.01 
   300 
% per annum
 
where on the day of application of the formula:

 
 A
is the percentage of the Lender's eligible liabilities (in excess of any stated minimum) which the Bank of England requires it to hold on a non-interest-bearing deposit account in accordance with its cash ratio requirements;
     
 
 B
is LIBOR for that Term;
     
 
 C
is the percentage of the Lender's eligible liabilities which the Bank of England requires it to place as a special deposit;
     
 
 D
is the interest rate per annum allowed by the Bank of England on a special deposit; and
     
 
 E
is the charge payable by the Lender to the Financial Services Authority under the fees rules (but, for this purpose, calculated by the Facility Agent on a notional basis as being the average of the fee tariffs within fee-block Category A1 (Deposit acceptors) of the fees rules, applying any applicable discount and ignoring any minimum fee required under the fees rules) and expressed in pounds per £1 million of the tariff base of that Lender.
 
(b)
For the purposes of this paragraph 2:
 
 
(i)
eligible liabilities and special deposit have the meanings given to them at the time of application of the formula by the Bank of England;
 
 
(ii)
fees rules means the then current rules on periodic fees in the Supervision Manual of the FSA Handbook; and
 
 
(iii)
tariff base has the meaning given to it in the fees rules.
 
(c)
(i)
In the application of the formulae, A, B, C and D are included as figures and not as percentages, e.g. if A = 0.5% and B = 15%, AB is calculated as 0.5 x 15. A negative result obtained by subtracting D from B is taken as zero.
 
 
(ii)
Each rate calculated in accordance with a formula is, if necessary, rounded upward to four decimal places.
 
(d)
(i)
Each Lender must supply to the Facility Agent the information required by it to make a calculation of the rate for that Lender. The Facility Agent may assume that this information is correct in all respects.
 
 
(ii)
If a Lender fails to do so, the Facility Agent may assume that the Lender's obligations in respect of cash ratio deposits, special deposits and the fees rules are the same as those of a typical bank from its jurisdiction of incorporation with a Facility Office in the same jurisdiction as its Facility Office.
 
 
(iii)
The Facility Agent has no liability to any Party if its calculation over or under compensates any Lender.
 
3.
For a Lender lending from a Facility Office in a Participating Member State
 
(a)
The relevant rate for a Lender lending from a Facility Office in a Participating Member State is the percentage rate per annum notified by that Lender to the Facility Agent as its cost of complying with the minimum reserve requirements of the European Central Bank.
 
(b)
If a Lender fails to specify a rate under paragraph 3(a) above, the Facility Agent will assume that the Lender has not incurred any such cost.
 
4.
Changes
 
The Facility Agent may, after consultation with the Company and the Lenders, notify all the Parties of any amendment to this Schedule which is required to reflect:
 
 
(a)
any change in law or regulation; or
 
 
(b)
any requirement imposed by the Bank of England, the Financial Services Authority or the European Central Bank (or, in any case, any successor authority).
 
Any notification will be, in the absence of manifest error, conclusive and binding on all the Parties.


 
SCHEDULE 5 
 
FORM OF TRANSFER CERTIFICATE
 
 
 
To: LLOYDS TSB BANK PLC as Facility Agent
 
From: [THE EXISTING LENDER] (the Existing Lender) and [THE NEW LENDER] (the New Lender)
 
Date: [               ]
 
 
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC - £100,000,000 Credit Agreement
dated [        ] 2006 (as amended and restated from time to time) (the Agreement)
 
We refer to the Agreement. This is a Transfer Certificate.
 
 
1.   The Existing Lender transfers by novation to the New Lender the Existing Lender's rights and obligations
       referred to in the Schedule below in accordance with the terms of the Agreement.
 
 
2.   The proposed Transfer Date is [      ].
 
 
3.    The administrative details of the New Lender for the purposes of the Agreement are set out in the Schedule.
 
 
4.    Transfer Certificate is governed by English law.


 
THE SCHEDULE
 
Rights and obligations to be transferred by novation
[insert relevant details, including applicable Commitment (or part)]
 
Administrative details of the New Lender
[insert details of Facility Office, address for notices and payment details etc.]
 
 
 
 
 
[EXISTING LENDER]
 
[NEW LENDER]
 
By:
By:
 
The Transfer Date is confirmed by the Facility Agent as [                  ].
 
[               ]
 
By:


 
SCHEDULE 6 
 
FORM OF COMPLIANCE CERTIFICATE
 
To: LLOYDS TSB BANK PLC as Facility Agent
 
From: WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
 
Date: [                     ]
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC - £100,000,000 Credit Agreement
dated [         ] 2006 (as amended and restated from time to time) (the Agreement)
 
1.
We refer to the Agreement. This is a Compliance Certificate.
 
2.
We confirm that as at [relevant testing date], Consolidated EBITDA was [                     ] and Interest Payable was [                     ], therefore the ratio of Consolidated EBITDA to Interest Payable was [                     ] to 1.
 
3.
We confirm that as at [relevant testing date], Regulatory Asset Base was [                     ] and Total Gross Debt was [                     ]; therefore Regulatory Asset Base exceeded Total Gross Debt by [                     ].
 
4.
We set out below calculations establishing the figures in paragraph 2 above:
 
[                     ].
 
5.
We confirm that the following companies were Material Subsidiaries at [relevant testing date]:
 
[                     ].
 
6.
[We confirm that no Default is outstanding as at [relevant testing date].] 1
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
 
By: 
 
 
1  If this statement cannot be made, the certificate should identify any Default that is outstanding and the steps, if any, being taken to remedy it.


 
SIGNATORIES
 
 
 
Company
 
WESTERN POWER DISTRIBUTION (SOUTH WEST) PLC
 
By:
 
 

Mandated Lead Arrangers
 
BARCLAYS CAPITAL
 
By:
 

 
BAYERISCHE LANDESBANK
acting through its London Branch
 
By:
 

 
LLOYDS TSB BANK PLC
 
By:
 

 
Original Lenders
 
BARCLAYS BANK PLC
 
By:
 

 
BAYERISCHE LANDESBANK
acting through its London Branch
 
By:
 



LLOYDS TSB BANK PLC
 
By:
 

 

Facility Agent
 
LLOYDS TSB BANK PLC
 
By:


 EX-10.Y 15 ppl10-k2006exhibit10y.htm EXHIBIT 10(Y) Exhibit 10(y)
 
 
 
Exhibit 10(y)
 
 
 
AGREEMENT
 
24 JANUARY 2007
 
CREDIT FACILITY
 
for
 
WESTERN POWER DISTRIBUTION HOLDINGS LIMITED
 
arranged by
 
BARCLAYS CAPITAL
BAYERISCHE LANDESBANK acting through its London Branch
LLOYDS TSB BANK plc
as Mandated Lead Arrangers
 
with
 
LLOYDS TSB BANK plc
as Facility Agent
 
£150,000,000
 



 
CONTENTS
Clause
Page

1.
Interpretation
1
2.
Facilities
9
3.
Purpose
10
4.
Conditions Precedent
10
5.
Utilisation
11
6.
Extension Option
11
7.
Optional Currencies
12
8.
Repayment of Loans
14
9.
Prepayment and Cancellation
14
10.
Interest
17
11.
Terms
18
12.
Market Disruption
19
13.
Taxes
20
14.
Increased Costs
22
15.
Mitigation
23
16.
Payments
24
17.
Representations
26
18.
Information Covenants
28
19.
Financial Covenants
31
20.
General Covenants
32
21.
Default
35
22.
The Administrative Parties
38
23.
Evidence and Calculations
43
24.
Fees
43
25.
Indemnities and Break Costs
44
26.
Expenses
46
27.
Amendments and Waivers
46
28.
Changes to the Parties
47
29.
Disclosure of Information
50
30.
Set-Off
50
31.
Pro Rata Sharing
50
32.
Severability
52
33.
Counterparts
52
34.
Notices
52
35.
Language
53
36.
Governing Law
53
37.
Enforcement
54



Schedule
Page
 
1.
Original Parties
55
2.
Conditions Precedent Documents
56
3.
Form of Request
57
4.
Calculation of the Mandatory Cost
58
5.
Form of Transfer Certificate
60
6.
Form of Compliance Certificate
62

Signatories
63

 
THIS AGREEMENT is dated 24 January, 2007
 
BETWEEN:
 
(1)
WESTERN POWER DISTRIBUTION HOLDINGS LIMITED (registered in England and Wales with number 4267536) (the Borrower);
 
(2)
BARCLAYS CAPITAL, BAYERISCHE LANDESBANK acting through its London Branch and LLOYDS TSB BANK plc each in this capacity as a Mandated Lead Arranger and together in this capacity, the Mandated Lead Arrangers;
 
(3)
THE FINANCIAL INSTITUTIONS listed in Schedule 1 (Original Parties) as original lenders (the Original Lenders);
 
(4)
LLOYDS TSB BANK PLC as facility agent (in this capacity the Facility Agent);
 

 
IT IS AGREED as follows:
 
1.
INTERPRETATION
 
1.1
Definitions
 
In this Agreement:
 
Act means the Electricity Act 1989 and, unless the context otherwise requires, all subordinate legislation made pursuant thereto.
 
Administrative Party means a Mandated Lead Arranger or the Facility Agent.
 
Affiliate means a Subsidiary or a Holding Company of a person or any other Subsidiary of that Holding Company.
 
Applicable Accounting Principles means those accounting principles, standards and practices generally accepted in the United Kingdom and the accounting and reporting requirements of the Companies Act 1985, in each case as used in the Original Financial Statements.
 
Authority means The Gas and Electricity Markets Authority established under Section 1 of the Utilities Act 2000.
 
Availability Period means the period from and including the date of this Agreement to and including the Final Maturity Date.
 
Balancing and Settlement Code means the document, as modified from time to time, setting out the electricity balancing and settlement arrangements designated by the Secretary of State and adopted by The National Grid Company plc (Registered No. 2366977) or its successor pursuant to its transmission licence.
 
Balancing and Settlement Code Framework means the agreement of that title, in the form approved by the Secretary of State, as amended from time to time, to which each Distribution Company is a party and by which the Balancing and Settlement Code is made binding upon that Distribution Company.
 
Break Costs means the amount (if any) which a Lender is entitled to receive under this Agreement as compensation if any part of a Loan or overdue amount is prepaid.
 
Business Day means a day (other than a Saturday or a Sunday) on which commercial banks are open in London and:
 
 
(a)
if on that day a payment in or a purchase of a currency (other than euro) is to be made, the principal financial centre of the country of that currency; or
 
 
(b)
if on that day a payment in or purchase of euro is to be made, which is also a TARGET Day.
 
Commitment means:
 
 
(a)
for an Original Lender, the amount set opposite its name in Schedule 1 (Original Parties) under the heading "Commitments" and the amount of any other Commitment it acquires; and
 
 
(b)
for any other Lender, the amount of any commitment it acquires,
 
to the extent not cancelled, transferred or reduced under this Agreement.
 
Compliance Certificate means a certificate substantially in the form of Schedule 6 (Form of Compliance Certificate) setting out, among other things, calculations of the financial covenants.
 
Default means:
 
 
(a)
an Event of Default; or
 
 
(b)
an event which would be (with the lapse of time, the expiry of a grace period, the giving of notice or the making of any determination under the Finance Documents or any combination of them) an Event of Default.
 
Distribution Company means Western Power Distribution (South West) PLC, a public limited company registered in England and Wales under the Companies Act 1985 (registered number 02366894) or Western Power Distribution (South Wales) PLC, registered in England and Wales under the Companies Act 1985 (registered number 02366985).
 
Environmental Law means all regulations and other laws concerning the protection of human health or the environment;
 
euro or euros or € means the single currency of the Participating Member States.
 
Event of Default means an event specified as such in this Agreement.
 
Existing Tranche C Facility means the tranche C revolving credit facility described in clause 2.3 (Tranche C Facility) of and made available under the £400,000,000 credit facility dated 18 October 2002 and made, among others, between Western Power Distribution (South West) PLC and Lloyds TSB Bank plc, as Facility Agent (as amended and restated from time to time).
 
Extended Final Maturity Date means the date specified as such in the notice exercising the Extension Option provided by the Borrower under Clause 6 (Extension Option), being a date falling no later than the seventh anniversary of this Agreement.
 
Facility means the revolving credit facility made available under this Agreement and described in Clause 2.1 (Facility).
 
Facility Office means the office(s) notified by a Lender to the Facility Agent:
 
 
(a)
on or before the date it becomes a Lender; or
 
 
(b)
by not less than five Business Days' notice,
 
as the office(s) through which it will perform its obligations under this Agreement.
 
Fee Letter means any letter entered into by reference to this Agreement between one or more Administrative Parties and the Borrower setting out the amount of certain fees referred to in the Agreement.
 
Final Maturity Date means
 
 
(a)
the fifth anniversary of the date of this Agreement; or
 
 
(b)
if the extension option in Clause 6 (Extension Option) is exercised the Extended Final Maturity Date.
 
Finance Document means:
 
 
(a)
this Agreement;
 
 
(b)
a Fee Letter;
 
 
(c)
a Transfer Certificate; or
 
 
(d)
any other document designated as such by the Facility Agent and the Borrower.
 
Finance Party means a Lender or an Administrative Party.
 
Financial Indebtedness means any indebtedness for or in respect of:
 
 
(a)
moneys borrowed;
 
 
(b)
any acceptance credit;
 
 
(c)
any bond, note, debenture, loan stock or other similar instrument;
 
 
(d)
any finance or capital lease;
 
 
(e)
receivables sold or discounted (otherwise than on a non-recourse basis);
 
 
(f)
the acquisition cost of any asset to the extent payable after its acquisition or possession by the party liable where the deferred payment is arranged primarily as a method of raising finance or financing the acquisition of that asset;
 
 
(g)
any derivative transaction protecting against or benefiting from fluctuations in any rate or price (and, except for non-payment of an amount, the then mark to market value of the derivative transaction will be used to calculate its amount);
 
 
(h)
any other transaction (including any forward sale or purchase agreement) which has the commercial effect of a borrowing;
 
 
(i)
any counter-indemnity obligation in respect of any guarantee, indemnity, bond, letter of credit or any other instrument issued by a bank or financial institution; or
 
 
(j)
any guarantee, indemnity or similar assurance against financial loss of any person in respect of any item referred to in paragraphs (a) to (i) above.
 
Group means the Borrower and its Subsidiaries.
 
Holding Company means a holding company within the meaning of section 736 of the Companies Act 1985 as amended by the Limited Liability Partnership Regulations 2001.
 
Increased Cost means:
 
 
(a)
an additional or increased cost;
 
 
(b)
a reduction in the rate of return under a Finance Document or on its overall capital; or
 
 
(c)
a reduction of an amount due and payable under any Finance Document,
 
which is incurred or suffered by a Finance Party or any of its Affiliates but only to the extent attributable to that Finance Party having entered into any Finance Document or funding or performing its obligations under any Finance Document.
 
Lender means:
 
 
(a)
an Original Lender; or
 
 
(b)
any person which becomes a Lender after the date of this Agreement.
 
LIBOR means for a Term of any Loan or overdue amount:
 
 
(a)
the applicable Screen Rate; or
 
 
(b)
if no Screen Rate is available for the relevant currency or Term of that Loan or overdue amount, the arithmetic mean (rounded upward to four decimal places) of the rates, as supplied to the Facility Agent at its request, quoted by the Reference Banks to leading banks in the London interbank market,
 
as of 11.00 a.m. on the Rate Fixing Day for the offering of deposits in the currency of that Loan or overdue amount for a period comparable to that Term.
 
Licence means:
 
 
(a)
the electricity distribution licence made and treated as granted to each Distribution Company under Section 6(1)(c) of the Act pursuant to a licensing scheme made by the Secretary of State under Part II of Schedule 7 to the Utilities Act 2000 on 28 September 2001; or
 
 
(b)
by any statutory amendment or replacement licence or licences granted pursuant to the Utilities Act 2000 which permit a Distribution Company to distribute electricity in the Authorised Area;
 
Loan means, unless otherwise stated in this Agreement, the principal amount of each borrowing under this Agreement or the principal amount outstanding of that borrowing.
 
Majority Lenders means, at any time, Lenders:
 
 
(a)
whose share in the outstanding Loans and whose undrawn Commitments then aggregate 662/3% or more of the aggregate of all the outstanding Loans and the undrawn Commitments of all the Lenders;
 
 
(b)
if there is no Loan then outstanding, whose undrawn Commitments then aggregate 662/3% or more of the Total Commitments; or
 
 
(c)
if there is no Loan then outstanding and the Total Commitments have been reduced to zero, whose Commitments aggregated 662/3% or more of the Total Commitments immediately before the reduction.
 
       Mandatory Cost means the cost of complying with certain regulatory requirements, expressed as a percentage rate per annum and calculated by the Facility Agent under Schedule 4 (Calculation of the Mandatory Cost).
 
Margin means the percentage rate per annum determined to be the Margin in accordance with Clause 10.5(a) (Margin), as adjusted from time to time in accordance with Clauses 10.5(b) to 10.5(e) (Margin).
 
Material Adverse Effect means something having a material adverse effect on the Borrower's ability to perform its payment obligations under this Agreement.
 
Maturity Date means the last day of the Term of a Loan.
 
Moody's means Moody's Investors' Services, Inc. (or any successor to its ratings business).
 
OFGEM means the Office of Gas and Electricity Markets.
 
Optional Currency means any currency (other than Sterling) in which a Loan may be denominated under this Agreement.
 
Original Financial Statements means the audited financial statements of the Borrower for the year ended 31 March 2006.
 
Participating Member States means a member state of the European Community that adopts the euro as its lawful currency under the legislation of the European Union for European Monetary Union.
 
Party means a party to this Agreement.
 
Pro Rata Share means:
 
 
(a)
for the purpose of determining a Lender's share in a utilisation of the Facility, the proportion which its Commitment under the Facility bears to all the Commitments under the Facility; and
 
 
(b)
for any other purpose on a particular date:
 
 
(i)
the proportion which a Lender's share of the Loans (if any) bears to all the Loans;
 
 
(ii)
if there is no Loan outstanding on that date, the proportion which its Commitment bears to the Total Commitments on that date; or
 
 
(iii)
if the Total Commitments have been cancelled, the proportion which its Commitments bore to the Total Commitments immediately before being cancelled.
 
For the purpose of subparagraph (iii) above, the Facility Agent will determine, in the case of a dispute whether the term in any case relates to the Facility.
 
Rate Fixing Day means:
 
 
(a)
the first day of a Term for a Loan denominated in Sterling; or
 
 
(b)
the second Business Day before the first day of a Term for a Loan denominated in any other currency;
 
or such other day as the Facility Agent determines is generally treated as the rate fixing day by market practice in the relevant interbank market.
 
Reference Banks means the Facility Agent, Barclays Bank PLC and Bayerische Landesbank acting through its London Branch and any other bank or financial institution appointed as such by the Facility Agent under this Agreement.
 
Repeating Representations means the representations which are deemed to be repeated under this Agreement.
 
Request means a request for a Loan, substantially in the form of Schedule 3 (Form of Request).
 
Rollover Loan means one or more Loans:
 
 
(a)
to be made on the same day that a maturing Loan is due to be repaid;
 
 
(b)
the aggregate amount of which is equal to or less than the maturing Loan;
 
 
(c)
in the same currency as the maturing Loan; and
 
 
(d)
to be made for the purpose of refinancing a maturing Loan.
 
S&P means Standard & Poor's Corporation (a division of the McGraw-Hill Companies, Inc) (or any successor to its ratings business).
 
Screen Rate means the British Bankers Association Interest Settlement Rate (if any) for the relevant currency and Term displayed on the appropriate page of the Telerate screen selected by the Facility Agent. If the relevant page is replaced or the service ceases to be available, the Facility Agent (after consultation with the Borrower and the Lenders) may specify another page or service displaying the appropriate rate.
 
Secretary of State means the Secretary of State for Trade and Industry.
 
Security Interest means any mortgage, pledge, lien, charge, assignment, hypothecation or security interest or any other agreement or arrangement having a similar effect.
 
Sterling and £ mean the lawful currency of the United Kingdom.
 
Subsidiary means:
 
 
(a)
a subsidiary within the meaning of section 736 of the Companies Act 1985 as amended by the Limited Liability Partnership Regulations 2001; and
 
 
(b)
unless the context otherwise requires, a subsidiary undertaking within the meaning of section 258 of the Companies Act 1985 as amended by the Limited Liability Partnership Regulations 2001.
 
TARGET Day means a day on which the Trans-European Automated Real-time Gross Settlement Express Transfer payment system is open for the settlement of payments in euro.
 
Tax means any tax, levy, impost, duty or other charge or withholding of a similar nature (including any related penalty or interest).
 
Tax Deduction means a deduction or withholding for or on account of Tax from a payment under a Finance Document.
 
Tax Payment means a payment made by the Borrower to a Finance Party in any way relating to a Tax Deduction or under any indemnity given by the Borrower in respect of Tax under any Finance Document.
 
Term means each period determined under this Agreement by reference to which interest on a Loan or an overdue amount is calculated.
 
Total Commitments means the aggregate of the Commitments of all the Lenders being the total amount specified as such in Schedule 1 (Original Parties) at the date of this Agreement.
 
Transfer Certificate means a certificate, substantially in the form of Schedule 5 (Form of Transfer Certificate), with such amendments as the Facility Agent may approve or reasonably require or any other form agreed between the Facility Agent and the Borrower.
 
U.K. means the United Kingdom.
 
U.S. Dollars and U.S.$ means the lawful currency for the time being of the United States of America.
 
Utilisation Date means each date on which the Facility is utilised.
 
1.2
Construction
 
(a)
The following definitions have the meanings given to them in Clause 19.1 (Definitions):
 
 
(i)
Consolidated EBITDA;
 
 
(ii)
Interest Payable;
 
 
(iii)
Measurement Period;
 
 
(iv)
Regulatory Asset Base; and
 
 
(v)
Total Net Debt.
 
(b)
In this Agreement, unless the contrary intention appears, a reference to:
 
 
(i)
an amendment includes a supplement, novation, restatement or re-enactment and amended will be construed accordingly;
 
assets includes present and future properties, revenues and rights of every description;
 
an authorisation includes an authorisation, consent, approval, resolution, licence, exemption, filing, registration or notarisation;
 
Barclays Capital is a reference to Barclays Capital, the investment banking division of Barclays Bank PLC;
 
disposal means a sale, transfer, grant, lease or other disposal, whether voluntary or involuntary, and dispose will be construed accordingly;
 
indebtedness includes any obligation (whether incurred as principal or as surety) for the payment or repayment of money;
 
know your customer requirements are the identification checks that a Finance Party requests in order to meet its obligations under any applicable law or regulation to identify a person who is (or is to become) its customer;
 
a person includes any individual, company, corporation, unincorporated association or body (including a partnership, trust, joint venture or consortium), government, state, agency, organisation or other entity whether or not having separate legal personality;
 
a regulation includes any regulation, rule, official directive, request or guideline (whether or not having the force of law but, if not having the force of law, being of a type with which any person to which it applies is accustomed to comply) of any governmental, inter-governmental or supranational body, agency, department or regulatory, self-regulatory or other authority or organisation;
 
the Winding-up of a person also includes the administration, dissolution or liquidation or other like process of that person, any composition or arrangement with the creditors, amalgamation, reconstruction, reorganisation or consolidation pursuant to Part XIII of the Companies Act 1985 proposed or carried out in respect of that person or a company voluntary arrangement pursuant to the Insolvency Act 1986 carried out or proposed in respect of that person;
 
 
(ii)
a currency is a reference to the lawful currency for the time being of the relevant country;
 
 
(iii)
a Default being outstanding means that it has not been remedied or waived;
 
 
(iv)
a provision of law is a reference to that provision as extended, applied, amended or re-enacted and includes any subordinate legislation;
 
 
(v)
a Clause, a Subclause or a Schedule is a reference to a clause or subclause of, or a schedule to, this Agreement;
 
 
(vi)
a person includes its successors in title, permitted assigns and permitted transferees;
 
 
(vii)
a Finance Document or another document is a reference to that Finance Document or other document as amended; and
 
 
(viii)
a time of day is a reference to London time.
 
(c)
Unless the contrary intention appears, a reference to a month or months is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month or the calendar month in which it is to end, except that:
 
 
(i)
if the numerically corresponding day is not a Business Day, the period will end on the next Business Day in that month (if there is one) or the preceding Business Day (if there is not);
 
 
(ii)
if there is no numerically corresponding day in that month, that period will end on the last Business Day in that month; and
 
 
(iii)
notwithstanding subparagraph (i) above, a period which commences on the last Business Day of a month will end on the last Business Day in the next month or the calendar month in which it is to end, as appropriate.
 
(d)
Unless expressly provided to the contrary in a Finance Document, a person who is not a party to a Finance Document may not enforce any of its terms under the Contracts (Rights of Third Parties) Act 1999 and notwithstanding any term of any Finance Document, the consent of any third party is not required for any variation (including any release or compromise of any liability) or termination of that Finance Document.
 
(e)
Unless the contrary intention appears:
 
 
(i)
a reference to a Party will not include that Party if it has ceased to be a Party under this Agreement;
 
 
(ii)
a word or expression used in any other Finance Document or in any notice given in connection with any Finance Document has the same meaning in that Finance Document or notice as in this Agreement; and
 
 
(iii)
any obligation of the Borrower under the Finance Documents which is not a payment obligation remains in force for so long as any payment obligation of the Borrower is or may be outstanding under the Finance Documents.
 
(f)
The headings in this Agreement do not affect its interpretation.
 
2.
FACILITIES
 
2.1
Facility
 
Subject to the terms of this Agreement, the Lenders make available to the Borrower a revolving loan facility with extension options denominated in Sterling in an aggregate amount equal to the Total Commitments.
 
2.2
Nature of a Finance Party's rights and obligations
 
Unless otherwise agreed by all the Finance Parties:
 
 
(a)
the obligations of a Finance Party under the Finance Documents are several;
 
 
(b)
failure by a Finance Party to perform its obligations does not affect the obligations of any other Party under the Finance Documents;
 
 
(c)
no Finance Party is responsible for the obligations of any other Finance Party under the Finance Documents;
 
 
(d)
the rights of a Finance Party under the Finance Documents are separate and independent rights;
 
 
(e)
a debt arising under the Finance Documents to a Finance Party is a separate and independent debt; and
 
 
(f)
a Finance Party may, except as otherwise stated in the Finance Documents, separately enforce those rights.
 
3.
PURPOSE
 
3.1
Loans
 
Each Loan may only be used for general corporate purposes and in compliance with any Licence.
 
3.2
No obligation to monitor
 
No Finance Party is bound to monitor or verify the utilisation of the Facility.
 
4.
CONDITIONS PRECEDENT
 
4.1
Conditions precedent documents
 
A Request may not be given until the Facility Agent has notified the Borrower and the Lenders that it has received all of the documents and evidence set out in Schedule 2 (Conditions Precedent Documents) in form and substance satisfactory to the Facility Agent. The Facility Agent must give this notification to the Borrower and the Lenders promptly upon being so satisfied.
 
4.2
Further conditions precedent
 
The obligations of each Lender to participate in any Loan are subject to the further conditions precedent that on both the date of the Request and the Utilisation Date for that Loan:
 
 
(a)
the Repeating Representations are correct in all material respects; and
 
 
(b)
no Default or, in the case of a Rollover Loan, no Event of Default is outstanding or would result from the Loan.
 
4.3
Maximum number
 
Unless the Facility Agent agrees, a Request may not be given if, as a result, there would be more than 10 Loans outstanding.
 
5.
UTILISATION
 
5.1
Giving of Requests
 
(a)
The Borrower may borrow a Loan by giving to the Facility Agent a duly completed Request.
 
(b)
Unless the Facility Agent otherwise agrees, the latest time for receipt by the Facility Agent of a duly completed Request is 11.00 a.m. one Business Day before the Rate Fixing Day for the proposed borrowing.
 
(c)
Each Request is irrevocable.
 
5.2
Completion of Requests
 
A Request for a Loan will not be regarded as having been duly completed unless:
 
 
(a)
the Utilisation Date is a Business Day falling within the Availability Period;
 
 
(b)
The amount of the Loan requested is:
 
 
(i)
a minimum of £5,000,000 or its equivalent in accordance with Clause 7.5 (Optional Currency equivalents), and an integral multiple of 1,000,000 units of that currency;
 
 
(ii)
the maximum undrawn amount available under this Agreement for Loans under the Facility on the proposed Utilisation Date; or
 
 
(iii)
such other amount as the Facility Agent may agree; and
 
 
(c)
the proposed Term complies with this Agreement.
 
Only one Loan may be requested in a Request.
 
5.3
Advance of Loan
 
(a)
The Facility Agent must promptly notify each Lender of the details of the requested Loan and the amount of its share in that Loan.
 
(b)
The amount of each Lender's share of the Loan will be its Pro Rata Share on the proposed Utilisation Date.
 
(c)
No Lender is obliged to participate in a Loan if as a result the Loans would exceed the Total Commitments.
 
(d)
If the conditions set out in this Agreement have been met, each Lender must make its share in the Loan available to the Facility Agent for the Borrower on the Utilisation Date.
 
6.
EXTENSION OPTION
 
(a)
The Borrower may by notice to the Facility Agent (the Initial Extension Request) not more than 60 days and not less than 30 days before the first anniversary of the date of this Agreement, request that the Final Maturity Date be extended for a further period of one year.
 
(b)
The Borrower may by notice to the Facility Agent (the Second Extension Request) not more than 60 days and not less than 30 days before the second anniversary of the date of this Agreement, request that the Final Maturity Date:
 
 
(i)
with respect to Lenders who have agreed to the Initial Extension Request, be extended for a further period of one year; and/or
 
 
(ii)
if no Initial Extension Request has been made, or with respect to Lenders who refused the Initial Extension Request:
 
 
(A)
be extended for a period of one year; or
 
 
(B)
be extended for a period of two years,
 
as selected by the Borrower in the notice to the Facility Agent.
 
(c)
The Facility Agent must promptly notify the Lenders of any Initial Extension Request or Second Extension Request (an Extension Request).
 
(d)
Each Lender may, in its sole discretion, agree to any Extension Request. Each Lender that agrees to an Extension Request by the date falling 15 days before, the relevant anniversary of the date of this Agreement, will extend its Commitment for a further period of one year or two years, as applicable, from the then current Final Maturity Date and the Final Maturity Date with respect to the Commitment of that Lender will be extended accordingly.
 
(e)
If any Lender fails to reply to an Extension Request on or before the date falling 15 days before the relevant anniversary of the date of this Agreement, it will be deemed to have refused that Extension Request and its Commitment will not be extended.
 
(f)
Subject to paragraph (h) below, each Extension Request is irrevocable.
 
(g)
If one or more (but not all) of the Lenders agree to an Extension Request, then the Facility Agent must notify the Borrower and the Lenders which have agreed to the extension, identifying in that notification which Lenders have not agreed to the Extension Request.
 
(h)
The Borrower may, on the basis that one or more of the Lenders have not agreed to the Extension Request and no later than the date falling five days before the relevant anniversary of the date of this Agreement, withdraw the request by notice to the Facility Agent which will promptly notify the Lenders.
 
7.
OPTIONAL CURRENCIES
 
7.1
General
 
In this Clause:
 
Agent's Spot Rate of Exchange means the Facility Agent's spot rate of exchange for the purchase of the relevant currency in the London foreign exchange market with Sterling at or about 11.00 a.m. on a particular day.
 
Pre-approved Currency means U.S.$ and euro.
 
Sterling Amount of a Loan or part of a Loan means:
 
 
(a)
if the Loan is denominated in Sterling, its amount; or
 
 
(b)
in the case of any Loan denominated in an Optional Currency, its equivalent in Sterling calculated on the basis of the Agent's Spot Rate of Exchange one Business Day before the Rate Fixing Day for that Term.
 
7.2
Selection
 
(a)
The Borrower must select the currency of a Loan in its Request. The Borrower may select Sterling or an Optional Currency for a Loan.
 
(b)
Unless the Facility Agent otherwise agrees, the Loans may not be denominated at any one time in more than three currencies.
 
7.3
Selection of Optional Currencies
 
(a)
A Loan may be denominated in an Optional Currency for a Term if:
 
 
(i)
that Optional Currency is readily available in the amount required and freely convertible into Sterling in the relevant interbank market on the Rate Fixing Day and the first day of that Term; and
 
 
(ii)
that Optional Currency is a Pre-approved Currency or has been previously approved by the Facility Agent (acting on the instruction of all the Lenders).
 
(b)
If the Facility Agent has received a request from the Borrower for a currency to be approved as an Optional Currency (other than a Pre-approved Currency), the Facility Agent must, within five Business Days, confirm to the Borrower:
 
 
(i)
whether or not the Lenders have given their approval; and
 
 
(ii)
if approval has been given, the minimum amount (and, if required, integral multiples) for any Loan in that currency.
 
7.4
Revocation of currency
 
(a)
Notwithstanding any other term of this Agreement, if before 9.30 a.m. on any Rate Fixing Day the Facility Agent receives notice from a Lender that:
 
 
(i)
the Optional Currency requested is not readily available to it in the relevant interbank market in the amount and for the period required; or
 
 
(ii)
participating in a Loan in the proposed Optional Currency might contravene any law or regulation applicable to it,
 
the Facility Agent must give notice to the Borrower to that effect promptly and in any event before 11.00 a.m. on that day.
 
(b)
In this event:
 
 
(i)
that Lender must participate in the Loan in Sterling; and
 
 
(ii)
the share of that Lender in the Loan and any other similarly affected Lender(s) will be treated as a separate Loan denominated in Sterling during that Term.
 
(c)
Any part of a Loan treated as a separate Loan under this Subclause will not be taken into account for the purposes of any limit on the number of Loans or currencies outstanding at any one time.
 
(d)
A Loan will still be treated as a Rollover Loan if it is not denominated in the same currency as the maturing Loan by reason only of the operation of this Subclause.
 
7.5
Optional Currency equivalents
 
Except as expressly provided in this Agreement, the equivalent in Sterling of a Loan or part of a Loan in an Optional Currency for the purposes of calculating:
 
 
(a)
whether any limit under this Agreement has been exceeded;
 
 
(b)
the amount of a Loan;
 
 
(c)
the share of a Lender in a Loan;
 
 
(d)
the amount of any repayment of a Loan; or
 
 
(e)
the undrawn amount of a Lender's Commitment,
 
is its Sterling Amount.
 
7.6
Notification
 
The Facility Agent must notify the Lenders and the Borrower of the relevant Sterling Amount (and the applicable Agent's Spot Rate of Exchange) promptly after they are ascertained.
 
8.
REPAYMENT OF LOANS
 
The Borrower must repay each Loan in full on its Maturity Date. No Loan may be outstanding after the Final Maturity Date. Subject to the other terms of this Agreement, any amounts repaid under this Clause 8 may be re-borrowed.
 
9.
PREPAYMENT AND CANCELLATION
 
9.1
Mandatory prepayment - illegality
 
(a)
A Lender must notify the Borrower promptly if it becomes aware that it is unlawful in any jurisdiction for that Lender to perform any of its obligations under a Finance Document or to fund or maintain its share in any Loan.
 
(b)
After notification under paragraph (a) above:
 
 
(i)
the Borrower must repay or prepay the share of that Lender in each Loan made to it on the date specified in paragraph (c) below; and
 
 
(ii)
the Commitment of that Lender will be immediately cancelled.
 
(c)
The date for repayment or prepayment of a Lender's share in a Loan will be:
 
 
(i)
the Business Day following receipt by the Borrower of notice from the Lender under paragraph (a) above; or
 
 
(ii)
if later, the latest date allowed by the relevant law.
 
9.2
Mandatory prepayment - change of control
 
(a)
If, except in the context of a group reorganisation where the Borrower continues to be controlled directly or indirectly, by PPL Corporation, the Borrower becomes aware of any person (whether alone or together with any associated person or persons) gaining control of the Borrower (for these purposes "associated person" means, in relation to any person, a person who is (i) "acting in concert" (as defined in the City Code on Takeovers and Mergers) with that person or (ii) a "connected person" (as defined in section 839 of the Income and Corporation Taxes Act 1988) of that person, and "control" has the meaning given to it in section 416 of the Income and Corporation Taxes Act 1988):
 
 
(i)
the Borrower shall promptly give notice of such change of control to the Facility Agent;
 
 
(ii)
the Lenders and the Borrower shall immediately enter into negotiations for a period of not more than 30 days from the date of the change of control with a view to agreeing whether the Facility shall continue to be made available and on what terms;
 
 
(iii)
during this 30-day negotiation period, the Borrower may not issue a Request for a Loan that is not a Rollover Loan, unless otherwise agreed by the Majority Lenders; and
 
 
(iv)
if no such agreement is reached within the said period of 30 days then:
 
 
(A)
any Lender may on 10 days' notice to the Facility Agent and to the Borrower require the repayment of its share in each Loan and cancel its Commitment; and
 
 
(B)
the Majority Lenders may on 10 days' notice to the Borrower require repayment in full of all outstanding Loans and cancel the Total Commitments.
 
9.3
Voluntary prepayment
 
(a)
The Borrower may, by giving not less than three Business Days' prior notice to the Facility Agent, prepay any Loan at any time in whole or in part.
 
(b)
A prepayment of part of a Loan drawn in US Dollars must be in a minimum amount of $5,000,000 and an integral multiple of U.S. $1,000,000.
 
(c)
A prepayment of part of a Loan drawn in Sterling or any Optional Currency other than US Dollar must be in a minimum amount of £5,000,000 (or its equivalent) and an integral multiple of £1,000,000 (or its equivalent).
 
9.4
Automatic cancellation
 
The Commitment of each Lender will be automatically cancelled at the close of business on the last day of the Availability Period.
 
9.5
Voluntary cancellation
 
(a)
The Borrower may, by giving not less than three Business Days' prior notice to the Facility Agent, cancel the unutilised amount of the Total Commitments in whole or in part.
 
(b)
Partial cancellation of the Total Commitments must be in a minimum amount of £5,000,000 and an integral multiple of £1,000,000.
 
(c)
Any cancellation in part will be applied against the relevant Commitment of each Lender pro rata.
 
9.6
Involuntary prepayment and cancellation
 
(a)
If the Borrower is, or will be, required to pay to a Lender a Tax Payment or an Increased Cost, the Borrower may, while the requirement continues, give notice to the Facility Agent requesting prepayment and cancellation in respect of that Lender.
 
(b)
After notification under paragraph (a) above:
 
 
(i)
the Borrower must repay or prepay that Lender's share in each Loan made to it on the date specified in paragraph (c) below; and
 
 
(ii)
the Commitment of that Lender will be immediately cancelled.
 
(c)
The date for repayment or prepayment of a Lender's share in a Loan will be the last day of the current Term for that Loan or, if earlier, the date specified by the Borrower in its notification.
 
9.7
Re-borrowing of Loans
 
Any voluntary prepayment of a Loan may be re-borrowed on the terms of this Agreement. Any mandatory or involuntary prepayment of a Loan may not be re-borrowed.
 
9.8
Miscellaneous provisions
 
(a)
Any notice of prepayment and/or cancellation under this Agreement is irrevocable and must specify the relevant date(s) and the affected Loans and Commitments. The Facility Agent must notify the Lenders promptly of receipt of any such notice.
 
(b)
All prepayments under this Agreement must be made with accrued interest on the amount prepaid. No premium or penalty is payable in respect of any prepayment except for Break Costs.
 
(c)
The Majority Lenders may agree a shorter notice period for a voluntary prepayment or a voluntary cancellation.
 
(d)
No prepayment or cancellation is allowed except in accordance with the express terms of this Agreement.
 
(e)
No amount of the Total Commitments cancelled under this Agreement may subsequently be reinstated.
 
10.
INTEREST
 
10.1
Calculation of interest
 
The rate of interest on each Loan for each Term is the percentage rate per annum equal to the aggregate of the applicable:
 
 
(a)
Margin;
 
 
(b)
LIBOR; and
 
 
(c)
Mandatory Cost.
 
10.2
Payment of interest
 
Except where it is provided to the contrary in this Agreement, the Borrower must pay accrued interest on each Loan made to it on the last day of each Term and also, if the Term is longer than six months, on the dates falling at six-monthly intervals after the first day of that Term.
 
10.3
Interest on overdue amounts
 
(a)
If the Borrower fails to pay any amount payable by it under the Finance Documents, it must immediately on demand by the Facility Agent pay interest on the overdue amount from its due date up to the date of actual payment, both before, on and after judgment.
 
(b)
Interest on an overdue amount is payable at a rate determined by the Facility Agent to be 1% per annum above the rate which would have been payable if the overdue amount had, during the period of non-payment, constituted a Loan in the currency of the overdue amount. For this purpose, the Facility Agent may (acting reasonably):
 
 
(i)
select successive Terms of any duration of up to three months; and
 
 
(ii)
determine the appropriate Rate Fixing Day for that Term.
 
(c)
Notwithstanding paragraph (b) above, if the overdue amount is a principal amount of a Loan and becomes due and payable prior to the last day of its current Term, then:
 
 
(i)
the first Term for that overdue amount will be the unexpired portion of that Term; and
 
 
(ii)
the rate of interest on the overdue amount for that first Term will be 1% per annum above the rate then payable on that Loan.
 
After the expiry of the first Term for that overdue amount, the rate on the overdue amount will be calculated in accordance with paragraph (b) above.
 
(d)
Interest (if unpaid) on an overdue amount will be compounded with that overdue amount at the end of each of its Terms but will remain immediately due and payable.
 
10.4
Notification of rates of interest
 
The Facility Agent must promptly notify each relevant Party of the determination of a rate of interest under this Agreement.
 
10.5
Margin
 
(a)
The applicable Margin for all Loans will be determined in accordance with the table below and by reference to the percentage rate per annum specified in Column 2 as set out below opposite the long term credit rating assigned to the Borrower and published by Moody's and/or S&P as specified in Column 1 as set out below;

 
 
Column 1
Credit Rating
(S&P/Moody's)
Column 2
Margin
%
 
BBB+/Baa1 (or higher)
0.35
 
BBB/Baa2
0.45
 
BBB-/Baa3
0.65
 
BB+/Ba1
0.80
 
BB/Ba2 (or lower)
1.00
 
(b)
Initially the applicable Margin shall be 0.65% per annum.
 
(c)
During any period in which (i) an Event of Default is outstanding; and/or (ii) there is no long term credit rating assigned to the Borrower by either S&P or Moody's, the applicable Margin shall, in each case, be 1.00% per annum.
 
(d)
In the event that the long term credit ratings assigned to the Borrower by S&P and Moody's would indicate a different Margin under (a) above then the lower of the two credit ratings shall apply to determine the applicable Margin, save that, in the event that there is more than one notch difference between the two credit ratings, then the middle level shall apply to determine the applicable Margin and, in the event that there are an even number of levels between the two credit ratings (and therefore no middle level) the higher of the two middle levels shall be used to determine the applicable Margin.
 
(e)
Any adjustment to the Margin pursuant to paragraphs (a) to (d) above shall be made on the date of publication by S&P and/or Moody's of a long term credit rating of the Borrower (or an amendment of a previously published rating) or on the date in which no long term credit rating is assigned to the Borrower, if such publication (or amendment) would result in a change in the Margin as provided above and, for the avoidance of doubt, such adjustment shall apply to Loans currently outstanding at such date of publication and with effect from such date.
 
(f)
Promptly after becoming aware of the same, the Borrower shall inform the Facility Agent in writing if any of the circumstances contemplated by paragraphs (b) through (d) apply.
 
11.
TERMS
 
11.1
Selection - Loans
 
(a)
Each Loan has one Term only.
 
(b)
The Borrower must select the Term for a Loan in the relevant Request.
 
(c)
Subject to the following provisions of this Clause, each Term for a Loan will be one, two, three or six months' or for a period of one to thirty days' duration as selected by the Borrower or any other period agreed by the Borrower and the Lenders.
 
(d)
The Borrower shall not use its right under paragraph (c) above to select for a Loan a Term of less than one month's duration more than six times in any calendar year.
 
11.2
No overrunning the Final Maturity Date
 
If a Term would otherwise overrun the Final Maturity Date, it will be shortened so that it ends on the Final Maturity Date.
 
11.3
Other adjustments
 
The Facility Agent and the Borrower may enter into such other arrangements as they may agree for the adjustment of Terms and the consolidation and/or splitting of Loans.
 
11.4
Notification
 
The Facility Agent must notify the Borrower and the Lenders of the duration of each Term promptly after ascertaining its duration.
 
12.
MARKET DISRUPTION
 
12.1
Failure of a Reference Bank to supply a rate
 
If LIBOR is to be calculated by reference to the Reference Banks but a Reference Bank does not supply a rate by 12.00 noon on a Rate Fixing Day, the applicable LIBOR will, subject as provided below, be calculated on the basis of the rates of the remaining Reference Banks.
 
12.2
Market disruption
 
(a)
In this Clause, each of the following events is a market disruption event:
 
 
(i)
LIBOR is to be calculated by reference to the Reference Banks but no, or only one, Reference Bank supplies a rate by 12.00 noon on the Rate Fixing Day; or
 
 
(ii)
the Facility Agent receives by close of business on the Rate Fixing Day notification from Lenders whose shares in the relevant Loan exceed 50% of that Loan that such Lenders are unable to obtain matching deposits in the relevant interbank market or the rate at which they can do so is in excess of LIBOR for the relevant Term.
 
(b)
The Facility Agent must promptly notify the Borrower and the Lenders of a market disruption event.
 
(c)
After notification under paragraph (b) above, the rate of interest on each Lender's share in the affected Loan for the relevant Term will be the aggregate of the applicable:
 
 
(i)
Margin;
 
 
(ii)
rate notified to the Facility Agent by that Lender as soon as practicable, and in any event before interest is due to be paid in respect of that Term, to be that which expresses as a percentage rate per annum the cost to that Lender of funding its share in that Loan from whatever source it may reasonably select; and
 
 
(iii)
Mandatory Cost.
 
12.3
Alternative basis of interest or funding
 
(a)
If a market disruption event occurs and the Facility Agent or the Borrower so requires, the Borrower and the Facility Agent must enter into negotiations for a period of not more than 30 days with a view to agreeing an alternative basis for determining the rate of interest and/or funding for the affected Loan and any future Loan.
 
(b)
Any alternative basis agreed will be, with the prior consent of all the Lenders, binding on all the Parties.
 
13.
TAXES
 
13.1
General
 
In this Clause:
 
Tax Credit means a credit against any Tax or any relief or remission for Tax (or its repayment).
 
U.K. Lender means a Lender which is within the charge to U.K. corporation tax in respect of, and beneficially entitled to, a payment of interest on a Loan made by a person that was a bank for the purposes of section 349 of the Income and Corporation Taxes Act 1988 (as currently defined in section 840A of the Income and Corporation Taxes Act 1988) at the time the Loan was made;
 
13.2
Tax gross-up
 
(a)
The Borrower must make all payments to be made by it under the Finance Documents without any Tax Deduction, unless a Tax Deduction is required by law.
 
(b)
If:
 
 
(i)
a Lender is not, or ceases to be, a U.K. Lender; or
 
 
(ii)
the Borrower or a Lender is aware that the Borrower must make a Tax Deduction (or that there is a change in the rate or the basis of a Tax Deduction),
 
it must promptly notify the Facility Agent. The Facility Agent must then promptly notify the affected Parties.
 
(c)
Except as provided below, if a Tax Deduction is required by law to be made by the Borrower or the Facility Agent, the amount of the payment due from the Borrower will be increased to an amount which (after making the Tax Deduction) leaves an amount equal to the payment which would have been due if no Tax Deduction had been required.
 
(d)
Except as provided below, the Borrower is not required to make an increased payment under paragraph (c) above to a Lender that is not, or has ceased to be, a U.K. Lender in excess of the amount that the Borrower would have had to pay had the Lender been, or not ceased to be, a U.K. Lender.
 
(e)
Paragraph (d) above will not apply if the Lender has ceased to be a U.K. Lender by reason of any change after the date it became a Lender under this Agreement in (or in the interpretation, administration, or application of) any law or double taxation agreement or any published practice or concession of any relevant taxing authority.
 
(f)
Where a Lender fails to give notice under paragraph (b) above within 60 days after it obtains knowledge (or, after reasonable due enquiry, ought to have obtained knowledge) of such event, then such Lender shall, with respect to any claim made by it under this Clause 13.2 (Tax gross-up), only be entitled to claim an increased payment for the period from and after the date that is 60 days prior to the date on which the Lender does give notice.
 
(g)
If the Borrower is required to make a Tax Deduction, it must make the minimum Tax Deduction and must make any payment required in connection with that Tax Deduction within the time allowed by law.
 
(h)
Within 30 days of making either a Tax Deduction or a payment required in connection with a Tax Deduction, the Borrower must deliver to the Facility Agent for the relevant Finance Party evidence satisfactory to that Finance Party (acting reasonably) that the Tax Deduction has been made or (as applicable) the appropriate payment has been paid to the relevant taxing authority.
 
13.3
Tax indemnity
 
(a)
Except as provided below, the Borrower must indemnify a Finance Party against any loss or liability which that Finance Party (in its absolute discretion) determines will be or has been suffered (directly or indirectly) by that Finance Party for or on account of Tax in relation to a payment received or receivable (or any payment deemed to be received or receivable) under a Finance Document.
 
(b)
Paragraph (a) above does not apply to any Tax assessed on a Finance Party under the laws of the jurisdiction in which:
 
 
(i)
that Finance Party is incorporated or, if different, the jurisdiction (or jurisdictions) in which that Finance Party is treated as resident for tax purposes; or
 
 
(ii)
that Finance Party's Facility Office is located in respect of amounts received or receivable in that jurisdiction,
 
if that Tax is imposed on or calculated by reference to the net income received or receivable by that Finance Party. However, any payment deemed to be received or receivable, including any amount treated as income but not actually received by the Finance Party, such as a Tax Deduction, will not be treated as net income received or receivable for this purpose.
 
(c)
A Finance Party making, or intending to make, a claim under paragraph (a) above must promptly notify the Borrower of the event which will give, or has given, rise to the claim.
 
13.4
Tax Credit
 
If the Borrower makes a Tax Payment and the relevant Finance Party has obtained and used any Tax Credit that is attributable to that Tax Payment, then, if in its discretion (acting reasonably) it can do so without any further adverse consequences for it, that Finance Party must pay an amount to the Borrower which that Finance Party determines (in its discretion, acting reasonably) will leave it (after that payment) in the same after-tax position as it would have been in if the Tax Payment had not been required to be made by the Borrower. The relevant Finance Party shall take those steps it considers reasonable to seek and claim any tax credit.
 
13.5
Tax Warranty of Lenders
 
Each Lender severally warrants to the Borrower on the date it becomes a Lender that it is a U.K. Lender. A Lender must promptly notify the Borrower if it ceases to be a U.K. Lender after this Agreement is entered into.
 
13.6
Stamp taxes
 
The Borrower must pay and indemnify each Finance Party against any stamp duty, registration or other similar Tax payable in connection with the entry into, performance or enforcement of any Finance Document, except for any such Tax payable in connection with the entry into of a Transfer Certificate.
 
13.7
Value added taxes
 
(a)
All costs and expenses payable under a Finance Document by the Borrower are exclusive of any value added tax or any other Tax of a similar nature which might be chargeable in connection with that amount. If any such Tax is chargeable, the Borrower must pay to the Finance Party (in addition to and at the same time as paying that amount) an amount equal to the amount of that Tax.
 
(b)
The obligation of the Borrower under paragraph (a) above will be reduced to the extent that the Finance Party determines (acting reasonably) that it is entitled to repayment or a credit in respect of the relevant Tax.
 
14.
INCREASED COSTS
 
14.1
Increased Costs
 
Except as provided below in this Clause, the Borrower must pay to a Finance Party the amount of any Increased Cost incurred by that Finance Party or any of its Affiliates as a result of:
 
 
(a)
the introduction of, or any change in, or any change in the interpretation or application of, any law or regulation; or
 
 
(b)
compliance with any law or regulation,
 
made after the date of this Agreement.
 
14.2
Exceptions
 
The Borrower need not make any payment for an Increased Cost to the extent that the Increased Cost is:
 
 
(a)
compensated for under another Clause or would have been but for an exception to that Clause;
 
 
(b)
a Tax on the overall net income of a Finance Party or any of its Affiliates;
 
 
(c)
attributable to a Finance Party or its Affiliate wilfully failing to comply with any law or regulation;
 
 
(d)
attributable to the implementation or application of or compliance with the "International Convergence of Capital Measurement and Capital Standards, a Revised Framework" published by Basel Committee on Banking and Supervision in June 2004 in the form existing on the date of this Agreement (Basel II) or any other law or regulation which implements Basel II (whether such implementation, application or compliance is by a government, regulator, Finance Party or any of its Affiliates); or
 
 
(e)
incurred in any period or periods ending prior to the date falling 60 days before the date any demand in relation to that Increased Cost is made (save where the relevant Finance Party (after due enquiry) was unaware of the existence of such Increased Cost or where such Increased Cost is caused by reason of a change in (or in the interpretation, administration or application of) law with retrospective effect).
 
14.3
Claims
 
A Finance Party intending to make a claim for an Increased Cost must notify the Borrower promptly of the circumstances giving rise to, and the amount of, the claim.
 
15.
MITIGATION
 
15.1
Mitigation
 
(a)
Each Finance Party must, in consultation with the Borrower, take all reasonable steps to mitigate any circumstances which arise and which result or would result in:
 
 
(i)
any Tax Payment or Increased Cost being payable to that Finance Party;
 
 
(ii)
that Finance Party being able to exercise any right of prepayment and/or cancellation under this Agreement by reason of any illegality;
 
 
(iii)
that Finance Party incurring any cost of complying with the minimum reserve requirements of the European Central Bank; or
 
 
(iv)
the occurrence of any market disruption event,
 
including transferring its rights and obligations under the Finance Documents to an Affiliate or changing its Facility Office.
 
(b)
A Finance Party is not obliged to take any step under this Subclause if, in the opinion of that Finance Party (acting reasonably), to do so might be prejudicial to it.
 
(c)
Each Finance Party must promptly notify the Borrower of any circumstances as described in 15.1(a)(i) to (iv).
 
(d)
The Borrower must indemnify each Finance Party for all costs and expenses reasonably incurred by it as a result of any step taken under this Clause 15.1 (Mitigation).
 
15.2
Substitution
 
Notwithstanding Clause 15.1 (Mitigation), if any circumstances arise which result in:
 
 
(a)
any Tax Payment or Increased Cost being payable to that Finance Party;
 
 
(b)
that Finance Party being able to exercise any right of prepayment and/or cancellation under this Agreement by reason of any illegality;
 
 
(c)
that Finance Party incurring any cost of complying with the minimum reserve requirements of the European Central Bank; or
 
 
(d)
the occurrence of any market disruption event,
 
then the Borrower, at its expense, at any time within 180 days after the occurrence of the relevant event or circumstance, so long as no Default is outstanding, may by notice to such Finance Party require it (and, if applicable, its Affiliate) to novate its rights and obligations hereunder (including its Commitment and its share of any Loans) in accordance with Clause 28 to a bank or financial institution specified by the Borrower and acceptable to the Facility Agent which is willing to take such a novation as aforesaid provided that:
 
 
(i)
such novation shall not conflict with or violate any law applicable to or binding on such Finance Party (or, if applicable, its Affiliate); and
 
 
(ii)
the Borrower shall have paid to the Finance Party (or, if applicable, its Affiliate) all amounts accrued and owing hereunder.
 
Notwithstanding the above, the Borrower shall not be entitled to require a novation under this Clause 15.2 with respect to any Finance Party if:
 
 
(A)
the relevant Finance Party shall have mitigated the effect of the relevant event or circumstance as provided in Clause 15.1(a), and the novation would have no greater or further mitigating effect; or
 
 
(B)
the relevant event or circumstances are applicable to all Finance Parties.
 
15.3
Conduct of business by a Finance Party
 
No term of this Agreement will:
 
 
(a)
interfere with the right of any Finance Party to arrange its affairs (Tax or otherwise) in whatever manner it thinks fit or oblige any Finance Party to investigate or claim any Tax Credit; or
 
 
(b)
oblige any Finance Party to disclose any information relating to its affairs (Tax or otherwise) or any computation in respect of Tax.
 
16.
PAYMENTS
 
16.1
Place
 
Unless a Finance Document specifies that payments under it are to be made in another manner, all payments by a Party (other than the Facility Agent) under the Finance Documents must be made to the Facility Agent to its account at such office or bank:
 
 
(a)
in the principal financial centre of the country of the relevant currency; or
 
 
(b)
in the case of euro, in the principal financial centre of a Participating Member State or London,
 
as it may notify to that Party for this purpose by not less than five Business Days' prior notice.
 
16.2
Funds
 
Payments under the Finance Documents to the Facility Agent must be made for value on the due date at such times and in such funds as the Facility Agent may specify to the Party concerned as being customary at the time for the settlement of transactions in the relevant currency in the place for payment.
 
16.3
Distribution
 
(a)
Each payment received by the Facility Agent under the Finance Documents for another Party must, except as provided below, be made available by the Facility Agent to that Party by payment (as soon as practicable after receipt) to its account with such office or bank:
 
 
(i)
in the principal financial centre of the country of the relevant currency; or
 
 
(ii)
in the case of euro, in the principal financial centre of a Participating Member State or London,
 
as it may notify to the Facility Agent for this purpose by not less than five Business Days' prior notice.
 
(b)
The Facility Agent may apply any amount received by it for the Borrower in or towards payment (as soon as practicable after receipt) of any amount due from the Borrower under the Finance Documents or in or towards the purchase of any amount of any currency to be so applied.
 
(c)
Where a sum is paid to the Facility Agent under this Agreement for another Party, the Facility Agent is not obliged to pay that sum to that Party until it has established that it has actually received it. However, the Facility Agent may assume that the sum has been paid to it, and, in reliance on that assumption, make available to that Party a corresponding amount. If it transpires that the sum has not been received by the Facility Agent, that Party must immediately on demand by the Facility Agent refund any corresponding amount made available to it together with interest on that amount from the date of payment to the date of receipt by the Facility Agent at a rate calculated by the Facility Agent to reflect its cost of funds.
 
16.4
Currency
 
(a)
Unless a Finance Document specifies that payments under it are to be made in a different manner, the currency of each amount payable under the Finance Documents is determined under this Clause.
 
(b)
Interest is payable in the currency in which the relevant amount in respect of which it is payable is denominated.
 
(c)
A repayment or prepayment of any principal amount is payable in the currency in which that principal amount is denominated on its due date.
 
(d)
Amounts payable in respect of costs and expenses are payable in the currency in which they are incurred.
 
(e)
Each other amount payable under the Finance Documents is payable in Sterling.
 
16.5
No set-off or counterclaim
 
All payments made by the Borrower under the Finance Documents must be made without set-off or counterclaim.
 
16.6
Business Days
 
(a)
If a payment under the Finance Documents is due on a day which is not a Business Day, the due date for that payment will instead be the next Business Day in the same calendar month (if there is one) or the preceding Business Day (if there is not) or whatever day the Facility Agent determines is market practice.
 
(b)
During any extension of the due date for payment of any principal under this Agreement interest is payable on that principal at the rate payable on the original due date.
 
16.7
Partial payments
 
(a)
If any Administrative Party receives a payment insufficient to discharge all the amounts then due and payable by the Borrower under the Finance Documents, the Administrative Party must apply that payment towards the obligations of the Borrower under the Finance Documents in the following order:
 
 
(i)
first, in or towards payment pro rata of any unpaid fees, costs and expenses of the Administrative Parties under the Finance Documents;
 
 
(ii)
secondly, in or towards payment pro rata of any accrued interest or fee due but unpaid under this Agreement;
 
 
(iii)
thirdly, in or towards payment pro rata of any principal amount due but unpaid under this Agreement; and
 
 
(iv)
fourthly, in or towards payment pro rata of any other sum due but unpaid under the Finance Documents.
 
(b)
The Facility Agent must, if so directed by all the Lenders, vary the order set out in subparagraphs (a)(ii) to (iv) above.
 
(c)
This Subclause will override any appropriation made by the Borrower.
 
16.8
Timing of payments
 
If a Finance Document does not provide for when a particular payment is due, that payment will be due within three Business Days of demand by the relevant Finance Party.
 
17.
REPRESENTATIONS
 
17.1
Representations
 
The representations set out in this Clause are made by the Borrower to each Finance Party.
 
17.2
Status
 
It is a limited liability company, duly incorporated under the Companies Act 1985 and validly existing under the laws of England.
 
17.3
Powers and authority
 
It has the power to enter into and perform, and has taken all necessary action to authorise the entry into and performance of, the Finance Documents to which it is or will be a party and the transactions contemplated by those Finance Documents.
 
17.4
Legal validity
 
Subject to any general principles of law limiting its obligations and referred to in any legal opinion required under this Agreement, each Finance Document to which it is a party is its legally binding, valid and enforceable obligation.
 
17.5
Non-conflict
 
The entry into and performance by it of, and the transactions contemplated by, the Finance Documents do not conflict with any borrowing or other power or restriction granted or imposed by:
 
 
(a)
any law or regulation applicable to it and violation of which has or is likely to have a Material Adverse Effect; or
 
 
(b)
its constitutional documents.
 
17.6
No Event of Default
 
No Event of Default is outstanding or will result from the execution of, or the performance of any transaction contemplated by, any Finance Document.
 
17.7
Authorisations
 
All authorisations required by it in connection with the entry into, performance, validity and enforceability of, and the transactions contemplated by, the Finance Documents have been obtained or effected (as appropriate) and are in full force and effect.
 
17.8
Financial statements
 
Its audited consolidated financial statements most recently delivered to the Facility Agent (which, at the date of this Agreement, are the Original Financial Statements):
 
 
(a)
have been prepared in accordance with accounting principles and practices generally accepted in its jurisdiction of incorporation, consistently applied; and
 
 
(b)
fairly represent its consolidated financial condition as at the date to which they were drawn up,
 
except, in each case, as disclosed to the contrary in those financial statements.
 
17.9
No material adverse change
 
Other than as disclosed in writing to the Mandated Lead Arrangers prior to the date of this Agreement there has been no material adverse change in its consolidated financial condition since the date to which the Original Financial Statements were drawn up.
 
17.10
Litigation
 
No litigation, arbitration or administrative proceedings are current or, to its knowledge, pending or threatened, which, if adversely determined, are reasonably likely to have a Material Adverse Effect.
 
17.11
Winding Up
 
No meeting has been convened for its Winding-up and, so far as it is aware, no petition, application or the like is outstanding for its Winding-up.
 
17.12
Non-Violation of other Agreements
 
Its entry into, exercise of its rights and/or performance of or compliance with its obligations under this Agreement do not and will not violate, to an extent or in a manner which has or is likely to have a Material Adverse Effect on it, any agreement to which it is a party or which is binding on it.
 
17.13
Times for making representations
 
(a)
The representations set out in this Clause are made by the Borrower on the date of this Agreement.
 
(b)
The representations in Clauses 17.2 to 17.7 (inclusive) are deemed to be repeated by the Borrower on the date of each Request and the first day of each Term.
 
(c)
When a representation is repeated, it is applied to the circumstances existing at the time of repetition.
 
18.
INFORMATION COVENANTS
 
18.1
Financial statements
 
(a)
The Borrower must supply to the Facility Agent in sufficient copies for all the Lenders:
 
 
(i)
its audited consolidated financial statements for each of its financial years;
 
 
(ii)
the audited financial statements for each Distribution Company for each of their respective financial years; and
 
 
(iii)
its interim financial statements for the first half-year of each of its financial years.
 
(b)
All financial statements must be supplied as soon as they are available and:
 
 
(i)
in the case of the Borrower's audited consolidated financial statements within 180 days;
 
 
(ii)
in the case of each Distribution Company's audited financial statements within 180 days; and
 
 
(iii)
in the case of the Borrower's interim financial statements within 90 days,
 
of the end of the relevant financial period.
 
18.2
Form of Financial Statement
 
If any financial statement delivered or to be delivered to the Facility Agent under Clause 18.1 is not to be or, as the case may be, has not been prepared in accordance with Applicable Accounting Principles:
 
 
(a)
The Borrower and the Facility Agent (on behalf of and after consultation with all the Lenders) shall, on the request of the Facility Agent or the Borrower, negotiate in good faith with a view to agreeing such amendments to the above financial ratio and/or the definitions of the terms used in it as are necessary to give the Lenders comparable protection to that contemplated at the date of this Agreement;
 
 
(b)
If amendments are agreed by the Borrower and the Majority Lenders within 25 days, those amendments shall take effect in accordance with the terms of that agreement;
 
 
(c)
If such amendments are not so agreed within 25 days, the Borrower shall:
 
 
(i)
within 30 days after the end of that 25 day period; and
 
 
(ii)
with all subsequent financial statements to be delivered to the Facility Agent under Clause 18.1,
 
deliver to the Facility Agent details of all such adjustments as need to be made to the relevant financial statements to bring them into line with the Companies Act 1985 (as in effect on the date of this Agreement) and Applicable Accounting Principles.
 
18.3
Compliance Certificate
 
(a)
The Borrower must supply to the Facility Agent a Compliance Certificate with each set of its financial statements, sent to the Facility Agent under this Agreement.
 
(b)
A Compliance Certificate must be signed by two directors of the Borrower.
 
18.4
Information - miscellaneous
 
The Borrower must supply to the Facility Agent, in sufficient copies for all the Lenders if the Facility Agent so requests:
 
 
(a)
copies of all documents despatched by the Borrower to its creditors generally or any class of them at the same time as they are despatched;
 
 
(b)
promptly upon becoming aware of them, details of any litigation, arbitration or administrative proceedings which are current, threatened or pending and which might, if adversely determined, have a Material Adverse Effect;
 
 
(c)
promptly on request, a list of the then current Material Subsidiaries; and
 
 
(d)
promptly on request, such further information regarding the financial condition and operations of the Group as any Finance Party through the Facility Agent may reasonably request.
 
18.5
Notification of Default
 
(a)
The Borrower must notify the Facility Agent of any Default (and the steps, if any, being taken to remedy it) promptly upon becoming aware of its occurrence.
 
(b)
Promptly on request by the Facility Agent, the Borrower must supply to the Facility Agent a certificate signed by two of its directors on its behalf, certifying that no Default is outstanding or, if a Default is outstanding, specifying the Default and the steps, if any, being taken to remedy it.
 
18.6
Use of websites
 
(a)
Except as provided below, the Borrower may deliver any information under this Agreement to a Lender by posting it on to an electronic website if:
 
 
(i)
the Facility Agent and the Lender agree;
 
 
(ii)
the Borrower and the Facility Agent designate an electronic website for this purpose;
 
 
(iii)
the Borrower notifies the Facility Agent of the address of and password for the website; and
 
 
(iv)
the information posted is in a format agreed between the Borrower and the Facility Agent.
 
The Facility Agent must supply each relevant Lender with the address of and password for the website.
 
(b)
Notwithstanding the above, the Borrower must supply to the Facility Agent in paper form a copy of any information posted on the website together with sufficient copies for:
 
 
(i)
any Lender not agreeing to receive information via the website; and
 
 
(ii)
within 10 Business Days of request any other Lender, if that Lender so requests.
 
(c)
The Borrower must promptly upon becoming aware of its occurrence, notify the Facility Agent if:
 
 
(i)
the website cannot be accessed;
 
 
(ii)
the website or any information on the website is infected by any electronic virus or similar software;
 
 
(iii)
the password for the website is changed; or
 
 
(iv)
any information to be supplied under this Agreement is posted on the website or amended after being posted.
 
If the circumstances in subparagraphs (i) or (ii) above occur, the Borrower must supply any information required under this Agreement in paper form.
 
18.7
Know your customer requirements
 
(a)
The Borrower must promptly on the request of any Finance Party supply to that Finance Party any documentation or other evidence which is reasonably requested by that Finance Party (whether for itself, on behalf of any Finance Party or any prospective new Lender) to enable a Finance Party or prospective new Lender to carry out and be satisfied with the results of all applicable know your customer requirements.
 
(b)
Each Lender must promptly on the request of the Facility Agent supply to the Facility Agent any documentation or other evidence which is reasonably required by the Facility Agent to carry out and be satisfied with the results of all know your customer requirements.
 
19.
FINANCIAL COVENANTS
 
19.1
Definitions
 
In this Clause:
 
Consolidated EBITDA means the consolidated net pre-taxation profits of the Group for a Measurement Period as adjusted by:
 
 
(a)
adding back Interest Payable;
 
 
(b)
taking no account of any exceptional or extraordinary item;
 
 
(c)
excluding any amount attributable to minority interests;
 
 
(d)
adding back depreciation and amortisation;
 
 
(e)
taking no account of any revaluation of an asset or any loss or gain over book value arising on the disposal of an asset (otherwise than in the ordinary course of trading) by a member of the Group during that Measurement Period; and
 
 
(f)
taking no account of any return on pension scheme assets or any interest on pension scheme liabilities.
 
Interest Payable means, in relation to any Measurement Period, the aggregate of all interest payable and similar charges of each member of the Group expressed in Sterling in accordance with Applicable Accounting Principles.
 
Measurement Period means a half-year of the Borrower.
 
Regulatory Asset Base means the aggregate regulatory asset base of the Distribution Companies most recently published by OFGEM.
 
Total Net Debt means, in respect of the Group, at any time the aggregate Financial Indebtedness of the Group which is required to be accounted for as debt in the consolidated annual financial statements of the Group but excluding any pension scheme liabilities of the Group and less any cash and cash equivalents (as indicated in the annual financial statements of the Group) held by any member of the Group.
 
19.2
Interpretation
 
(a)
Except as provided to the contrary in this Agreement, an accounting term used in this Clause is to be construed in accordance with the principles applied in connection with the Original Financial Statements.
 
(b)
Any amount in a currency other than Sterling is to be taken into account at its Sterling equivalent calculated on the basis of:
 
 
(i)
the Facility Agent's spot rate of exchange for the purchase of the relevant currency in the London foreign exchange market with Sterling at or about 11.00 a.m. on the day the relevant amount falls to be calculated; or
 
 
(ii)
if the amount is to be calculated on the last day of a financial period of the Borrower, the relevant rates of exchange used by the Borrower in, or in connection with, its financial statements for that period.
 
(c)
No item must be credited or deducted more than once in any calculation under this Clause.
 
19.3
Interest cover
 
The Borrower must ensure that the ratio of Consolidated EBITDA to Interest Payable is not, at the end of each Measurement Period, less than 3 to 1.
 
19.4
Asset Cover
 
The Borrower must ensure that at all times the Regulatory Asset Base will exceed Total Net Debt by at least the higher of (a) an amount equivalent to 15 per cent of Total Net Debt or (b) £150,000,000.
 
20.
GENERAL COVENANTS
 
20.1
General
 
The Borrower agrees to be bound by the covenants set out in this Clause relating to it and, where the covenant is expressed to apply to each member of the Group, the Borrower must ensure that each of its Subsidiaries performs that covenant.
 
20.2
Authorisations
 
The Borrower must promptly obtain, maintain and comply with the terms of any authorisation required under any law or regulation to enable it to perform its obligations under, or for the validity or enforceability of, any Finance Document.
 
20.3
Compliance with laws
 
Each member of the Group must comply in all respects with all laws to which it is subject where failure to do so is reasonably likely to have a Material Adverse Effect.
 
20.4
Pari passu ranking
 
The Borrower must ensure that its payment obligations under the Finance Documents rank at least pari passu with all its other present and future unsecured payment obligations, except for obligations mandatorily preferred by law applying to companies generally.
 
20.5
Negative pledge
 
(a)
Except as provided below, neither the Borrower nor any Distribution Company may create or allow to exist any Security Interest on any of its assets.
 
(b)
Paragraph (a) does not apply to:
 
 
(i)
any Security Interest created under or in connection with or arising out of the Balancing and Settlement Code or any transactions or arrangements entered into in connection with the management of risks relating thereto;
 
 
(ii)
in respect of overdue amounts which have not been overdue for more than 30 days and/or are being contested in good faith, liens arising solely by operation of law or by order of a court or tribunal (or by an agreement of similar effect) and/or in the ordinary course of business or operations;
 
 
(iii)
any Security Interest created after the date of this Agreement for the sole purpose of re-financing all or any part of the Facility (at the option of the Borrower) provided that the monies borrowed or raised on such Security Interest shall, to that extent, be applied reasonably promptly in accordance with this Agreement in or towards repayment of the Facility;
 
 
(iv)
any Security Interest arising out of title retention provisions in a supplier's standard conditions of supply of goods acquired in the ordinary course of business or operations;
 
 
(v)
any Security Interest created on any asset acquired after the date of this Agreement for the sole purpose of financing or re-financing that acquisition and securing a principal, capital or nominal amount not exceeding the cost of that acquisition, provided that the Security Interest is removed or discharged within six months of the date of acquisition of such asset;
 
 
(vi)
any Security Interest outstanding on or over any asset acquired after the date of this Agreement and in existence at the date of such acquisition, provided that the Security Interest is removed or discharged within six months of the date of acquisition of such asset;
 
 
(vii)
any Security Interest created on any asset to secure any Financial Indebtedness incurred in connection with the financing of any asset or project in respect of which the repayment of that Financial Indebtedness is to be made from the revenues arising out of, or other proceeds of realisation from, that asset or project, with recourse to those revenues and proceeds and other assets used in connection with, or forming the subject matter of, that asset or project but without recourse (or with such limited recourse as the Majority Banks may from time to time agree) to any other assets of the Group;
 
 
(viii)
any netting arrangements under any swap or other hedging transaction which is on standard market terms;
 
 
(ix)
any Security Interest created or outstanding with the prior approval of the Majority Banks; and
 
 
(x)
any Security Interest created or outstanding on or over assets of:
 
 
(A)
the Borrower provided that the aggregate outstanding principal or nominal amount secured by all Security Interests created or outstanding under this exception on or over such assets shall not at any time exceed £5,000,000 or its equivalent; and
 
 
(B)
a Distribution Company provided that the aggregate outstanding principal or nominal amount secured by all Security Interests created or outstanding under this exception on or over such assets shall not at any time exceed £25,000,000 or its equivalent for each Distribution Company.
 
20.6
Disposals
 
(a)
Except as provided below, no member of the Group may, either in a single transaction or in a series of transactions and whether related or not, dispose of all or any part of its assets (other than cash) which is substantial in the context of the consolidated total assets of the Group.
 
(b)
Paragraph (a) does not apply to:
 
 
(i)
any disposal made in the ordinary course of business or operations of the disposing entity (including, without limitation, disposals of subsidiaries or lines of business, provided that this shall not include a disposal of the core electricity distribution business);
 
 
(ii)
disposals on normal commercial terms of obsolete assets or assets no longer required for the purpose of the relevant Person's business or operations;
 
 
(iii)
any realisation of investments acquired, purchased or made by the temporary application of funds not immediately required in the relevant Person's business or operations;
 
 
(iv)
the exchange of assets for other assets of a similar or superior nature and value, or the sale of assets on normal commercial terms for cash which is payable in full on the completion of the sale and is to be, and is, applied in or towards the purchase of similar assets within six months;
 
 
(v)
the disposal of assets by one wholly-owned Subsidiary of the Borrower to another or (if the consideration for the disposal does not exceed a normal commercial consideration) to the Borrower by one of its Subsidiaries;
 
 
(vi)
disposals of any National Grid shares on normal commercial terms;
 
 
(vii)
disposals in connection with sale-and-leaseback or sale and repurchase transactions or any other form of "off balance sheet" financing, provided that the aggregate book value (in the books of the disposing party) of all assets the subject of all such disposals made during the period commencing on the date of this Agreement and ending on the date when no amount remains to be lent or remains payable under this Agreement shall not exceed:
 
 
(A)
£5,000,000 in the case of disposals made by the Borrower; and
 
 
(B)
£50,000,000 in the case of disposals made by each Distribution Company; and
 
 
(viii)
any disposal which the Majority Banks shall have agreed shall not be taken into account.
 
20.7
Financial indebtedness of Western Power Distribution LLP
 
The Borrower will procure that Western Power Distribution LLP will not incur any additional Financial Indebtedness (other than Financial Indebtedness owed to another member of the Group) in addition to any existing Financial Indebtedness outstanding at the date of this Agreement.
 
20.8
Change of business
 
The Borrower shall procure that no substantial change is made to the general nature of the business of the Borrower or the Group.
 
20.9
Environmental matters
 
The Borrower will and will ensure that each Distribution Company will comply with all applicable Environmental Law and other regulations, orders or other law applicable to the conduct of the business of the supply or distribution of electricity, in each case, where failure to do so would have a Material Adverse Effect.
 
20.10
Insurance
 
Each member of the Group must insure its business and assets with insurance companies to such an extent and against such risks as that member of the Group reasonably considers to be appropriate, having regard to the insurance arrangements of companies engaged in similar business.
 
20.11
Licence
 
The Borrower will procure that:
 
 
(a)
each Distribution Company complies in all respects with the terms of its Licence where failure to comply would have a Material Adverse Effect or would have a material adverse effect on that Distribution Company's ability to perform its obligations under the Licence;
 
 
(b)
it will promptly notify the Facility Agent upon receipt by the Distribution Companies of any notice from the government, any court or any regulatory authority or agency of a revocation, termination, material adverse amendment, suspension or withdrawal of a Licence unless contemporaneously that Licence is to be replaced, substituted or reissued on the same, or substantially the same or improved terms; and
 
 
(c)
the Distribution Companies will comply with the requirements of all applicable rules, regulations, orders and other requirements of the Secretary of State and/or OFGEM under the Act of any other law applicable to the conduct of the business of the distribution of electricity, where failure to comply would have a Material Adverse Effect or would have a material adverse effect on that Distribution Company's ability to perform its obligations under the Licence.
 
20.12
Arm's Length Transactions
 
The Borrower shall not (and the Borrower shall ensure that no member of the Group shall) enter into any transactions with any member of the Group, a Holding Company or any Affiliate of such Group or Holding Company except on arm's length terms and for full market value (or on terms which are more favourable to the Group).
 
21.
DEFAULT
 
21.1
Events of Default
 
Each of the events set out in this Clause is an Event of Default.
 
21.2
Non-payment
 
The Borrower fails to pay any sum payable under any Finance Document when due unless:
 
 
(a)
its failure to pay is caused by administrative or technical error; and
 
 
(b)
payment is made within three Business Days of its due date.
 
21.3
Breach of other obligations
 
(a)
The Borrower does not perform or comply with its obligations under Clause 19 (Financial Covenants), Clause 20.5 (Negative pledge) or Clause 20.6 (Disposals).
 
(b)
The Borrower does not perform or comply with any of its other obligations under any Finance Document in any material respect or any representation or warranty by the Borrower in this Agreement or in any document delivered under it is or proves to have been incorrect when made or deemed repeated, unless the non-compliance or circumstances giving rise to the misrepresentation, as the case may be, is capable of remedy and is not remedied within 30 days of the earlier of the Facility Agent giving notice requiring the same to be remedied and the Borrower becoming aware of such non-compliance or misrepresentation, as the case may be.
 
21.4
Cross-default
 
Any other Financial Indebtedness or commitment for Financial Indebtedness of the Borrower is cancelled or terminated or becomes due and payable before its normal maturity (whether by declaration or automatically) or any creditor of the Borrower becomes entitled to declare any other Financial Indebtedness due and payable before its normal maturity date, in each case, by reason of default on the part of the Borrower or is not paid when due nor within any applicable grace period, other than in circumstances where such default or liability to pay is being contested in good faith and by appropriate proceedings. However, no Event of Default will occur under this Clause 21.4 unless and until the aggregate amount of such Financial Indebtedness in respect of which one or more of the events mentioned above in this Clause 21.4 has occurred exceeds £20,000,000 or its equivalent.
 
21.5
Insolvency
 
(a)
Any of the following occurs in respect of the Borrower:
 
 
(i)
it is unable to pay its debts generally as they fall due or it is deemed by a court of competent jurisdiction to be insolvent;
 
 
(ii)
it suspends making payments on all or any class of its debts or publicly announces an intention to do so;
 
 
(iii)
by reason of actual or anticipated financial difficulties, it begins negotiations with all or any class of its creditors for the general rescheduling of its indebtedness; or
 
 
(iv)
a moratorium is declared in respect of any of its indebtedness.
 
(b)
If a moratorium occurs in respect of the Borrower, the ending of the moratorium will not remedy any Event of Default caused by the moratorium.
 
21.6
Insolvency proceedings
 
(a)
Except as provided below, any of the following occurs in respect of the Borrower:
 
 
(i)
any person presents a petition for its winding-up, administration or dissolution;
 
 
(ii)
an order for its winding-up, administration or dissolution is made;
 
 
(iii)
any liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer is appointed in respect of it or any of its assets;
 
 
(iv)
its directors or other officers request the appointment of a liquidator, trustee in bankruptcy, judicial custodian, compulsory manager, receiver, administrative receiver, administrator or similar officer; or
 
 
(v)
any other analogous step or procedure is taken in any jurisdiction.
 
(b)
Paragraph (a) does not apply to (i) a petition for winding-up presented by a creditor which is being actively contested in good faith and with due diligence and with a reasonable prospect of success or (ii) a voluntary solvent winding-up, amalgamation, reconstruction or reorganisation or otherwise part of a solvent scheme of arrangement, in each case on terms approved by the Majority Lenders.
 
21.7
Creditors' process
 
A distress, attachment, execution or other legal process material in relation to the Borrower's ability to perform its payment obligations under this Agreement is levied, enforced or sued out on or against the assets of the Borrower and is not discharged or stayed within 90 days.
 
21.8
Licence
 
(a)
Any Licence is revoked or surrendered or ceases to be held by the relevant Distribution Company other than in circumstances which permit the relevant Distribution Company or its Affiliates to carry on the distribution business of that Distribution Company either without a licence as a result of any change in the Act or regulatory regime or with a new licence, permitting the distribution of electricity in the authorised areas covered by the Licence, issued under the Act or pursuant to the Utilities Act, 2000; or
 
(b)
any Licence is amended in a manner that;
 
 
(i)
would materially restrict the ability of the Distribution Companies to pay dividends to their Holding Company (excluding, for the avoidance of doubt, as a result of a price control review by OFGEM); and
 
 
(ii)
would have a Material Adverse Effect.
 
21.9
Balancing and Settlement Code
 
(a)
A Distribution Company ceases to be a party to the Balancing and Settlement Code Framework Agreement other than in circumstances where that Distribution Company is able to carry on its distribution business; or
 
(b)
a Distribution Company breaches the Balancing and Settlement Code and such breach has or is reasonably likely to have a Material Adverse Effect other than in circumstances where that Distribution Company is able to carry on its distribution business.
 
21.10
Ownership of Distribution Companies
 
The Borrower does not own (directly or indirectly) 100 per cent. of the issued share capital of each Distribution Company.
 
21.11
Ring Fence
 
Article 95 of the Borrower's articles of association adopted by written resolution passed on 14 June 2005 is removed or amended where such removal or amendment would have a Material Adverse Effect.
 
21.12
Unlawfulness
 
It is or becomes unlawful for the Borrower to perform any of its obligations under this Agreement in any material respect.
 
21.13
Repudiation
 
The Borrower or a member of the Group repudiates a Finance Document or evidences an intention to repudiate a Finance Document.
 
21.14
Acceleration
 
If an Event of Default is outstanding, the Facility Agent may, and must if so instructed by the Majority Lenders, by notice to the Borrower:
 
 
(a)
cancel the Total Commitments; and/or
 
 
(b)
declare that all or part of any amounts outstanding under the Finance Documents are:
 
 
(i)
immediately due and payable; and/or
 
 
(ii)
payable on demand by the Facility Agent acting on the instructions of the Majority Lenders.
 
Any notice given under this subclause will take effect in accordance with its terms.
 
22.
THE ADMINISTRATIVE PARTIES
 
22.1
Appointment and duties of the Facility Agent
 
(a)
Each Finance Party (other than the Facility Agent) irrevocably appoints the Facility Agent to act as its agent under the Finance Documents.
 
(b)
Each Finance Party irrevocably authorises the Facility Agent to:
 
 
(i)
perform the duties and to exercise the rights, powers and discretions that are specifically given to it under the Finance Documents, together with any other incidental rights, powers and discretions; and
 
 
(ii)
execute each Finance Document expressed to be executed by the Facility Agent.
 
(c)
The Facility Agent has only those duties which are expressly specified in the Finance Documents. Those duties are solely of a mechanical and administrative nature.
 
22.2
Role of the Mandated Lead Arranger
 
Except as specifically provided in the Finance Documents, no Mandated Lead Arranger has any obligations of any kind to any other Party in connection with any Finance Document.
 
22.3
No fiduciary duties
 
Except as specifically provided in a Finance Document, nothing in the Finance Documents makes an Administrative Party a trustee or fiduciary for any other Party or any other person. No Administrative Party need hold in trust any moneys paid to it for a Party or be liable to account for interest on those moneys.
 
22.4
Individual position of an Administrative Party
 
(a)
If it is also a Lender, each Administrative Party has the same rights and powers under the Finance Documents as any other Lender and may exercise those rights and powers as though it were not an Administrative Party.
 
(b)
Each Administrative Party may:
 
 
(i)
carry on any business with the Borrower or its related entities (including acting as an agent or a trustee for any other financing); and
 
 
(ii)
retain any profits or remuneration it receives under the Finance Documents or in relation to any other business it carries on with the Borrower or its related entities.
 
22.5
Reliance
 
The Facility Agent may:
 
 
(a)
rely on any notice or document believed by it to be genuine and correct and to have been signed by, or with the authority of, the proper person;
 
 
(b)
rely on any statement made by any person regarding any matters which may reasonably be assumed to be within his knowledge or within his power to verify;
 
 
(c)
engage, pay for and rely on professional advisers selected by it (including those representing a Party other than the Facility Agent); and
 
 
(d)
act under the Finance Documents through its personnel and agents.
 
22.6
Majority Lenders' instructions
 
(a)
The Facility Agent is fully protected if it acts on the instructions of the Majority Lenders in the exercise of any right, power or discretion or any matter not expressly provided for in the Finance Documents. Any such instructions given by the Majority Lenders will be binding on all the Lenders. In the absence of instructions, the Facility Agent may act as it considers to be in the best interests of all the Lenders.
 
(b)
The Facility Agent is not authorised to act on behalf of a Lender (without first obtaining that Lender's consent) in any legal or arbitration proceedings in connection with any Finance Document.
 
(c)
The Facility Agent may require the receipt of security satisfactory to it, whether by way of payment in advance or otherwise, against any liability or loss which it may incur in complying with the instructions of the Majority Lenders.
 
22.7
Responsibility
 
(a)
No Administrative Party is responsible to any other Finance Party for the adequacy, accuracy or completeness of:
 
 
(i)
any Finance Document or any other document; or
 
 
(ii)
any statement or information (whether written or oral) made in or supplied in connection with any Finance Document.
 
(b)
Without affecting the responsibility of the Borrower for information supplied by it or on its behalf in connection with any Finance Document, each Lender confirms that it:
 
 
(i)
has made, and will continue to make, its own independent appraisal of all risks arising under or in connection with the Finance Documents (including the financial condition and affairs of the Borrower and its related entities and the nature and extent of any recourse against any Party or its assets); and
 
 
(ii)
has not relied exclusively on any information provided to it by any Administrative Party in connection with any Finance Document.
 
(c)
(i)
Nothing in this Agreement will oblige the Facility Agent to satisfy any know your customer requirement in relation to the identity of any person on behalf of any Finance Party.
 
 
(ii)
Each Finance Party confirms to the Facility Agent that it is solely responsible for any know your customer requirements it is required to carry out and that it may not rely on any statement in relation to those requirements made by any other person.
 
22.8
Exclusion of liability
 
(a)
The Facility Agent is not liable or responsible to any other Finance Party for any action taken or not taken by it in connection with any Finance Document, unless directly caused by its gross negligence or wilful misconduct.
 
(b)
No Party may take any proceedings against any officer, employee or agent of the Facility Agent in respect of any claim it might have against the Facility Agent or in respect of any act or omission of any kind by that officer, employee or agent in connection with any Finance Document. Any officer, employee or agent of the Facility Agent may rely on this Subclause and enforce its terms under the Contracts (Rights of Third Parties) Act 1999.
 
22.9
Default
 
(a)
The Facility Agent is not obliged to monitor or enquire whether a Default has occurred. The Facility Agent is not deemed to have knowledge of the occurrence of a Default.
 
(b)
If the Facility Agent:
 
 
(i)
receives notice from a Party referring to this Agreement, describing a Default and stating that the event is a Default; or
 
 
(ii)
is aware of the non-payment of any principal or interest or any fee payable to a Lender under this Agreement,
 
it must promptly notify the Lenders.
 
22.10
Information
 
(a)
The Facility Agent must promptly forward to the person concerned the original or a copy of any document which is delivered to the Facility Agent by a Party for that person.
 
(b)
Except where a Finance Document specifically provides otherwise, the Facility Agent is not obliged to review or check the adequacy, accuracy or completeness of any document it forwards to another Party.
 
(c)
Except as provided above, the Facility Agent has no duty:
 
 
(i)
either initially or on a continuing basis to provide any Lender with any credit or other information concerning the risks arising under or in connection with the Finance Documents (including any information relating to the financial condition or affairs of the Borrower or its related entities or the nature or extent of recourse against any Party or its assets) whether coming into its possession before, on or after the date of this Agreement; or
 
 
(ii)
unless specifically requested to do so by a Lender in accordance with a Finance Document, to request any certificate or other document from the Borrower.
 
(d)
In acting as the Facility Agent, the agency division of the Facility Agent is treated as a separate entity from its other divisions and departments. Any information acquired by the Facility Agent which, in its opinion, is acquired by it otherwise than in its capacity as the Facility Agent may be treated as confidential by the Facility Agent and will not be treated as information possessed by the Facility Agent in its capacity as such.
 
(e)
The Facility Agent is not obliged to disclose to any person any confidential information supplied to it by a member of the Group solely for the purpose of evaluating whether any waiver or amendment is required to any term of the Finance Documents.
 
(f)
The Borrower irrevocably authorises the Facility Agent to disclose to the other Finance Parties any information which, in its opinion, is received by it in its capacity as the Facility Agent.
 
22.11
Indemnities
 
(a)
Without limiting the liability of the Borrower under the Finance Documents, each Lender must indemnify the Facility Agent for that Lender's Pro Rata Share of any loss or liability incurred by the Facility Agent in acting as the Facility Agent, except to the extent that the loss or liability is caused by the Facility Agent's gross negligence or wilful misconduct.
 
(b)
The Facility Agent may deduct from any amount received by it for a Lender any amount due to the Facility Agent from that Lender under a Finance Document but unpaid.
 
(c)
The Borrower must indemnify the Facility Agent against any loss or liability properly incurred by the Facility Agent as a result of:
 
 
(i)
investigating any event which the Facility Agent reasonably believes to be a Default; or
 
 
(ii)
acting or relying on any notice which the Facility Agent reasonably believes to be genuine, correct and appropriately authorised.
 
22.12
Compliance
 
The Facility Agent may refrain from doing anything (including disclosing any information) which might, in its opinion, constitute a breach of any law or regulation or be otherwise actionable at the suit of any person, and may do anything which, in its opinion, is necessary or desirable to comply with any law or regulation.
 
22.13
Resignation of the Facility Agent
 
(a)
The Facility Agent may resign and appoint any of its Affiliates as successor Facility Agent by giving notice to the Lenders and the Borrower.
 
(b)
Alternatively, the Facility Agent may resign by giving notice to the Lenders and the Borrower, in which case the Majority Lenders may appoint a successor Facility Agent.
 
(c)
If no successor Facility Agent has been appointed under paragraph (b) above within 30 days after notice of resignation was given, the Facility Agent may appoint a successor Facility Agent.
 
(d)
The person(s) appointing a successor Facility Agent must, if practicable, consult with the Borrower prior to the appointment. Any successor Facility Agent must have an office in the U.K.
 
(e)
The resignation of the Facility Agent and the appointment of any successor Facility Agent will both become effective only when the successor Facility Agent notifies all the Parties that it accepts its appointment. On giving the notification, the successor Facility Agent will succeed to the position of the Facility Agent and the term "Facility Agent" will mean the successor Facility Agent.
 
(f)
The retiring Facility Agent must, at its own cost, make available to the successor Facility Agent such documents and records and provide such assistance as the successor Facility Agent may reasonably request for the purposes of performing its functions as the Facility Agent under the Finance Documents.
 
(g)
Upon its resignation becoming effective, this Clause will continue to benefit the retiring Facility Agent in respect of any action taken or not taken by it in connection with the Finance Documents while it was the Facility Agent, and, subject to paragraph (f) above, it will have no further obligations under any Finance Document.
 
(h)
The Majority Lenders may, by notice to the Facility Agent, require it to resign under paragraph (b) above.
 
22.14
Relationship with Lenders
 
(a)
The Facility Agent may treat each Lender as a Lender, entitled to payments under this Agreement and as acting through its Facility Office(s) until it has received not less than five Business Days' prior notice from that Lender to the contrary.
 
(b)
The Facility Agent may at any time, and must if requested to do so by the Majority Lenders, convene a meeting of the Lenders.
 
(c)
The Facility Agent must keep a register of all the Parties and supply any other Party with a copy of the register on request. The register will include each Lender's Facility Office(s) and contact details for the purposes of this Agreement.
 
22.15
Facility Agent's management time
 
If the Facility Agent requires, any amount payable to the Facility Agent by any Party under any indemnity or in respect of any costs or expenses incurred by the Facility Agent under the Finance Documents after the date of this Agreement may include the cost of using its management time or other resources and will be calculated on the basis of such reasonable daily or hourly rates as the Facility Agent may notify to the relevant Party. This is in addition to any amount in respect of fees or expenses paid or payable to the Facility Agent under any other term of the Finance Documents.
 
22.16
Notice period
 
Where this Agreement specifies a minimum period of notice to be given to the Facility Agent, the Facility Agent may, at its discretion, accept a shorter notice period.
 
23.
EVIDENCE AND CALCULATIONS
 
23.1
Accounts
 
Accounts maintained by a Finance Party in connection with this Agreement are prima facie evidence of the matters to which they relate for the purpose of any litigation or arbitration proceedings.
 
23.2
Certificates and determinations
 
Any certification or determination by a Finance Party of a rate or amount under the Finance Documents will be, in the absence of manifest error, conclusive evidence of the matters to which it relates.
 
23.3
Calculations
 
Any interest or fee accruing under this Agreement accrues from day to day and is calculated on the basis of the actual number of days elapsed and a year of 360 or 365 days or otherwise, depending on what the Facility Agent determines is market practice.
 
24.
FEES
 
24.1
Facility Agent's fee
 
The Borrower must pay to the Facility Agent for its own account an agency fee in the manner agreed between the Facility Agent and the Borrower.
 
24.2
Arrangement fee
 
The Borrower must pay an arrangement and participation fee in the manner agreed between the Mandated Lead Arrangers and the Borrower.
 
24.3
Commitment fee
 
(a)
The Borrower must pay a commitment fee computed at the rate of 40% of the Margin from time to time on the undrawn, uncancelled amount of each Lender's Commitment calculated from the later of:
 
 
(i)
the date of this Agreement; and
 
 
(ii)
the earlier of either
 
 
(A)
the date on which the Existing Tranche C Facility is irrevocably cancelled in full; and
 
 
(B)
the date falling 10 Business Days after the date of this Agreement.
 
(b)
Accrued commitment fee is payable quarterly in arrear. Accrued commitment fee is also payable to the Facility Agent for a Lender on the date its Commitment is cancelled in full.
 
24.4
Utilisation fee
 
(a)
The Borrower must pay to the Facility Agent for each Lender a utilisation fee computed at the rate of 0.05% per annum of the aggregate amount of the Loans for each day on which the aggregate amount of the Loans exceeds 50% of the Total Commitments.
 
(b)
Utilisation fee is payable on the amount of each Lender's share in the Loans.
 
(c)
Accrued utilisation fee is payable quarterly in arrear. Accrued utilisation fee is also payable to the Facility Agent for a Lender on the date that its Commitment is cancelled and its share in the Loans prepaid or repaid in full.
 
24.5
Extension Fee
 
(a)
The Borrower must pay to the Facility Agent for each Lender whose Commitment is extended under Clause 6 (Extension Option) an extension fee of 0.05% of the Lender's Commitment which is to be extended.
 
(b)
The Borrower must pay to the Facility Agent for each Lender which agrees to an Extension Request (having confirmed to the Borrower that it has obtained credit approval for such extension) but whose Commitment is not extended because the Borrower elects to withdraw its Extension Request pursuant to Clause 6(h) (Extension Option) a work fee of 0.025% of the Lender's Commitment that was to be extended.
 
(c)
Each extension fee is payable on the date that the Final Maturity Date is extended (or would have been extended, had the Extension Request not been withdrawn under Clause 6(h) (Extension Option)).
 
(d)
An extension fee is payable in respect of each period of one year that a Lender agrees to.
 
25.
INDEMNITIES AND BREAK COSTS
 
25.1
Currency indemnity
 
(a)
The Borrower must, as an independent obligation, indemnify each Finance Party against any loss or liability which that Finance Party incurs as a consequence of:
 
 
(i)
that Finance Party receiving an amount in respect of the Borrower's liability under the Finance Documents; or
 
 
(ii)
that liability being converted into a claim, proof, judgment or order,
 
in a currency other than the currency in which the amount is expressed to be payable under the relevant Finance Document.
 
(b)
Unless otherwise required by law, the Borrower waives any right it may have in any jurisdiction to pay any amount under the Finance Documents in a currency other than that in which it is expressed to be payable.
 
25.2
Other indemnities
 
The Borrower shall within 15 days of demand indemnify the Facility Agent and each Lender against any funding or other cost, loss, expense or liability in an amount certified by it in reasonable detail (together with documentation in support) sustained or incurred by it as a direct result of:
 
 
(a)
the occurrence of any Event of Default;
 
 
(b)
(other than by reason of negligence or default by a Finance Party) a Loan not being made after a Request has been delivered for that Loan; or
 
 
(c)
the receipt or recovery by any party (or the Facility Agent on its behalf) of all or any part of a Loan or overdue sum due from the Borrower otherwise than on the Final Maturity Date or Maturity Date (as relevant) of that Loan or, in the case of an overdue sum, the last day of an interest period relating to that overdue sum, as the case may be or a Loan or any part thereof not being prepaid in accordance with a notice of prepayment.
 
25.3
Break Costs
 
(a)
The Borrower must pay to each Lender its Break Costs.
 
(b)
Break Costs are the amount (if any) determined by the relevant Lender by which:
 
 
(i)
the interest which that Lender would have received for the period from the date of receipt of any part of its share in a Loan or an overdue amount to the last day of the applicable Term for that Loan or overdue amount if the principal or overdue amount received had been paid on the last day of that Term;
 
exceeds
 
 
(ii)
the amount which that Lender would be able to obtain by placing an amount equal to the amount received by it on deposit with a leading bank in the appropriate interbank market for a period starting on the Business Day following receipt and ending on the last day of the applicable Term.
 
(c)
Each Lender must supply to the Facility Agent for the Borrower details of the amount of any Break Costs claimed by it under this Subclause.
 
26.
EXPENSES
 
26.1
Initial costs
 
The Borrower must pay to each Administrative Party the amount of all costs and expenses (including legal fees) reasonably incurred by it in connection with the negotiation, preparation, printing, execution and syndication of the Finance Documents.
 
26.2
Subsequent costs
 
The Borrower must pay to the Facility Agent the amount of all costs and expenses (including legal fees) reasonably incurred by it in connection with:
 
 
(a)
the negotiation, preparation, printing and execution of any Finance Document (other than a Transfer Certificate) executed after the date of this Agreement; and
 
 
(b)
any amendment, waiver or consent requested by or on behalf of the Borrower or specifically allowed by this Agreement.
 
26.3
Enforcement costs
 
The Borrower must pay to each Finance Party the amount of all costs and expenses (including legal fees) incurred by it in connection with the enforcement of, or the preservation of any rights under, any Finance Document.
 
27.
AMENDMENTS AND WAIVERS
 
27.1
Procedure
 
(a)
Except as provided in this Clause, any term of the Finance Documents may be amended or waived with the agreement of the Borrower and the Majority Lenders. The Facility Agent may effect, on behalf of any Finance Party, an amendment or waiver allowed under this Clause.
 
(b)
The Facility Agent must promptly notify the other Parties of any amendment or waiver effected by it under paragraph (a) above. Any such amendment or waiver is binding on all the Parties.
 
27.2
Exceptions
 
(a)
An amendment or waiver which relates to:
 
 
(i)
the definition of Majority Lenders in Clause 1.1 (Definitions) or Consolidated EBITDA, Interest Payable, Regulatory Asset Base or Total Net Debt in Clause 19.1 (Definitions);
 
 
(ii)
an extension of the date of payment of any amount to a Lender under the Finance Documents;
 
 
(iii)
a reduction in the Margin or a reduction in the amount of any payment of principal, interest, fee or other amount payable to a Lender under the Finance Documents;
 
 
(iv)
an increase in, or an extension of, a Commitment or the Total Commitments;
 
 
(v)
a term of a Finance Document which expressly requires the consent of each Lender;
 
 
(vi)
the right of a Lender to assign or transfer its rights or obligations under the Finance Documents; or
 
 
(vii)
this Clause,
 
may only be made with the consent of all the Lenders.
 
(b)
An amendment or waiver which relates to the rights or obligations of an Administrative Party may only be made with the consent of that Administrative Party.
 
27.3
Change of currency
 
If a change in any currency of a country occurs (including where there is more than one currency or currency unit recognised at the same time as the lawful currency of a country), the Finance Documents will be amended to the extent the Facility Agent (acting reasonably and after consultation with the Borrower) determines is necessary to reflect the change.
 
27.4
Waivers and remedies cumulative
 
The rights of each Finance Party under the Finance Documents:
 
 
(a)
may be exercised as often as necessary;
 
 
(b)
are cumulative and not exclusive of its rights under the general law; and
 
 
(c)
may be waived only in writing and specifically.
 
Delay in exercising or non-exercise of any right is not a waiver of that right.
 
28.
CHANGES TO THE PARTIES
 
28.1
Assignments and transfers by the Borrower
 
The Borrower may not assign or transfer any of its rights and obligations under the Finance Documents without the prior consent of all the Lenders.
 
28.2
Assignments and transfers by Lenders
 
(a)
A Lender (the Existing Lender) may, subject to the following provisions of this Subclause, at any time assign or transfer (including by way of novation) any of its rights and obligations under this Agreement to any other person (the New Lender).
 
(b)
Unless the Borrower and the Facility Agent otherwise agree, a transfer of part of a Commitment or rights and obligations under this Agreement by the Existing Lender must be in a minimum amount of £5,000,000.
 
(c)
The consent of the Borrower is required for any assignment or transfer unless the New Lender is another Lender or an Affiliate of a Lender. The consent of the Borrower must not be unreasonably withheld or delayed. The Borrower will be deemed to have given its consent five Business Days after the Lender has requested it unless consent is expressly refused by the Borrower within that time.
 
(d)
The Facility Agent is not obliged to execute a Transfer Certificate until it has completed all know your customer requirements to its satisfaction. The Facility Agent must promptly notify the Existing Lender and the New Lender if there are any such requirements.
 
(e)
The Borrower may not withhold its consent solely because the assignment or transfer might increase the Mandatory Cost.
 
(f)
A transfer of obligations will be effective only if either:
 
 
(i)
the obligations are novated in accordance with the following provisions of this Clause; or
 
 
(ii)
the New Lender confirms to the Facility Agent and the Borrower in form and substance satisfactory to the Facility Agent that it is bound by the terms of this Agreement as a Lender. On the transfer becoming effective in this manner the Existing Lender will be released from its obligations under this Agreement to the extent that they are transferred to the New Lender.
 
(g)
Unless the Facility Agent otherwise agrees, the New Lender must pay to the Facility Agent for its own account, on or before the date any assignment or transfer occurs, a fee of £2000.
 
(h)
Any reference in this Agreement to a Lender includes a New Lender but excludes a Lender if no amount is or may be owed to or by it under this Agreement.
 
28.3
Procedure for transfer by way of novations
 
(a)
In this Subclause:
 
Transfer Date means, for a Transfer Certificate, the later of:
 
 
(i)
the proposed Transfer Date specified in that Transfer Certificate; and
 
 
(ii)
the date on which the Facility Agent executes that Transfer Certificate.
 
(b)
A novation is effected if:
 
 
(i)
the Existing Lender and the New Lender deliver to the Facility Agent a duly completed Transfer Certificate; and
 
 
(ii)
the Facility Agent executes it.
 
The Facility Agent must execute as soon as reasonably practicable a Transfer Certificate delivered to it and which appears on its face to be in order.
 
(c)
Each Party (other than the Existing Lender and the New Lender) irrevocably authorises the Facility Agent to execute any duly completed Transfer Certificate on its behalf.
 
(d)
On the Transfer Date:
 
 
(i)
the New Lender will assume the rights and obligations of the Existing Lender expressed to be the subject of the novation in the Transfer Certificate in substitution for the Existing Lender; and
 
 
(ii)
the Existing Lender will be released from those obligations and cease to have those rights.
 
28.4
Limitation of responsibility of Existing Lender
 
(a)
Unless expressly agreed to the contrary, an Existing Lender is not responsible to a New Lender for the legality, validity, adequacy, accuracy, completeness or performance of:
 
 
(i)
any Finance Document or any other document; or
 
 
(ii)
any statement or information (whether written or oral) made in or supplied in connection with any Finance Document,
 
and any representations or warranties implied by law are excluded.
 
(b)
Each New Lender confirms to the Existing Lender and the other Finance Parties that it:
 
 
(i)
has made, and will continue to make, its own independent appraisal of all risks arising under or in connection with the Finance Documents (including the financial condition and affairs of the Borrower and its related entities and the nature and extent of any recourse against any Party or its assets) in connection with its participation in this Agreement; and
 
 
(ii)
has not relied exclusively on any information supplied to it by the Existing Lender in connection with any Finance Document.
 
(c)
Nothing in any Finance Document requires an Existing Lender to:
 
 
(i)
accept a re-transfer from a New Lender of any of the rights and obligations assigned or transferred under this Clause; or
 
 
(ii)
support any losses incurred by the New Lender by reason of the non-performance by the Borrower of its obligations under any Finance Document or otherwise.
 
28.5
Costs resulting from change of Lender or Facility Office
 
If:
 
 
(a)
a Lender assigns or transfers any of its rights and obligations under the Finance Documents or changes its Facility Office; and
 
 
(b)
as a result of circumstances existing at the date the assignment, transfer or change occurs, the Borrower would be obliged to pay a Tax Payment or an Increased Cost,
 
the Borrower need only pay that Tax Payment or Increased Cost to the same extent that it would have been obliged to if no assignment, transfer or change had occurred.
 
28.6
Changes to the Reference Banks
 
(a)
If a Reference Bank (or, if a Reference Bank is not a Lender, the Lender of which it is an Affiliate) ceases to be a Lender, the Facility Agent must (in consultation with the Borrower) appoint another Lender or an Affiliate of a Lender to replace that Reference Bank.
 
(b)
If a Reference Bank ceases to have a London office or novates or assigns all its rights and obligations under this Agreement or if any Commitments of any Reference Bank are cancelled or if Loans it has advanced are prepaid it shall be replaced as a Reference Bank by such other Bank with an office in London as the Facility Agent (after consultation with the Borrower) shall designate by notice to the Borrower and the Banks.
 
29.
DISCLOSURE OF INFORMATION
 
(a)
Each Finance Party must keep confidential any information supplied to it by or on behalf of the Borrower in connection with the Finance Documents. However, a Finance Party is entitled to disclose information:
 
 
(i)
which is publicly available, other than as a result of a breach by that Finance Party of this Clause;
 
 
(ii)
in connection with any legal or arbitration proceedings;
 
 
(iii)
if required to do so under any law or regulation;
 
 
(iv)
to a governmental, banking, taxation or other regulatory authority;
 
 
(v)
to its professional advisers;
 
 
(vi)
to the extent allowed under paragraph (b) below; or
 
 
(vii)
with the agreement of the Borrower.
 
(b)
A Finance Party may disclose to an Affiliate or any person with whom it may enter, or has entered into, any kind of transfer, participation or other agreement in relation to this Agreement (a participant):
 
 
(i)
a copy of any Finance Document; and
 
 
(ii)
any information which that Finance Party has acquired under or in connection with any Finance Document.
 
However, before a participant may receive any confidential information, it must agree with the relevant Finance Party to keep that information confidential on the terms of paragraph (a) above.
 
This Clause supersedes any previous confidentiality undertaking given by a Finance Party in connection with this Agreement prior to it becoming a Party.
 
30.
SET-OFF
 
A Finance Party may set off any matured obligation owed to it by the Borrower under the Finance Documents (to the extent beneficially owned by that Finance Party) against any obligation (whether or not matured) owed by that Finance Party to the Borrower, regardless of the place of payment, booking branch or currency of either obligation. If the obligations are in different currencies, the Finance Party may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off.
 
31.
PRO RATA SHARING
 
31.1
Redistribution
 
If any amount owing by the Borrower under this Agreement to a Lender (the recovering Lender) is discharged by payment, set-off or any other manner other than through the Facility Agent under this Agreement (a recovery), then:
 
 
(a)
the recovering Lender must, within three Business Days, supply details of the recovery to the Facility Agent;
 
 
(b)
the Facility Agent must calculate whether the recovery is in excess of the amount which the recovering Lender would have received if the recovery had been received by the Facility Agent under this Agreement; and
 
 
(c)
the recovering Lender must pay to the Facility Agent an amount equal to the excess (the redistribution).
 
31.2
Effect of redistribution
 
(a)
The Facility Agent must treat a redistribution as if it were a payment by the Borrower under this Agreement and distribute it among the Lenders, other than the recovering Lender, accordingly.
 
(b)
When the Facility Agent makes a distribution under paragraph (a) above, the recovering Lender will be subrogated to the rights of the Finance Parties which have shared in that redistribution.
 
(c)
If and to the extent that the recovering Lender is not able to rely on any rights of subrogation under paragraph (b) above, the Borrower will owe the recovering Lender a debt which is equal to the redistribution, immediately payable and of the type originally discharged.
 
(d)
If:
 
 
(i)
a recovering Lender must subsequently return a recovery, or an amount measured by reference to a recovery, to the Borrower; and
 
 
(ii)
the recovering Lender has paid a redistribution in relation to that recovery,
 
each Finance Party must reimburse the recovering Lender all or the appropriate portion of the redistribution paid to that Finance Party, together with interest for the period while it held the re-distribution. In this event, the subrogation in paragraph (b) above will operate in reverse to the extent of the reimbursement.
 
31.3
Exceptions
 
Notwithstanding any other term of this Clause, a recovering Lender need not pay a redistribution to the extent that:
 
 
(a)
it would not, after the payment, have a valid claim against the Borrower in the amount of the redistribution; or
 
 
(b)
it would be sharing with another Finance Party any amount which the recovering Lender has received or recovered as a result of legal or arbitration proceedings, where:
 
 
(i)
the recovering Lender notified the Facility Agent of those proceedings; and
 
 
(ii)
the other Finance Party had an opportunity to participate in those proceedings but did not do so or did not take separate legal or arbitration proceedings as soon as reasonably practicable after receiving notice of them.
 
32.
SEVERABILITY
 
If a term of a Finance Document is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect:
 
 
(a)
the legality, validity or enforceability in that jurisdiction of any other term of the Finance Documents; or
 
 
(b)
the legality, validity or enforceability in other jurisdictions of that or any other term of the Finance Documents.
 
33.
COUNTERPARTS
 
Each Finance Document may be executed in any number of counterparts. This has the same effect as if the signatures on the counterparts were on a single copy of the Finance Document.
 
34.
NOTICES
 
34.1
In writing
 
(a)
Any communication in connection with a Finance Document must be in writing and, unless otherwise stated, may be given:
 
 
(i)
in person, by post, or fax or any other electronic communication approved by the Facility Agent; or
 
 
(ii)
if between the Facility Agent and a Lender and the Facility Agent and the Lender agree, by e-mail or other electronic communication.
 
(b)
For the purpose of the Finance Documents, an electronic communication will be treated as being in writing.
 
(c)
Unless it is agreed to the contrary, any consent or agreement required under a Finance Document must be given in writing.
 
34.2
Contact details
 
(a)
Except as provided below, the contact details of each Party for all communications in connection with the Finance Documents are those notified by that Party for this purpose to the Facility Agent on or before the date it becomes a Party.
 
(b)
The contact details of the Borrower for this purpose are:
 
Address: Avonbank,
Feeder Road,
Bristol,
BS2 0TB
 
Fax number: +44 (0)1179 332108
 
E-mail: irwilliams@westernpower.co.uk
 
Attention: Ian Williams.
 
(c)
The contact details of the Facility Agent for this purpose are:
 
Address: Loans Administration Department
 
Lloyds TSB Bank plc
 
Bank House
 
Wine Street
 
Bristol BS1 2AN
 
Fax number: +44 (0)117 923 3367
 
Attention: The Manager
 
(d)
Any Party may change its contact details by giving five Business Days' notice to the Facility Agent or (in the case of the Facility Agent) to the other Parties.
 
(e)
Where a Party nominates a particular department or officer to receive a communication, a communication will not be effective if it fails to specify that department or officer.
 
34.3
Effectiveness
 
(a)
Except as provided below, any communication in connection with a Finance Document will be deemed to be given as follows:
 
 
(i)
if delivered in person, at the time of delivery;
 
 
(ii)
if posted, five days after being deposited in the post, postage prepaid, in a correctly addressed envelope; and
 
 
(iii)
if by fax, when received in legible form.
 
(b)
A communication given under paragraph (a) above but received on a non-working day or after business hours in the place of receipt will only be deemed to be given on the next working day in that place.
 
(c)
A communication to the Facility Agent will only be effective on actual receipt by it.
 
34.4
The Borrower
 
All formal communication under the Finance Documents to or from the Borrower must be sent through the Facility Agent.
 
35.
LANGUAGE
 
(a)
Any notice given in connection with a Finance Document must be in English.
 
(b)
Any other document provided in connection with a Finance Document must be:
 
 
(i)
in English; or
 
 
(ii)
(unless the Facility Agent otherwise agrees) accompanied by a certified English translation. In this case, the English translation prevails unless the document is a statutory or other official document.
 
36.
GOVERNING LAW
 
This Agreement is governed by English law.
 
37.
ENFORCEMENT
 
37.1
Jurisdiction
 
(a)
The English courts have exclusive jurisdiction to settle any dispute in connection with any Finance Document.
 
(b)
The English courts are the most appropriate and convenient courts to settle any such dispute and the Borrower waives objection to those courts on the grounds of inconvenient forum or otherwise in relation to proceedings in connection with any Finance Document.
 
(c)
This Clause is for the benefit of the Finance Parties only. To the extent allowed by law, a Finance Party may take:
 
 
(i)
proceedings in any other court; and
 
 
(ii)
concurrent proceedings in any number of jurisdictions.
 
THIS AGREEMENT has been entered into on the date stated at the beginning of this Agreement.


 
SCHEDULE 1 
 
ORIGINAL PARTIES
 

 
Name of Original Lender
 
Commitments
   
 
Barclays Bank PLC
 
£50,000,000
 
Bayerische Landesbank, acting through its London Branch
 
£50,000,000
 
Lloyds TSB Bank plc
 
£50,000,000
   
 
Total Commitments
 
£150,000,000


 
SCHEDULE 2 
 
CONDITIONS PRECEDENT DOCUMENTS
 
Borrower
 
1.
A certified copy of the certificate of incorporation and the memorandum and articles of the Borrower.
 
2.
A certified copy of a resolution of the board of directors or a committee of the board of directors of the Borrower approving the terms of, and the transactions contemplated by, the Finance Documents.
 
3.
A specimen of the signature of each person authorised on behalf of the Borrower to execute or witness the execution of any Finance Document or to sign or send any document or notice in connection with any Finance Document.
 
4.
A certificate of an authorised signatory of the Borrower confirming that:
 
 
(a)
each copy document provided by it pursuant to this Schedule 2 is correct, complete and full force and effect as at a date no earlier than the date of this Agreement; and
 
 
(b)
borrowing the Total Commitments would not cause any borrowing limit binding on the Borrower to be exceeded.
 
Legal opinions
 
A legal opinion of Linklaters, legal advisers to the Mandated Lead Arranger and the Facility Agent addressed to the Finance Parties.
 
Other documents and evidence
 
1.
Evidence that all fees and expenses then due and payable from the Borrower under this Agreement have been or will be paid no later than the first Utilisation Date.
 
2.
Copies of each duly executed Fee Letter.
 
3.
The Original Financial Statements.
 
4.
Evidence that the Existing Tranche C Facility will be irrevocably prepaid and cancelled in full on or by the first Utilisation Date.


 
SCHEDULE 3 
 
FORM OF REQUEST
 
To: Lloyds TSB Bank plc as Facility Agent
 
From: [               ]
 
Date: [               ]
 
WESTERN POWER DISTRIBUTION HOLDINGS LIMITED - £150,000,000 Credit Agreement dated 24 January 2007 (as amended and restated from time to time) (the Agreement)

 
1.
We refer to the Agreement. This is a Request.
 
2.
We wish to borrow a Loan on the following terms:
 
 
(a)
Utilisation Date: [               ]
 
 
(b)
Amount/currency: [               ]
 
 
(c)
Term: [               ].
 
3.
Our payment instructions are: [               ].
 
4.
We confirm that each condition precedent under the Agreement which must be satisfied on the date of this Request is so satisfied.
 
5.
We confirm that as at [relevant testing date] Consolidated EBITDA was [            ] and Interest Payable was [           ]; therefore, the ratio of Consolidated EBITDA to Interest Payable was [    ] to 1.
 
6. We confirm that as at [relevant testing date] Regulatory Asset Base was [         ] and Total Net Debt was [         ]; therefore, Regulatory Asset Base exceeded Total Net Debt by [       ].
 
7.
This Request is irrevocable.
 
By:
 
[                 ]


 
SCHEDULE 4 
 
CALCULATION OF THE MANDATORY COST
 
1.
General
 
The Mandatory Cost is the weighted average of the rates calculated below by the Facility Agent on the first day of a Term. The Facility Agent must distribute each amount of Mandatory Cost among the Lenders on the basis of the rate for each Lender.
 
2.
For a Lender lending from a Facility Office in the U.K.
 
(a)
The relevant rate for a Lender lending from a Facility Office in the U.K. is the arithmetic mean of the rates notified by that Lender to the Facility Agent and calculated in accordance with the following formulae:
 
for a Loan in Sterling:
 
    
AB + C(B - D) + E x 0.01
per cent. per annum
100 - (A + C)
 
 
      for any other Loan:
 
    
E x 0.01
per cent. per annum
300
 
 
where on the day of application of the formula:
 
A is the percentage of the Lender's eligible liabilities (in excess of any stated minimum) which the Bank of England requires it to hold on a non-interest-bearing deposit account in accordance with its cash ratio requirements;
 
B is LIBOR for that Term;
 
C is the percentage of the Lender's eligible liabilities which the Bank of England requires it to place as a special deposit;
 
D is the interest rate per annum allowed by the Bank of England on a special deposit; and
 
E is the charge payable by the Lender to the Financial Services Authority under the fees rules (but, for this purpose, calculated by the Facility Agent on a notional basis as being the average of the fee tariffs within fee-block Category A1 (Deposit acceptors) of the fees rules, applying any applicable discount and ignoring any minimum fee required under the fees rules) and expressed in pounds per £1 million of the tariff base of that Lender.
 
(b)
For the purposes of this paragraph 2:
 
 
(i)
eligible liabilities and special deposit have the meanings given to them at the time of application of the formula by the Bank of England;
 
 
(ii)
fees rules means the then current rules on periodic fees in the Supervision Manual of the FSA Handbook; and
 
 
(iii)
tariff base has the meaning given to it in the fees rules.
 
(c)
(i)
In the application of the formulae, A, B, C and D are included as figures and not as percentages, e.g. if A = 0.5% and B = 15%, AB is calculated as 0.5 x 15. A negative result obtained by subtracting D from B is taken as zero.
 
 
(ii)
Each Lender must supply to the Facility Agent the information required by it to make a calculation of the rate for that Lender. The Facility Agent may assume that this information is correct in all respects.
 
(d)
(i)
Each rate calculated in accordance with a formula is, if necessary, rounded upward to four decimal places.
 
 
(ii)
If a Lender fails to do so, the Facility Agent may assume that the Lender's obligations in respect of cash ratio deposits, special deposits and the fees rules are the same as those of a typical bank from its jurisdiction of incorporation with a Facility Office in the same jurisdiction as its Facility Office.
 
 
(iii)
The Facility Agent has no liability to any Party if its calculation over or under compensates any Lender.
 
3.
For a Lender lending from a Facility Office in a Participating Member State
 
(a)
The relevant rate for a Lender lending from a Facility Office in a Participating Member State is the percentage rate per annum notified by that Lender to the Facility Agent as its cost of complying with the minimum reserve requirements of the European Central Bank.
 
(b)
If a Lender fails to specify a rate under paragraph (a) above, the Facility Agent will assume that the Lender has not incurred any such cost.
 
4.
Changes
 
The Facility Agent may, after consultation with the Borrower and the Lenders, notify all the Parties of any amendment to this Schedule which is required to reflect:
 
 
(a)
any change in law or regulation; or
 
 
(b)
any requirement imposed by the Bank of England, the Financial Services Authority or the European Central Bank (or, in any case, any successor authority).
 
Any notification will be, in the absence of manifest error, conclusive and binding on all the Parties.


 
SCHEDULE 5 
 
FORM OF TRANSFER CERTIFICATE
 
To: Lloyds TSB Bank plc as Facility Agent
 
From: [THE EXISTING LENDER] (the Existing Lender) and [THE NEW LENDER] (the New Lender)
 
Date: [          ]
 
WESTERN POWER DISTRIBUTION HOLDINGS LIMITED - £150,000,000 Credit Agreement dated 24 January 2007 (as amended and restated from time to time) (the Agreement)
 
We refer to the Agreement. This is a Transfer Certificate.
 
1.
The Existing Lender transfers by novation to the New Lender the Existing Lender's rights and obligations referred to in the Schedule below in accordance with the terms of the Agreement.
 
2.
The proposed Transfer Date is [          ].
 
3.
The administrative details of the New Lender for the purposes of the Agreement are set out in the Schedule.
 
4.
This Transfer Certificate is governed by English law.
 
 


 
THE SCHEDULE
 
Rights and obligations to be transferred by novation
[insert relevant details, including applicable Commitment (or part)]
 
Administrative details of the New Lender
[insert details of Facility Office, address for notices and payment details etc.]
 
 

[EXISTING LENDER]
[NEW LENDER]
 
By:
By:
 
The Transfer Date is confirmed by the Facility Agent as [          ].
 
[          ]
 
By:


 
SCHEDULE 6 
 
FORM OF COMPLIANCE CERTIFICATE
 
To: Lloyds TSB Bank plc as Facility Agent
 
From: WESTERN POWER DISTRIBUTION HOLDINGS LIMITED
 
Date: [          ]
 
WESTERN POWER DISTRIBUTION HOLDINGS LIMITED - £150,000,000 Credit Agreement dated 24 January 2007 (as amended and restated from time to time) (the Agreement)
 
1.
We refer to the Agreement. This is a Compliance Certificate.
 
2.
We confirm that as at [relevant testing date], Consolidated EBITDA was [          ] and Interest Payable was [          ], therefore the ratio of Consolidated EBITDA to Interest Payable was [          ] to 1.
 
3.
We confirm that as at [relevant testing date], Regulatory Asset Base was [          ] and Total Net Debt was [          ]; therefore Regulatory Asset Base exceeded Total Net Debt by [          ].
 
4.
We set out below calculations establishing the figures in paragraph 2 above:
 
[          ].
 
5.
[We confirm that no Default is outstanding as at [relevant testing date].]¹
 
WESTERN POWER DISTRIBUTION HOLDINGS LIMITED
 
By:
 
 
____________
1
If this statement cannot be made, the certificate should identify any Default that is outstanding and the steps, if any, being taken to remedy it.

SIGNATORIES
 
 
Borrower
 
WESTERN POWER DISTRIBUTION HOLDINGS LIMITED
 
By:   IAN R WILLIAMS

 
Mandated Lead Arranger
 
BARCLAYS CAPITAL
 
By:  MARK POPE


BAYERISCHE LANDESBANK,
acting through its London Branch

By:
STEVE J MEYER
  
MATTHEW WILLIAMS


LLOYDS TSB BANK PLC

By:  STEPHEN HALL


 
Original Lenders
 
BARCLAYS BANK PLC
 
By:  MARK POPE


BAYERISCHE LANDESBANK,
acting through its London Branch

By:
STEVE J MEYER
  
MATTHEW WILLIAMS


LLOYDS TSB BANK PLC

By:  STEPHEN HALL


 
Facility Agent
 
LLOYDS TSB BANK PLC
 
By:  STEPHEN HALL


 EX-10.BB3 16 ppl10-k2006exhibit10bb3.htm EXHIBIT 10(BB)-3 Exhibit 10(bb)-3
Exhibit 10(bb)-3
 
AMENDMENT NO. 2

TO

PPL OFFICERS DEFERRED COMPENSATION PLAN
 
WHEREAS, PPL Services Corporation ("PPL") has adopted the PPL Officers Deferred Compensation Plan ("Plan") effective July 1, 2000; and
WHEREAS, the Plan was amended and restated effective November 1, 2003, and subsequently amended by Amendment No. 1; and
WHEREAS, PPL desires to further amend the Plan;
NOW, THEREFORE, the Plan is hereby amended as follows:
I.
Effective January 1, 2007, Article 4.10 is added to read:
4.10 The Account of any Participant with Deferred Cash Compensation and Deferred Cash Awards for the calendar year shall be increased by a matching contribution amount, equal to 100% of the aggregate Deferred Cash Compensation and Deferred Cash Awards that do not exceed 3% of Cash Compensation, minus the amount of any Matching Contributions actually made to Participant's Accounts in the PPL Deferred Savings Plan and/or PPL Subsidiary Savings Plan for that calendar year.
II.
Except as provided for in this Amendment No. 2, all other provisions of the Plan shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment No. 2 is executed this _____ day of _____________________, 2007.
 
PPL SERVICES CORPORATION


By:_______________________________
Ronald Schwarz
Vice President - Human Resources


 
 EX-10.CC4 17 ppl10-k2006exhibit10cc4.htm EXHIBIT 10(CC)-4 Exhibit 10(cc)-4

Exhibit 10(cc)-4

AMENDMENT NO. 3
TO
PPL SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
 
WHEREAS, PPL Services Corporation ("PPL") adopted the PPL Supplemental Executive Retirement Plan (the "Plan"), effective July 1, 2000, for certain of its employees; and
WHEREAS, the Plan was amended and restated effective July 1, 2003, and subsequently amended by Amendment No. 1 and 2; and
WHEREAS, PPL desires to further amend the Plan;
NOW, THEREFORE, the Plan is hereby amended as follows:
I.
Effective January 1, 2007, the following sections of Articles 2, 3 and 10 are amended to read:
2.
Definitions.
 
(f)
"Cause" for Participant's Termination of Employment by PPL or an Affiliated Company means
   
(1)
If a "Change in Control," as defined by the PPL Retirement Plan has occurred,
     
(A)
the willful and continued failure by Participant to substantially perform Participant's duties with PPL or an Affiliated Company (other than any such failure resulting from Participant's incapacity due to physical or mental illness or, if applicable, any such actual or anticipated failure after the issuance of any “Notice of Termination for Good Reason” by the Participant pursuant to any severance agreement between Participant and PPL or an Affiliated Company) after a written demand for substantial performance is delivered to Participant by the Board, which demand specifically identifies the manner in which the Board believes that Participant has not substantially performed Participant's duties, or
     
(B)
the willful engaging by Participant in conduct which is demonstrably and materially injurious to PPL or an Affiliated Company, monetarily or otherwise.
     
(C)
For purposes of Subsections (A) and (B) of this definition, (A) no act, or failure to act, on Participant's part shall be deemed "willful" unless done, or omitted to be done, by Participant not in good faith and without reasonable belief that Participant's act, or failure to act, was in the best interest of PPL or the Affiliated Company, and (B) in the event of a dispute concerning the application of this provision, no claim by PPL or an Affiliated Company that Cause exists shall be given effect unless PPL or the Affiliated Company establishes to the Board by clear and convincing evidence that Cause exists.
   
(2)
If a "Change in Control," as defined by the PPL Retirement Plan, has not occurred, "Cause" means the Participant's Termination of Employment due to the willful violation of any PPL or an Affiliated Company policy (including PPL's Standards of Conduct and Integrity or any successor thereto), violation of any lawful direction of PPL or an Affiliated Company, gross negligence in the performance of duties, or commission of a felony.
 
(s)
"Years of Service" means the number of full and partial years used to calculate Participant's accrued benefit under the Retirement Plan, or which would be used to calculate an accrued benefit if the Participant were eligible to participate in the Retirement Plan but (1) excluding years prior to Participant's attainment of age 30, and (2) including service with any Affiliated Company prior to the Participant’s most recently becoming a Participant eligible under this Plan, provided such service would otherwise be counted under the Retirement Plan, but excluding any such service with an Affiliated Company performed before the Affiliated Company became an Affiliated Company, and (3) including Supplemental Years of Service granted to the Participant as set forth in Appendix A. In the event of a "Change in Control," as defined by the PPL Retirement Plan, all Supplemental Years of Service granted to the Participant as set forth in Appendix A shall become Years of Service and Years of Vesting Service under the Plan, on a pro rata basis, as follows:
   
(1) For Supplemental Years of Service requiring a specified number of Years of Service, by multiplying the maximum number of Supplemental Years of Service by actual Years of Service divided by the specified number of Years of Service otherwise required.
   
(2) For Supplemental Years of Service requiring attainment of a specified age, by multiplying the maximum number of Supplemental Years of Service by actual Years of Service divided by the number of Years of Service that would have been attained if the Participant worked to the specified age.
 
(t)
"Year(s) of Vesting Service" means (1) the number of full years used to calculate Participant's vested interest in his accrued benefit under the Retirement Plan, or which would be used if eligible under the Retirement Plan, but excluding any such service with an Affiliated Company performed before the Affiliated Company became an Affiliated Company, and (2) the number of Supplemental Years of Service, if any, that may have been granted to the Participant, as set forth in Appendix A. In the event of a "Change in Control," as defined by the PPL Retirement Plan, all Supplemental Years of Service granted to the Participant as set forth in Appendix A shall become Years of Service and Years of Vesting Service under the Plan, on a pro rata basis, as follows:
   
(1) For Supplemental Years of Service requiring a specified number of Years of Service, by multiplying the maximum number of Supplemental Years of Service by actual Years of Vesting Service divided by the specified number of Years of Service otherwise required.
   
(2) For Supplemental Years of Service requiring attainment of a specified age, by multiplying the maximum number of Supplemental Years of Service by actual Years of Vesting Service divided by the number of Years of Vesting Service that would have been attained if the Participant worked to the specified age.
3.
Benefit Eligibility.
 
(c)
Notwithstanding Section 3(a), in the event of a "Change in Control," as defined by the PPL Retirement Plan, all Participants shall be eligible for a Benefit, except for a Participant who has a Termination of Employment by PPL or an Affiliated Company for Cause.
10.
Termination or Amendment. The Board may, in its sole discretion, terminate and amend this Plan from time to time provided, however, that the Plan may not be terminated or amended to the prejudice or detriment of any Participant during the three (3) year period immediately following a Change in Control (as defined in the PPL Retirement Plan) (or, if later, thirty six (36) months from the consummation of the transaction giving rise to the Change in Control). Without limiting the generality of the foregoing, the proviso of the preceding sentence shall not, at any time or in any event, be amended or deleted. Subject to the foregoing, the CLC may adopt any amendment that does not significantly affect the cost of the Plan or significantly alter the benefit design or eligibility requirements of the Plan. Each amendment to the Plan will be binding on the Participating Company to which it applies. No termination or amendment shall (without Participant's consent) alter Participant's right to monthly payments which have commenced prior to the effective date of such termination or amendment. No termination or amendment of this Plan shall reduce the vested accrued benefit of a Participant in any manner, as of the time such amendment or termination is effective. Notwithstanding the foregoing, if PPL is liquidated, the CLC shall cause the amounts due hereunder to be paid in one or more installments or upon such other terms and conditions and at such other time as the CLC determines to be just and equitable, but in no event later than the time such amounts would otherwise have been paid.
II.
Except as provided for in this Amendment No. 3, all other provisions of the Plan shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment No. 3 is executed this ____ day of __________________, 2007.
 
PPL SERVICES CORPORATION


By:______________________________
Ronald Schwarz
Vice President-Human Resources

 EX-10.DD3 18 ppl10-k2006exhibit10dd3.htm EXHIBIT 10(DD)-3 Exhibit 10(dd)-3
Exhibit 10(dd)-3

AMENDMENT NO. 2

TO

PPL CORPORATION
INCENTIVE COMPENSATION PLAN

WHEREAS, PPL Corporation, (“PPL”) has adopted the PPL Corporation Incentive Compensation Plan (“Plan”), effective January 1, 1987; and
WHEREAS, the Plan was amended and restated effective January 1, 2003; and subsequently amended by Amendment No. 1; and
WHEREAS, PPL desires to further amend the Plan;

NOW, THEREFORE, the Plan is hereby amended as follows:

I. Effective October 27, 2006, Section 8 is amended to read:

SECTION 8. STOCK OPTIONS.
 
H. Term of Option. At the time an Option is granted, the Committee shall establish an Option term applicable to such Award. Except as otherwise provided in this Plan or in the Notification, the Option term for any Award shall not end later than the earliest of the following:
(a) the date a Participant violates any non-compete agreement entered into by the Participant and PPL Corporation or an Affiliated Company;
(b) the day before the tenth anniversary of the Date of Grant for such Award; or
(c) the applicable date below:
(1) Termination - The Option term with respect to all Awards to a Participant who has a Termination that is not for Cause shall end 60 days after the date of such Termination; provided, however, that the Committee is authorized in its sole discretion to extend the Option term for a reasonable period after such 60 day period. The Option term with respect to all Awards to a Participant who has a Termination for Cause shall end on the date of Termination.
(2) Retirement, Death or Disability - The Option term with respect to all Awards to a Participant who has a, death or Disability shall end 36 months after the date of such, death or Disability. The Beneficiary shall have the right to exercise the Option in the event of the Participant's death. The Option term with respect to all awards to a Participant who has a Retirement shall end on the earlier of the date specified in paragraph (a) or (b), above.
(3) Change in Control - Notwithstanding anything in this Section 8H to the contrary, the Option term with respect to all outstanding Options and all Awards to a Participant, following a Change in Control, shall end on the earlier of the date specified in paragraph (a) or (b), above.
 
 
II.  
Except as provided for in this Amendment No. 2, all other provisions of the Plan shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment No. 2 is executed this         day of   ___________, 2007.
 

PPL SERVICES CORPORATION
  
PPL CORPORATION
         
By:
 
  
By:
 
 
John R. Biggar
    
John R. Biggar
 
Executive Vice President and Chief Financial Officer
    
Executive Vice President and Chief Financial Officer
EX-10.EE3 19 ppl10-k2006exhibit10ee3.htm EXHIBIT 10(EE)-3 Exhibit 10(ee)-3
Exhibit 10(ee)-3
 
AMENDMENT NO. 2

TO

PPL CORPORATION INCENTIVE
COMPENSATION PLAN FOR KEY EMPLOYEES

WHEREAS, PPL Corporation, (“PPL”) has adopted the PPL Corporation Incentive Compensation Plan for Key Employees (“Plan”), effective January 1, 1997; and
WHEREAS, the Plan was amended and restated effective January 1, 2003, and subsequently amended by Amendment No. 1; and
WHEREAS, PPL desires to further amend the Plan;
NOW, THEREFORE, the Plan is hereby amended as follows:
I. Effective October 27, 2006, Section 8H is amended to read:

SECTION 8. STOCK OPTIONS.

H. Term of Option. At the time an Option is granted, CLC shall establish an Option term applicable to such Award. Except as otherwise provided in this Plan or in the Notification, the Option term for any Award shall not end later than the earliest of the following:
(a) the date a Participant violates any noncompete agreement entered into by the Participant and PPL Corporation or an Affiliated Company;
(b) the day before the tenth anniversary of the Date of Grant for such Award; or
(c) the applicable date below:
(1) Termination - The Option term with respect to all Awards to a Participant who has a Termination that is not for Cause shall end 60 days after the date of such Termination; provided, however, that CLC is authorized in its sole discretion to extend the Option term for a reasonable period after such 60 day period. The Option term with respect to all Awards to a Participant who has a Termination for Cause shall end on the date of Termination.
(2) Retirement, Death or Disability - The Option term with respect to all Awards to a Participant who has a death or Disability shall end 36 months after the date of such death or Disability. The Beneficiary shall have the right to exercise the Option in the event of the Participant's death. The Option term with respect to all awards to a Participant who has a Retirement shall end on the earlier of the date specified in paragraph (a) or (b), above.
(3) Change in Control - Notwithstanding anything in this Section 8H to the contrary, the Option term with respect to all outstanding Options and all Awards to a Participant, following a Change in Control, shall end on the earlier of the date specified in paragraph (a) or (b), above.
II.  
Except as provided for in this Amendment No. 2, all other provisions of the Plan shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment No. 2 is executed this         day of ____________________, 2007.
 
PPL SERVICES CORPORATION
  
PPL CORPORATION
         
By:
    
By:
  
 
John R. Biggar
    
John R. Biggar
 
Executive Vice President and
    
Executive Vice President and
 
Chief Financial Officer
    
Chief Financial Officer

EX-10.JJ 20 ppl10-k2006exhibit10jj.htm EXHIBIT 10(JJ) Exhibit 10(jj)
Exhibit 10(jj)




December 19, 2005
PERSONAL and CONFIDENTIAL

Mr. Jerry Matthews Simmons, Jr.
76 Rocking Pine Place
The Woodlands, Texas 77381

Dear Matt:

We are delighted with the prospect of your joining PPL Corporation. On behalf of PPL, I would like to present our formal offer to you to join us as Vice President & Controller, PPL Corporation, reporting directly to Paul Farr, Senior Vice President. You will be an employee of PPL Services Corporation. Naturally, as an elected officer, this position is subject to appropriate Board approval. If you accept our offer, we will proceed to seek such approval immediately.

We have provided a level of base salary and performance-oriented incentive programs that will make employment with PPL both challenging and financially attractive.

Our offer includes a first-year compensation program consisting of an annualized salary of $225,000 and a sign-on bonus. The sign-on bonus has a value of $100,000, which will be paid in cash following your employment date. If you voluntarily leave PPL prior to completion of one full-year of service, you would be required to return the sign-on bonus to PPL. Your signature below authorizes PPL to deduct any amounts owed from your final paycheck. The attached compensation term sheet outlines our offer in detail.

As an elected officer, you will be eligible for various incentives. Currently, the annualized value of these incentives includes: (i) a target annual cash incentive of 40% of your annual salary; (ii) an annual incentive targeted at 52.5% of your annual salary in the form of restricted stock for performance achievement based on three year financial and operational goals, and specific, annual, strategic goals, and (iii) annual stock options valued at 52.5% of your annual salary. The total annual incentive target consisting of these three components is 145% of your annual salary. Awards under these programs take place in the first quarter of the year for corporate performance during the prior year and for newly hired executives are pro-rated.

The equity awards under our incentive programs for 2005 take place in the first quarter of 2006. Assuming you begin employment in 2006, you would not normally be eligible for any 2006 equity awards, based on 2005 performance; you would be eligible for pro-rated 2007 equity grant, which will be based on 2006 performance. However, as part of our offer, we agree to recommend to the compensation committee of the Board that you be granted equity awards for 2006 at target levels. Should the committee approve this award, you would be granted PPL restricted stock units and stock options which as of the award date would be valued at $225,000.

We will also extend to you change in control protection as an officer of PPL. This protection is provided to key executives under a separate contract and, in your case, when approved, would provide two times annual salary and cash bonus up to the maximum available without incurring the federal excise tax on excess severance payments. These agreements also extend the employee's group life, disability, accident and health insurance coverage for a two-year period.

If your employment should be terminated within one year for any reason, provided it is not for cause, we will provide you a severance payment equal to one year’s base salary. If your employment is terminated for reasons other than for cause after your first year of employment, you will continue to receive your salary for a period of 52 weeks or until you secure alternative employment, whichever occurs first, provided you execute a release in a form acceptable to PPL.

You will be eligible for PPL’s other executive benefits including coverage under the Supplemental Executive Retirement Plan (SERP), the Officers Deferred Compensation Plan (ODCP) and the Premium Incentive Exchange Program (Exchange Plan). The SERP provides officers with enhanced retirement benefits upon retirement after 10 years of service. The ODCP permits deferral of compensation to allow an executive to manage current income taxes, and the Exchange Plan allows eligible officers to exchange all or a portion of their annual cash incentive for PPL restricted stock units - at a 40% premium. The Exchange Plan is designed to assist executives in accumulating PPL stock in order to comply with our Executive Equity Ownership Guideline program. In your position, you would be required to hold one-time your salary in PPL shares by the end of five years.

Finally, you will, of course, also be eligible for PPL’s comprehensive package of other employee benefit plans including the tax qualified employee pension, savings/401(k) plan, health benefits, dental, life insurance, and other benefits. Of interest may be our vacation policy. We assume employees are hired as of age 22—therefore; you will be eligible for 25 days or 5 weeks of vacation, prorated for your first year of hire.

To facilitate your move to the Lehigh Valley, PPL offers generous relocation benefits, which are managed by SIRVA Relocation. Enclosed is a brief summary of relocation benefits. A relocation counselor will be assigned to you to provide support throughout the relocation process.

In order to continue the employment process, please follow these steps:

·  
This offer is valid through Friday, January 6, 2006. Please sign the enclosed copy of this letter.
·  
If you accept this offer, please call (800) 760-8378, National Drug Screen, Inc. Tell them you are a candidate for employment at PPL and are calling to schedule a pre-employment drug screen. They will schedule you and provide you with a location and time to go for the screening. If you experience any problems in scheduling your drug screen call the PPL Dispensary, 484-634-4928.
·  
On the enclosed copy of this letter, write the date, time and name of the facility where you made arrangements for your drug screen.
·  
Complete the enclosed HR/Payroll Employment Information Form.
·  
Complete the Relocation Agreement Forms and contact John Clipper at 610-774-4152 to begin the relocation process.

By Friday, January 6, 2006 return the signed letter, including drug screen arrangement information, completed HR/Payroll Form, and Relocation Agreement Forms in the enclosed self-addressed envelope.

Our offer is contingent upon your satisfactory completion of the drug screen, background reference and security check. Additionally, on your first day of employment we will need to complete the government-mandated I-9 form showing proof of employment eligibility under the Immigration Reform and Control Act of 1986. A list of suitable proofs of identity is enclosed.

Please feel free to call me at any time, at 610-774-4536 if you have any questions. We are looking forward to your joining us as a key member of the management team responsible for guiding PPL toward a successful future.

Sincerely,
 
Ronald Schwarz
Enclosures

Please sign below to accept this proposal:




Signed: __________________________ Date: ______________________

DATE OF DRUG SCREEN
FACILITY COMPLETING DRUG SCREEN
   

Matt Simmons
PPL Offer

Illustrative Compensation Term Sheet
 
                   
I.
  
Compensation:
              
                   
   
Annual Base Salary:
        
$225,000
    
   
Annual Cash Incentive @ 40% Target*:
    
$90,000
    
                 
   
Annual Total Cash at Target:
      
$315,000
    
                   
II.
  
Annual Restricted Stock @ 52.5%Target*:
    
$118,125
    
   
Grant (3-year restriction) Value
            
                   
III.
  
Annual Stock Option Value @ 52.5% Target*:
    
$118,125
    
                   
   
Annual Total Direct Compensation at Target:
    
$551,250
  
                   
IV.
  
Special Consideration Values:
            
                   
 
·  
Sign on:
        
$100,000
    
   
$100,000 cash after 1 month
              
                   
 
·  
2005 Long-term Incentive:
        
$225,000
    
               
   
Offer Grand Total Value
    
$876,250
  
                   
V.
  
Other*:
              
               
 
·  
Matching (100% on 3%) Savings/401(k) Plan
          
 
·  
Pension Plans - Qualified and Supplemental
         
 
·  
Five Weeks Vacation
          
 
·  
Health/Dental/Life Coverage
          
 
·  
Company-paid Sickness, Short-term and Long-term Disability
    
 
·  
Vision Care
          
 
·  
Prescription Drug Coverage
          
 
·  
Retiree Medical and Life Insurance
          
               
 
*
This illustration is based on a full year of plan participation; partial year participation will be determined in accordance with the employment offer letter. Incentive awards made in 2006 are for the 2005 performance period; awards made in 2007 are for 2006 performance.
 
Revised December 19, 2005

 EX-10.PP 21 ppl10-k2006exhibit10pp.htm EXHIBIT 10(PP) Exhibit 10(pp)
Exhibit 10(pp)

May 31, 2006


PERSONAL and CONFIDENTIAL

Mr. William H. Spence
114 Woodridge Drive
Kennett Square, Pennsylvania 19348


Dear Bill:

We are delighted with the prospect of your joining PPL Corporation (PPL). On behalf of PPL, I would like to present our formal offer to you to join us as Executive Vice President & Chief Operating Officer, reporting directly to Jim Miller. As you know, Jim is currently President & COO and is expected to become Chairman, President and CEO upon Bill Hecht’s retirement later this year.

You will be Executive Vice President and Chief Operating Officer of PPL Corporation and an officer and employee of PPL Services Corporation, as well as serve on the boards of a number of our subsidiaries. In addition, you will be a member of the Corporate Leadership Council (CLC), a group currently comprised of the CEO, COO, CFO and chief legal officer. Naturally, as an elected officer, this position is subject to PPL’s Board of Directors’ approval. If you accept our offer, we will proceed to seek such approval immediately.

We have provided a level of base salary and performance-oriented incentive programs that will make employment with PPL both challenging and financially attractive.

Our offer includes a first-year compensation program consisting of an annualized salary of $525,000 plus incentive compensation.

As an elected officer, you will be eligible for various incentives. Currently, the annualized value of these incentives includes: (i) a target annual cash incentive of 75% of your annual salary; (ii) an annual incentive targeted at 120% of your annual salary in the form of restricted stock for performance achievement based on three year financial and operational goals, and specific, annual, strategic goals, and (iii) annual stock options valued at 120% of your annual salary. The total annual incentive target consisting of these three components is 315% of your annual salary. Awards under these programs are determined in the first quarter of the year for corporate performance during the prior year and for newly hired executives are typically pro-rated for time served.

As part of our offer, we will propose to the Compensation and Corporate Governance Committee of the Board (C&CGC) that the 2006 annual cash and long-term incentive (restricted stock unit and stock option) awards, made in January 2007, be at the full amount for the year and not pro-rated for partial 2006 service. Assuming you start employment July 1, 2006, the incremental value, over the normal pro-rata award, would be about $826,875, at target or budget performance. The actual award levels will be based on final 2006 performance.

In addition to the above annual compensation, we will provide a sign-on bonus with a value of $500,000, which will be paid $200,000 in cash, following your employment date, and $300,000 in the form of restricted stock units on which the restrictions will expire in three years. Should your employment be terminated during the restriction period for reasons other than for cause, we wilI cause the restrictions to lapse, subject to compliance with any legal requirements. If you voluntarily leave PPL prior to completion of one full-year of service, you would be required to return the cash sign-on bonus to PPL. Your signature below authorizes PPL to deduct any amounts owed from your final paycheck.

The enclosed term-sheet summarizes the components of our offer.

We will also extend to you change in control protection as an officer of PPL. This protection is provided to key executives under a separate contract and, in your case, when approved, would provide three times annual salary and cash bonus plus a gross-up for any excise taxes that may be required under Section 280G of the Internal Revenue Code. In addition, this contract will also provide a single-sum payment equal to the value of three additional years of service credit under PPL’s retirement program and continued access to coverage under the Company’s group health, life and disability insurance plans for a three-year period.

If your employment should be terminated within one year for any reason other than due to a change in control of PPL, and provided it is not for cause, we will provide you a severance payment equal to two year’s base salary. If your employment is terminated for reasons other than for cause after your first year of employment, you will continue to receive your salary for a period of 24 months or until you secure alternative employment, whichever occurs first, provided you execute a release in a form acceptable to PPL.

You will be eligible for PPL’s other executive benefits including coverage under the Supplemental Executive Retirement Plan (SERP), the Officers Deferred Compensation Plan (ODCP) and the Premium Incentive Exchange Program (Exchange Plan). The SERP provides officers with enhanced retirement benefits upon retirement after 10 years of service. The ODCP permits deferral of compensation to allow an executive to manage current income taxes, and the Exchange Plan allows eligible officers to exchange all or a portion of their annual cash incentive for PPL restricted stock units - at a 40% premium. The Exchange Plan is designed to assist executives in accumulating PPL stock in order to comply with our Executive Equity Ownership Guideline program. In your position, you would be required to hold three-times your salary in PPL shares by the end of five years.

As part of our offer, we will provide you with additional service for purposes of determining your SERP benefit if you retire under the plan; this service will be used to determine your eligibility for benefits (vesting and retirement eligibility) as well as used to enhance your benefit. This additional service will be equal to one year of additional service for each year of completed service with PPL, pro-rated for partial years. Assuming you retire at age 60 and have 11 completed years of PPL service at that time, your total retirement benefit would be about 43% of final average pay (22 years of service times 2% of final average pay for the first 20 years plus 1.5% for the years over 20). The PPL retirement benefit will be offset by any defined benefit pension amounts you have from former employers. The additional pension service will need the approval of the C&CGC which we will seek promptly.

Finally, you will, of course, also be eligible for PPL’s comprehensive package of other employee benefit plans including the tax qualified employee pension, savings/401(k) plan, health benefits, dental, life insurance, and other benefits. Of interest may be our vacation policy. We assume employees are hired as of age 22—therefore; you will be eligible for 6 weeks of vacation, prorated for your first year of hire.

To facilitate your move to the Lehigh Valley, PPL offers generous relocation benefits, which are managed by SIRVA Relocation. A relocation counselor will be assigned to you to provide support throughout the relocation process. Enclosed is a copy of General Procedure 504 - Relocation Expenses for Management Employees. If you are unable to complete the move within the one year outlined in the policy, we will be willing to provide an extension. If you have questions, regarding the relocation process, please contact John Clipper, 610-774-4152.

In order to continue the employment process, follow these steps:

·  
This offer is valid through June 5, 2006 and we must have your written acceptance by that date. Please sign the enclosed copy of this letter.
·  
Within the next two (2) working days from receipt of this letter call 800-760-8378, National Drug Screen, Inc. Tell them you are candidate for employment at PPL and are calling to schedule a pre-employment drug screen. They will schedule you and provide you with a location and time to go for the screening. If you experience any problems in scheduling your drug screen call the PPL Dispensary, 484-634-4028.
·  
On the enclosed copy of this letter, write the date, time and name of the facility where you made arrangements for your drug screen.
·  
Complete the enclosed PPL Application Form.
·  
Complete the enclosed HR/Payroll Employment Information Form.

By June 5, return the signed letter, including drug screen arrangement information, completed PPL Application Form, completed HR/Payroll Form, and completed Fair Credit Reporting Act Form in the enclosed self-addressed envelope.

Our offer is contingent upon your satisfactory completion of the drug screen, background reference and security checks. Additionally, on your first day of employment we will need to complete the government-mandated I-9 form showing proof of employment eligibility under the Immigration Reform and Control Act of 1986. A list of suitable proofs of identity is enclosed.

We recognize that you would be interested in a long-term relationship with the Company, and it is certainly our hope and expectation that such a relationship would develop. Please know, however, that employment at the Company would be on an “at-will” basis. This means that it is for no defined period of time and can be terminated by either you or the Company, with or without cause or advance notice. Of course, as a professional courtesy, we would appreciate advance notification from you of any intended change in your employment status. Likewise, we would attempt, where appropriate, to provide reasonable notice of any intended change in your status.

Please feel free to call me at any time, at 610-774-4536 if you have any questions. We are looking forward to your joining us as a key member of the management team responsible for guiding PPL toward a successful future.

Sincerely,
 
 
Ronald Schwarz
Enclosures

Please sign below to accept this proposal:

 
Signed: __________________________ Date: ______________________


DATE OF DRUG SCREEN
FACILITY COMPLETING DRUG SCREEN
   


 
William H. Spence
PPL Offer
                   
Illustrative Compensation Term Sheet
          
                   
I.
  
Cash Compensation:
              
                   
   
Annual Base Salary:
        
$525,000
    
   
Annual Cash Incentive @ 75% Target*:
    
$393,750
    
                 
   
Annual Total Cash at Target:
      
$918,750
    
                   
II.
  
Annual Restricted Stock @ 120%Target*:
    
$630,000
    
   
Grant (3-year restriction) Value
            
                   
III.
  
Annual Stock Option Value @ 120% Target*:
    
$630,000
    
                   
   
Annual Total Direct Compensation at Target:
    
$2,178,750
  
                   
I
IV.
  
Special Consideration Values:
            
                   
 
  
·  Sign on:
        
$500,000
    
   
$200,000 in cash
              
   
$300,000 in restricted stock units (3-year restriction)
          
                   
 
  
·  2006 Annual Cash Incentive:
      
$196,875
    
   
Value of full-year award over pro-rata award;
          
   
(assuming July 1 start date)
            
                 
 
  
·  2006 Long-term Incentive:
      
$630,000
    
   
Value of full-year award over pro-rata award;
          
   
50% restricted stock units (3-year restriction)
        
   
50% stock options
        
   
(assuming July 1 start date)
        
                 
 
  
 ·  Additional service for purposes of determining PPL retirement benefits.
  
                 
   
Offer Grand Total Value
        
$3,505,625**
  
                   
 
V.
  
Other:
              
 
  
·  Executive Financial Planning
            
 
  
·  Matching (100% on 3%) Savings/401(k) Plan
        
 
  
·  Pension Plans - Qualified and Supplemental
         
 
  
·  Six Weeks Vacation
          
 
  
·  Health/Dental/Life Coverage
          
 
  
·  Company-paid Sickness, Short-term and Long-term Disability
    
 
  
·  Vision Care
          
 
  
·  Prescription Drug Coverage
          
   
·  Retiree Medical and Life Insurance
          
                   
*
  
This illustration is based on a full year of plan participation; partial year participation will be determined in accordance with the employment offer letter. Incentive awards for 2006 performance period are made in 2007 are for 2006 performance.
                   
**
  
Excluding the value of additional retirement service.
          

EX-10.QQ 22 ppl10-k2006exhibit10qq.htm EXHIBIT 10(QQ) Exhibit 10(qq)
Exhibit 10(qq)





August 29, 2006


PERSONAL and CONFIDENTIAL


Mr. David G. DeCampli
205 Oak Street
Elmhurst, IL 60126


Dear Dave:

We are delighted with the prospect of your joining PPL Corporation. On behalf of PPL, I would like to present our formal offer to you to join us as Senior Vice President-T&D Engineering & Operations, reporting directly to John Sipics, President, PPL Electric Utilities. Naturally, as an elected officer, this position is subject to appropriate Board approval. If you accept our offer, we will proceed to seek such approval immediately.

We have provided a level of base salary and performance-oriented incentive programs that will make employment with PPL both challenging and financially attractive.

Our offer includes a first-year compensation program consisting of an annualized salary of $265,000 and incentive compensation, described below. In addition, we will provide a sign-on bonus with a value of $450,000, which will be paid $225,000 in cash following your employment date and $225,000 in the form of restricted stock units on which the restrictions will expire in three years. If you voluntarily leave PPL prior to completion of one full-year of service, you would be required to return the sign-on bonus to PPL. Your signature below authorizes PPL to deduct any amounts owed from your final paycheck. The attached compensation term sheet outlines our offer in detail.

As an elected officer, you will be eligible for various incentives. Currently, the annualized value of these incentives includes: (i) a target annual cash incentive of 40% of your annual salary; (ii) an annual incentive targeted at 52.5% of your annual salary in the form of restricted stock units for performance achievement based on three year financial and operational goals, and specific, annual, strategic goals, and (iii) annual stock options valued at 52.5% of your annual salary. The total annual incentive target consisting of these three components is 145% of your annual salary. Awards under these programs take place in the first quarter of the year for corporate performance during the prior year.

The incentive awards for 2006 take place in the first quarter of 2007. Assuming you begin employment in 2006, you would normally be eligible for a pro-rated 2007 annual cash incentive and a pro-rated restricted stock unit grant, both of which would be based on 2006 performance, and a full stock option award. As part of our offer, we will determine your 2007 annual cash incentive award assuming you worked all of 2006 for PPL. Assuming target performance, this would result in a payment of $106,000. This award would be eligible for the Exchange Program, discussed below.

We will also extend to you change in control protection as an officer of PPL. This protection is provided to key executives under a separate contract and, in your case, when approved, would provide two times annual salary and annual cash incentive up to the maximum available without incurring the federal excise tax on excess severance payments. These agreements also extend the employee group life, disability, accident and health insurance coverage for a two-year period and provide an additional two years of pension credit in determining your PPL retirement benefit.

If your employment should be terminated within one year for any reason, provided it is not for cause, we will provide you a severance payment equal to one year’s base salary. If your employment is terminated for reasons other than for cause after your first year of employment, you will receive payment equal to your salary for a period of 52 weeks or until you secure alternative employment, whichever occurs first, provided you execute a release in a form acceptable to PPL. In addition, for a period equal to the severance payment period (e.g., one year if you are terminated within one year of hire) we will continue active employee health, dental and basic life insurance benefits, provided you execute a release in a form acceptable to PPL.

You will be eligible for PPL’s other executive benefits including coverage under the Supplemental Executive Retirement Plan (SERP), the Officers Deferred Compensation Plan (ODCP) and the Premium Incentive Exchange Program (Exchange Plan). The SERP provides officers with enhanced retirement benefits upon retirement after 10 years of service. The ODCP permits deferral of compensation to allow an executive to manage current income taxes, and the Exchange Plan allows eligible officers to exchange all or a portion of their annual cash incentive for PPL restricted stock units - at a 40% premium. The Exchange Plan is designed to assist executives in accumulating PPL stock in order to comply with our Executive Equity Ownership Guideline program. In your position, you would be required to hold one-time your salary in PPL shares by the end of five years.

The PPL retirement program, comprised of our all-employee defined benefit pension plan and SERP, will provide you significant value as of retirement on or after age 60. We would like to discuss this with you when we discuss the offer.

Finally, you will, of course, also be eligible for PPL’s comprehensive package of other employee benefit plans including the tax qualified employee pension, savings/401(k) plan, health benefits, dental, life insurance, and other benefits including vacation where you will be eligible for 6 weeks of vacation, prorated for your first year of hire. Assuming employment begins early October, you will have 5 vacation days for 2006. Our health benefits for active employees currently only require employee contributions of 5% of cost on average, with a market standard option available without employee contributions. Retiree medical benefits are available for employees retiring after attaining age 55 with one year of service (this policy will be changing after 2006).

To facilitate your move to the Lehigh Valley, PPL offers generous relocation benefits, which are managed by SIRVA Relocation. Enclosed is a brief summary of relocation benefits. A relocation counselor will be assigned to you to provide support throughout the relocation process.

In order to continue the employment process, please follow these steps:

·  
This offer is valid through Monday, September 11, 2006. Please sign the enclosed copy of this letter.
·  
If you accept this offer, please call (800) 760-8378, National Drug Screen, Inc. Tell them you are a candidate for employment at PPL and are calling to schedule a pre-employment drug screen. They will schedule you and provide you with a location and time to go for the screening. If you experience any problems in scheduling your drug screen call the PPL Dispensary, 484-634-4928.
·  
On the enclosed copy of this letter, write the date, time and name of the facility where you made arrangements for your drug screen.
·  
Complete the enclosed PPL Application Form.
·  
Complete the enclosed HR/Payroll Employment Information Form.
·  
Complete the Relocation Agreement Forms and contact John Clipper at 610-774-4152 to begin the relocation process.

By Monday, September 11, 2006, return the signed letter, including drug screen arrangement information, completed PPL Application Form, completed HR/Payroll Form, and Relocation Agreement Forms in the enclosed self-addressed envelope.

Our offer is contingent upon your satisfactory completion of the drug screen, background reference and security check. Additionally, on your first day of employment we will need to complete the government-mandated I-9 form showing proof of employment eligibility under the Immigration Reform and Control Act of 1986. A list of suitable proofs of identity is enclosed.

Please feel free to call me at any time, at 610-774-4536 if you have any questions. We are looking forward to your joining us as a key member of the management team responsible for guiding PPL toward a successful future.

Sincerely,
 
 
Ronald Schwarz
Enclosures

Please sign below to accept this proposal:

 

Signed: __________________________ Date: ______________________


DATE OF DRUG SCREEN
FACILITY COMPLETING DRUG SCREEN
   




 
David G. DeCampli
Revised PPL Offer
                   
Illustrative Compensation Term Sheet
          
                   
I.
  
Cash Compensation:
              
   
Annual Base Salary:
        
$265,000
    
   
Annual Cash Incentive @ Target*:
40%
  
$106,000
    
   
Annual Total Cash at Target:
        
$371,000
  
                   
II.
  
Annual Restricted Stock @ Target*:
52.5%
  
$139,125
    
   
Grant (3-year restriction) Value
            
                   
III.
  
Annual Stock Option Value @ Target*:
52.5%
  
$139,125
    
   
Total Long-term Incentive @ Target:
    
$278,250
    
                   
   
Annual Total Direct Compensation at Target:
    
$649,250
  
                   
IV.
  
Special Consideration Values:
            
   
Sign on:
        
$450,000
    
   
Cash:
  
$225,000
          
   
Restricted stock units:
$225,000
          
                   
   
2006 Annual Cash Incentive:
      
$106,000
    
                   
   
Offer Grand Total Value
        
$1,205,250
  
                   
V.
  
Other:
              
   
Executive Financial Planning
            
   
Pension Plans - Qualified and Supplemental
          
   
Matching (100% on 3%) Savings/401(k) Plan
        
   
Health/Dental/Life Coverage
            
   
Prescription Drug Coverage
            
   
Vision Care
              
   
Retiree Medical and Life Insurance
          
   
Company-paid Sickness, Short-term and Long-term Disability
      
   
Six Weeks Vacation
              
                   
                   
 
*
This illustration is based on a full year of plan participation; partial year participation will be determined in accordance with the employment offer letter. Incentive awards for the 2006 performance period are made in 2007 for the 2006 performance.
                   
                   

EX-10.UU 23 ppl10-k2006exhibit10uu.htm EXHIBIT 10(UU) Exhibit 10(uu)

 
PPL Corporation
 
Restricted Stock Unit Agreement
 
(Transition)
 
This Letter Agreement will confirm a grant to you of Restricted Stock Units ("Units") of PPL Corporation Common Stock under the PPL Incentive Compensation Plan or the PPL Incentive Compensation Plan for Key Employees (the "Plan").
1.  Grant of Units. The Company hereby grants to you Units representing a future delivery of a specified number of shares of common stock of the Company at a specified time, as shown on Exhibit A of this Agreement, under the terms and conditions set forth herein and the Plan.
2.  Issuance of Stock. Upon the lapse of restrictions on your Units, PPL Corporation's Investor Relations specialists will implement a procedure to identify PPL Corporation common stock in the number of shares you are entitled to receive after the lapse of restrictions on your Units. Pursuant to Paragraph 5, the total number of shares will be reduced by that number of shares equal in value to your income tax withholding obligation. PPL Corporation uses a stock transfer agent to place common stock in your name. For issuance of common stock under the Incentive Compensation Plan for Key Employees, the transfer of common stock may be delayed until after the first quarter dividend record date, in order to provide dividends on the shares to participants prior to the sale of the shares. However, for retirement, death or disability, or change in control (paragraphs 6, 7, and 9), there shall be no delay in the transfer of common stock. Depending upon market volatility, holidays, and whether the Company elects to use treasury shares, unissued shares, or purchase on the open market, there will be a delay between the date the restrictions on your Units lapse and the date shares are registered in your name. This time lapse will normally not exceed 30 days. Your shares will be registered in your name and deposited into a PPL Shareowner account.
3.  Dividend Equivalents. With respect to each dividend or distribution paid or made on Common Stock to holders of record while you hold Units hereunder, you shall be paid a dollar equivalent as salary at approximately the same time such dividend or distribution on Common Stock is paid or made, but in no event later than March 15 of the year following the calendar year of the dividend or distribution on common stock.
4.  Applicability of the Plan. This Agreement and the Units granted hereunder are subject to all the terms and conditions of the Plan, which are hereby incorporated by reference, and may not be assigned or transferred, except by will or the laws of descent and distribution in the case of your death.
5.  Withholding Taxes. Upon the lapse of restrictions on your Units and receipt of shares pursuant to Paragraph 2 (the “Issuance of Stock”), the Company will pay all applicable withholding taxes by withholding from the shares otherwise payable to you shares of common stock equivalent in value (calculated based on the stock price on the date of the Payment Event) to the dollar amount of withholding taxes for which you are obligated.
6.  Retirement. "Retirement" means termination of employment with the Company and your election for monthly retirement benefits to commence immediately under the PPL Retirement Plan, or, if you are not a participant in the PPL Retirement Plan, you elect or are eligible for immediate commencement of benefits under any other defined benefit pension plan, whether or not tax qualified (such as the PPL SERP). Twelve months after the date of your retirement all restrictions on your Units lapse, and the income tax withholding and issuance of stock set forth above will take place.
7.  Death or Long-Term Disability. On your death or your receipt of benefits under the PPL Long Term Disability Plan for three months (by reason of a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months), restrictions on your Units shall lapse in the same manner as if you continued working until you were age 65, except that the six-month delay otherwise applicable to "specified employees" under Code Section 409A shall not apply. Units shall be paid to your beneficiary in the event of your death.
8.  Termination of Employment. If your employment is terminated, voluntarily or involuntarily, and you are not eligible for or do not elect immediate commencement of monthly retirement benefits under the PPL Retirement Plan (or other defined benefit pension plan if not a PPL Retirement Plan participant), all of your Units will be automatically forfeited.
9.  Change in Control. In the event of a "change in ownership or effective control" of PPL Corporation, as defined in the Plan, restriction on all Units will immediately lapse and payment of stock shall occur in accordance with the provisions of Paragraph 2.
10.  Definitions; Conflict. Capitalized terms not otherwise defined shall have the meaning specified in the Plan. In the event of any conflict between this Agreement and the Plan, the terms of the Plan shall control.
11.  No Right to Continued Employment. The grant of Units shall not confer on you any right to be retained in the employ of the Company or a subsidiary, or to receive subsequent Units or other awards under the Plan. The right of the Company or any subsidiary to terminate your employment with it at any time or as otherwise provided by any agreement between the Company or any subsidiary and you is specifically reserved.
12.  Applicable Law. The validity, construction, interpretation, administration, and effect of the Plan, and of its rules and regulations, and rights relating to the Plan and to this Agreement, shall be governed by the substantive laws, but not the choice of law rules, of the Commonwealth of Pennsylvania.
13.  No Rights of a Shareholder. You shall not have any rights of a shareholder with respect to shares issuable hereunder except to the extent shares have been issued to you as a result of the lapse of restrictions on your Unit.
14.  Amendment. The terms of this Agreement may be amended from time to time by the Committee in its sole discretion in any manner it deems appropriate; provided that no such amendment shall, without your consent, diminish your rights under this Agreement.
____________
 
To confirm your acceptance of the foregoing, kindly sign and promptly return one copy of Exhibit A of this Letter Agreement to the Company.
Sincerely,
PPL Corporation




By:                                               
James H. Miller
Chairman/President & CEO
 
Exhibit A
 
RESTRICTED STOCK UNIT AGREEMENT

2006 Restricted Stock Unit Grant

Transition Grant


Granted to: John R. Biggar

SSN: 104-36-0862

Plan: Incentive Compensation Plan (ICP)




Date of award: 1/25/2007


Date restrictions expire: 3/31/2008


Units: 8,880





Signature of Employee: __________________________________________


Date: ______________________

 EX-10.WW 24 ppl10-k2006exhibit10ww.htm EXHIBIT 10(WW) Exhibit 10(ww)
Exhibit 10(ww)

 
Summary of Compensation Arrangements for David G. DeCampli
 
Reference is made to the Current Report on Form 8-K filed by PPL Electric Utilities Corporation (“PPL Electric”) on January 31, 2007 for general information regarding the compensation arrangements of PPL Electric’s executive officers, and to Exhibit 10(qq) filed herewith for the employment letter of David G. DeCampli. Mr. DeCampli began serving as Senior Vice President-Transmission and Distribution Engineering and Operations of PPL Electric effective December 4, 2006. Pursuant to his employment letter, Mr. DeCampli received a signing bonus of $450,000 of which $225,000 was paid in cash following his employment date and $225,000 was provided in the form of restricted stock units which will vest in three years. Mr. DeCampli’s base salary and cash and equity incentive awards were approved by the Corporate Leadership Council of PPL Corporation on February 12, 2007. His 2007 annual base salary is $265,000, effective January 1, 2007, and he received an annual cash incentive award of $117,000. Under PPL’s Incentive Compensation Plan for Key Employees, Mr. DeCampli was granted long-term incentive equity awards as follows:
 
Restricted Stock Units (Strategic Objective Results): 1,980 Units
 
Restricted Stock Units (Sustained Financial and Operational Results): 2,390 Units
 
Stock Options: 25,110 Shares
 
Under his employment letter, if Mr. DeCampli’s employment is terminated within one year from his date of hire, he is entitled to receive a severance payment equal to one year’s base salary, and he will continue to receive employee health, dental and basic life insurance benefits for one year following his termination. If his employment is terminated after one year from his date of hire, he will receive a payment equal to his salary for a period of 52 weeks or until he secures alternative employment, whichever occurs first. Mr. DeCampli will be required to execute a form of release that is acceptable to PPL in order to receive severance benefits. Mr. DeCampli is also entitled to protection in case of a change in control of PPL. Under this arrangement, he is entitled to two times annual salary and annual cash incentive. This arrangement also extends his coverage under employee group life, disability, accident and health insurance for two years and provides an additional two years of pension credit when determining his PPL retirement benefit. Mr. DeCampli is also eligible to participate in the Supplemental Executive Retirement Plan (“SERP”) which provides officers with enhanced retirement benefits upon retirement after 10 years of service. Mr. DeCampli may also participate in the Officers’ Deferred Compensation Plan (“ODCP”) which permits participants to defer compensation to manage current income taxes as well as the Premium Exchange Program (“Exchange Program”) which allows participants to exchange all or a portion of their annual cash incentive for PPL Restricted Stock Units which are valued at a 40% premium. The Exchange Program assists executives in accumulating PPL Stock in order to comply with PPL’s Executive Equity Ownership Guideline Program. Under this Program, Mr. DeCampli is required to hold the number of PPL shares equal in amount to his base salary by the end of five years from his date of hire. Information concerning PPL Electric’s change in control arrangements, SERP, Exchange Program and other executive compensation information is provided in PPL Electric’s most recent Information Statement for its Annual Meeting of Shareowners filed on March 10, 2006 and on file with the SEC.
 
 EX-12.A 25 ppl10-k2006exhibit12a.htm EXHIBIT 12(A) Exhibit 12(a)
Exhibit 12(a)
PPL CORPORATION AND SUBSIDIARIES
 
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(Millions of Dollars)
                     
   
2006
  
     2005 (c)
  
     2004 (c)
  
     2003 (c)
  
    2002 (c)
                               
Fixed charges, as defined:
                                        
Interest on long-term debt
  
$
482
    
$
465
    
$
491
    
$
417
    
$
486
  
Interest on short-term debt and
  other interest
    
13
      
29
      
20
      
25
      
70
  
Amortization of debt discount,
  expense and premium - net
    
11
      
23
      
8
      
41
      
25
  
Estimated interest component of
  operating rentals
    
29
      
32
      
34
      
45
      
38
  
Preferred security distributions of   subsidiaries on a pre-tax basis
    
24
      
5
      
5
      
45
      
79
  
                                         
Total fixed charges
  
$
559
    
$
554
    
$
558
    
$
573
    
$
698
  
                                         
Earnings, as defined:
                                        
Net income (a)
  
$
896
    
$
746
    
$
718
    
$
738
      
439
  
Preferred security dividend requirements
    
14
      
2
      
2
      
29
      
67
  
Less undistributed income (loss) of
  equity method investments
    
(3
)
    
(14
)
    
(14
)
    
(19
)
    
(23
)
     
913
      
762
      
734
      
786
      
529
  
                                         
Add:
                                        
Income taxes
    
275
      
122
      
201
      
178
      
211
  
Total fixed charges as above
  (excluding capitalized interest
  and preferred security distributions of
  subsidiaries on a pre-tax basis)
    
511
      
540
      
547
      
521
      
598
  
                                         
Total earnings
  
$
1,699
    
$
1,424
    
$
1,482
    
$
1,485
    
$
1,338
  
                                         
Ratio of earnings to fixed charges
    
3.0
      
2.6
      
2.7
      
2.6
      
1.9
  
                                         
Ratio of earnings to combined fixed
  charges and preferred stock
  dividends (b)
    
3.0
      
2.6
      
2.7
      
2.6
      
1.9
  

(a)
  
Net income excludes minority interest, loss from discontinued operations and the cumulative effects of changes in accounting principles.
(b)
  
PPL, the parent holding company, does not have any preferred stock outstanding; therefore, the ratio of earnings to combined fixed charges and preferred stock dividends is the same as the ratio of earnings to fixed charges.
(c)
  
Certain line items have been revised due to the June 2006 sale of the 50% ownership interest in the Griffith plant and the related reclassification of prior period operating losses to "Loss from Discontinued Operations."
EX-12.B 26 ppl10-k2006exhibit12b.htm EXHIBIT 12(B) Exhibit 12(b)
Exhibit 12(b)
PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES
 
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
                     
   
2006
  
2005 (b)
  
2004 (b)
  
2003 (b)
  
2002 (b)
                               
Fixed charges, as defined:
                                        
Interest on long-term debt
  
$
296
    
$
259
    
$
255
    
$
149
    
$
169
  
Interest on short-term debt and
  other interest
    
16
      
26
      
23
      
25
      
52
  
Amortization of debt discount,
  expense and premium - net
    
(1
)
    
7
      
(6
)
    
31
      
9
  
Estimated interest component of
  operating rentals
    
15
      
15
      
17
      
31
      
21
  
Preferred security distributions of   subsidiaries on a pre-tax basis
                            
8
      
12
  
                                         
Total fixed charges
  
$
326
    
$
307
    
$
289
    
$
244
    
$
263
  
                                         
Earnings, as defined:
                                        
Net income (a)
  
$
729
    
$
610
    
$
671
    
$
731
    
$
510
  
Preferred security dividend requirement
                            
5
      
8
  
Less undistributed income (loss) of
  equity method investments
    
(2
)
    
(14
)
    
(13
)
    
(15
)
    
(22
)
     
731
      
624
      
684
      
751
      
540
  
Add:
                                        
Income taxes
    
189
      
76
      
205
      
193
      
267
  
Total fixed charges as above
  (excluding capitalized interest
  and preferred security distributions of
  subsidiaries on a pre-tax basis)
    
304
      
300
      
284
      
229
      
231
  
                                         
Total earnings
  
$
1,224
    
$
1,000
    
$
1,173
    
$
1,173
    
$
1,038
  
                                         
Ratio of earnings to fixed charges
    
3.8
      
3.3
      
4.1
      
4.8
      
3.9
  

(a)
  
Net income excludes minority interest, loss from discontinued operations and the cumulative effects of changes in accounting principles.
(b)
  
Certain line items have been revised due to the June 2006 sale of the 50% ownership interest in the Griffith plant and the related reclassification of prior period operating losses to "Loss from Discontinued Operations."
EX-12.C 27 ppl10-k2006exhibit12c.htm EXHIBIT 12(C) Exhibit 12(c)
Exhibit 12(c)
PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES
 
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(Millions of Dollars)
 
   
2006
  
2005
  
2004
  
2003
  
2002
                               
Fixed charges, as defined:
                                        
Interest on long-term debt
  
$
131
    
$
151
    
$
176
    
$
201
    
$
209
  
Interest on short-term debt and
  other interest
    
13
      
22
      
7
      
3
      
3
  
Amortization of debt discount,
  expense and premium - net
    
8
      
9
      
7
      
8
      
7
  
Estimated interest component of
  operating rentals
    
7
      
8
      
8
      
7
      
7
  
Preferred security distributions of
  subsidiaries on a pre-tax basis
                                    
13
  
                                         
Total fixed charges
  
$
159
    
$
190
    
$
198
    
$
219
    
$
239
  
                                         
Earnings, as defined:
                                        
Net income
  
$
194
    
$
147
    
$
76
    
$
28
    
$
55
  
                                         
Add:
                                        
Income taxes
    
104
      
69
      
8
      
18
      
18
  
Total fixed charges as above
  (excluding capitalized interest
  and preferred security distributions of
  subsidiaries on a pre-tax basis)
    
158
      
190
      
197
      
219
      
225
  
                                         
Total earnings
  
$
456
    
$
406
    
$
281
    
$
265
    
$
298
  
                                         
Ratio of earnings to fixed charges
    
2.9
      
2.1
      
1.4
      
1.2
      
1.2
  
 
Preferred stock dividend requirements on
a pre-tax basis
  
$
24
    
$
4
    
$
4
    
$
5
    
$
7
  
Fixed charges, as above
    
159
      
190
      
198
      
219
      
239
  
Total fixed charges and preferred
  stock dividends
  
$
183
    
$
194
    
$
202
    
$
224
    
$
246
  
Ratio of earnings to combined fixed
charges and preferred stock dividends
    
2.5
      
2.1
      
1.4
      
1.2
      
1.2
  
EX-21.A 28 ppl10-k2006exhibit21a.htm EXHIBIT 21(A) Exhibit 21(a)
 
Exhibit 21(a)
    
PPL Corporation
    
Subsidiaries of the Registrant
    
As of December 31, 2006
    
 
    
 
    
Company Name
  
State or Jurisdiction of
Business Conducted under Same Name
  
Incorporation/Formation
     
PPL Electric Utilities Corporation
  
Pennsylvania
     
PPL Energy Funding Corporation
  
Pennsylvania
     
PPL Energy Supply, LLC
  
Delaware
     
PPL Investment Corporation
  
Delaware
     
PPL Global, LLC
  
Delaware
     
PMDC International Holdings, Inc.
  
Delaware
     
PPL EnergyPlus, LLC
  
Pennsylvania
     
PPL Generation, LLC
  
Delaware
     
PPL Montana Holdings, LLC
  
Delaware
     
PPL Montana, LLC
  
Delaware
     
PPL Susquehanna, LLC
  
Delaware
     
WPD Holdings Ltd.
  
United Kingdom
EX-21.B 29 ppl10-k2006exhibit21b.htm EXHIBIT 21(B) Exhibit 21(b)

Exhibit 21(b)
    
PPL Electric Utilities Corporation
    
Subsidiaries of the Registrant
    
As of December 31, 2006
    
 
    
 
    
Company Name
  
State or Jurisdiction of
Business Conducted under Same Name
  
Incorporation/Formation
 
    
PPL Transition Bond Company, LLC
  
Delaware

EX-23.A 30 ppl10-k2006exhibit23a.htm EXHIBIT 23(A) Exhibit 23(a)


Exhibit 23(a)



Consent of Independent Registered Public Accounting Firm


We consent to the incorporation by reference in PPL Corporation’s Registration Statements on Form S-3 (Nos. 333-116478, 333-116478-01, 333-116478-02, 333-85716, 333-85716-01, 333-85716-02, 333-106200, 333-106200-01, 333-132574, 333-132574-01, 333-132574-02, and 333-132574-03), the Registration Statements on Form S-3D (Nos. 333-128543 and 333-102845), and the Registration Statements on Form S-8 (Nos. 333-02003, 333-112453, 333-110372, and 333-95967) of our reports dated February 26, 2007, with respect to the consolidated financial statements and schedule of PPL Corporation, PPL Corporation’s management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of PPL Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2006.



/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 26, 2007
 EX-23.B 31 ppl10-k2006exhibit23b.htm EXHIBIT 23(B) Exhibit 23(b)


Exhibit 23(b)



Consent of Independent Registered Public Accounting Firm


We consent to the incorporation by reference in PPL Energy Supply, LLC’s Registration Statements on Form S-3 (Nos. 333-128219, 333-116477, 333-106200, 333-106200-01, 333-132574, 333-132574-01, 333-132574-02, and 333-132574-03) of our report dated February 26, 2007, with respect to the consolidated financial statements and schedule of PPL Energy Supply, LLC, included in this Annual Report (Form 10-K) for the year ended December 31, 2006.


/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 26, 2007

 EX-23.C 32 ppl10-k2006exhibit23c.htm EXHIBIT 23(C) Exhibit 23(c)


Exhibit 23(c)



Consent of Independent Registered Public Accounting Firm


We consent to the incorporation by reference in PPL Electric Utilities Corporation’s Registration Statements on Form S-3 (Nos. 333-132574, 333-132574-01, 333-132574-02, and 333-132574-03) of our report dated February 26, 2007, with respect to the consolidated financial statements and schedule of PPL Electric Utilities Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2006.


/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
February 26, 2007

 EX-23.D 33 ppl10-k2006exhibit23d.htm EXHIBIT 23(D) Exhibit 23(d)
Exhibit 23(d)



CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Nos. 333-116478, 333-116478-01, 333-116478-02, 333-85716, 333-85716-01, 333-85716-02, 333-106200, 333-106200-01, 333-132574, 333-132574-01, 333-132574-02, and 333-132574-03 ), the Registration Statements on Form S-3D (Nos. 333-128543 and 333-102845), and the Registration Statements on Form S-8 (Nos. 333-02003, 333-112453, 333-110372, and 333-95967) of PPL Corporation of our report dated February 24, 2006, except for Note 10 which is as of December 13, 2006, relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K.



/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 26, 2007
 EX-23.E 34 ppl10-k2006exhibit23e.htm EXHIBIT 23(E) Exhibit 23(e)
Exhibit 23(e)




CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Nos. 333-128219, 333-116477, 333-106200 and 333-106200-01, 333-132574, 333-132574-01, 333-132574-02, and 333-132574-03) of PPL Energy Supply, LLC of our report dated February 24, 2006, except for Note 10 which is as of December 13, 2006, relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K.
 



/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 26, 2007
 EX-23.F 35 ppl10-k2006exhibit23f.htm EXHIBIT 23(F) Exhibit 23(f)
Exhibit 23(f)




CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (Nos. 333-132574, 333-132574-01, 333-132574-02, and 333-132574-03) of PPL Electric Utilities Corporation of our report dated February 24, 2006 relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K.
 
 

/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 26, 2007
 
 EX-24 36 ppl10-k2006exhibit24.htm EXHIBIT 24 Exhibit 24
Exhibit 24
 
PPL CORPORATION

2006 ANNUAL REPORT
TO THE SECURITIES AND EXCHANGE COMMISSION
ON FORM 10-K

POWER OF ATTORNEY
 
The undersigned directors of PPL Corporation, a Pennsylvania corporation, that is to file with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, its 2006 Annual Report on Form 10-K, do hereby appoint each of James H. Miller, John R. Biggar and Robert J. Grey their true and lawful attorney, with power to act without the other and with full power of substitution and resubstitution, to execute for them and in their names said Form 10-K Report and any and all amendments thereto, whether said amendments add to, delete from or otherwise alter said Form 10-K Report, or add or withdraw any exhibits or schedules to be filed therewith and any and all instruments in connection therewith. The undersigned hereby grant to each said attorney full power and authority to do and perform in the name of and on behalf of the undersigned, and in any and all capacities, any act and thing whatsoever required or necessary to be done in and about the premises, as fully and to all intents and purposes as the undersigned might do, hereby ratifying and approving the acts of each of the said attorneys.

IN WITNESS WHEREOF, the undersigned have hereunto set their hands this 26th day of February, 2007.


 /s/ Frederick M. Bernthal    /s/ Craig A. Rogerson
Frederick M. Bernthal
  
Craig A. Rogerson
     
     
/s/ John W. Conway    /s/ W. Keith Smith
John W. Conway
  
W. Keith Smith
     
     
 /s/ E. Allen Deaver    /s/ Susan M. Stalnecker
E. Allen Deaver
  
Susan M. Stalnecker
     
     
 /s/ Louise K. Goeser    /s/ Keith H. Williamson
Louise K. Goeser
  
Keith H. Williamson
     
     
 /s/ Stuart Heydt    
Stuart Heydt
    







EX-31.A 37 ppl10-k2006exhibit31a.htm EXHIBIT 31(A) Exhibit 31(a)
Exhibit 31(a)

CERTIFICATION
 
 
I, JAMES H. MILLER, certify that:
   
1.
I have reviewed this annual report on Form 10-K of the registrant for the year ended December 31, 2006; 
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
   
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
     
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 
   
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
     
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
   
   
   
Date: February 28, 2007
/s/  James H. Miller                                                  
 
James H. Miller
Chairman, President and Chief Executive Officer
PPL Corporation

EX-31.B 38 ppl10-k2006exhibit31b.htm EXHIBIT 31(B) Exhibit 31(b)
Exhibit 31(b)

CERTIFICATION
 
 
I, JOHN R. BIGGAR, certify that:
   
1.
I have reviewed this annual report on Form 10-K of the registrant for the year ended December 31, 2006; 
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
   
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
     
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 
   
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
     
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
   
   
   
Date: February 28, 2007
/s/  John R. Biggar                                                    
 
John R. Biggar
Executive Vice President and Chief Financial Officer
PPL Corporation
EX-31.C 39 ppl10-k2006exhibit31c.htm EXHIBIT 31(C) Exhibit 31(c)
Exhibit 31(c)

CERTIFICATION
 
 
I, JAMES H. MILLER, certify that:
   
1.
I have reviewed this annual report on Form 10-K of the registrant for the year ended December 31, 2006;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
   
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
c.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 
   
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
     
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
   
   
   
Date: February 28, 2007
/s/  James H. Miller                                                  
 
James H. Miller
President
PPL Energy Supply, LLC
EX-31.D 40 ppl10-k2006exhibit31d.htm EXHIBIT 31(D) Exhibit 31(d)
Exhibit 31(d)

CERTIFICATION
 
 
I, PAUL A. FARR, certify that:
   
1.
I have reviewed this annual report on Form 10-K of the registrant for the year ended December 31, 2006;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
   
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
c.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 
   
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
     
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
   
   
   
Date: February 28, 2007
/s/  Paul A. Farr                                                         
 
Paul A. Farr
Senior Vice President
PPL Energy Supply, LLC
EX-31.E 41 ppl10-k2006exhibit31e.htm EXHIBIT 31(E) Exhibit 31(e)
Exhibit 31(e)

CERTIFICATION
 
 
I, WILLIAM H. SPENCE, certify that:
   
1.
I have reviewed this annual report on Form 10-K of the registrant for the year ended December 31, 2006;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
   
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
c.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 
   
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
     
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
   
   
   
Date: February 28, 2007
/s/  William H. Spence                                    
 
William H. Spence
President
PPL Electric Utilities Corporation
EX-31.F 42 ppl10-k2006exhibit31f.htm EXHIBIT 31(F) Exhibit 31(f)
Exhibit 31(f)

CERTIFICATION
 
 
I, PAUL A. FARR, certify that:
   
1.
I have reviewed this annual report on Form 10-K of the registrant for the year ended December 31, 2006;
   
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
   
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
   
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
   
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     
 
b.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     
 
c.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 
   
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
     
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
   
   
   
Date: February 28, 2007
/s/  Paul A. Farr                                                        
 
Paul A. Farr
Senior Vice President-Financial
PPL Electric Utilities Corporation
EX-32.A 43 ppl10-k2006exhibit32a.htm EXHIBIT 32(A) Exhibit 32(a)
Exhibit 32(a)
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
FOR PPL CORPORATION'S 10-K FOR THE YEAR ENDED DECEMBER 31, 2006

In connection with the annual report on Form 10-K of PPL Corporation (the "Company") for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Covered Report"), I, the principal executive officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

 
·
The Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     
 
·
The information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: February 28, 2007
/s/ James H. Miller                                   
James H. Miller
Chairman, President and Chief Executive Officer
PPL Corporation

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 EX-32.B 44 ppl10-k2006exhibit32b.htm EXHIBIT 32(B) Exhibit 32(b)
Exhibit 32(b)
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
FOR PPL CORPORATION'S 10-K FOR THE YEAR ENDED DECEMBER 31, 2006

In connection with the annual report on Form 10-K of PPL Corporation (the "Company") for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Covered Report"), I, the principal financial officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

 
·
The Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     
 
·
The information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: February 28, 2007
/s/ John R. Biggar                                   
John R. Biggar
Executive Vice President and
Chief Financial Officer
PPL Corporation

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 EX-32.C 45 ppl10-k2006exhibit32c.htm EXHIBIT 32(C) Exhibit 32(c)
Exhibit 32(c)
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
FOR PPL ENERGY SUPPLY, LLC'S 10-K FOR THE YEAR ENDED DECEMBER 31, 2006

In connection with the annual report on Form 10-K of PPL Energy Supply, LLC (the "Company") for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Covered Report"), I, the principal executive officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

 
·
The Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     
 
·
The information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: February 28, 2007
/s/ James H. Miller                                   
James H. Miller
President
PPL Energy Supply, LLC

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 EX-32.D 46 ppl10-k2006exhibit32d.htm EXHIBIT 32(D) Exhibit 32(d)
Exhibit 32(d)
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
FOR PPL ENERGY SUPPLY, LLC'S 10-K FOR THE YEAR ENDED DECEMBER 31, 2006

In connection with the annual report on Form 10-K of PPL Energy Supply, LLC (the "Company") for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Covered Report"), I, the principal financial officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

 
·
The Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     
 
·
The information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: February 28, 2007
/s/ Paul A. Farr                                   
Paul A. Farr
Senior Vice President
PPL Energy Supply, LLC

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 EX-32.E 47 ppl10-k2006exhibit32e.htm EXHIBIT 32(E) Exhibit 32(e)
Exhibit 32(e)
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
FOR PPL ELECTRIC UTILITIES CORPORATION'S 10-K FOR THE YEAR ENDED DECEMBER 31, 2006

In connection with the annual report on Form 10-K of PPL Electric Utilities Corporation (the "Company") for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Covered Report"), I, the principal executive officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

 
·
The Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     
 
·
The information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: February 28, 2007
/s/ William H. Spence                                  
William H. Spence
President
PPL Electric Utilities Corporation

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 EX-32.F 48 ppl10-k2006exhibit32f.htm EXHIBIT 32(F) Exhibit 32(f)
Exhibit 32(f)
CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
FOR PPL ELECTRIC UTILITIES CORPORATION'S 10-K FOR THE YEAR ENDED DECEMBER 31, 2006

In connection with the annual report on Form 10-K of PPL Electric Utilities Corporation (the "Company") for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Covered Report"), I, the principal financial officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that:

 
·
The Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
     
 
·
The information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Date: February 28, 2007
/s/ Paul A. Farr                                   
Paul A. Farr
Senior Vice President-Financial
PPL Electric Utilities Corporation

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 EX-99.A 49 ppl10-k2006exhibit99a.htm EXHIBIT 99(A) Exhibit 99(a)
Exhibit 99(a)
 
PPL Corporation - Corporate Organization
(Selected Subsidiaries)
PPL Corporation
  
   
PPL Electric Utilities Corporation
 
PPL Transition Bond Company, LLC
 
PPL Receivables Corporation
 
CEP Commerce, LLC
     
CEP Lending, Inc.
   
PPL Gas Utilities Corporation
   
PPL Services Corporation
   
PPL Capital Funding, Inc.
   
PPL Deposit Corporation
   
PPL Principal Corporation
   
PPL Properties, Inc.
   
PPL Power Insurance Ltd.
   
PPL Energy Funding Corporation
 
CEP Reserves, Inc.
 
PPLSolutions, LLC
 
PPL Energy Supply, LLC
     
PPL Investment Corporation
     
PPL Global, LLC
       
PMDC Chile, Inc. (includes Emel)
       
PPLG US Latin America, Inc. (includes Elfec and Integra)
       
PPLG El Salvador (includes EC)
       
PMDC International Holdings, Inc. (includes WPD)
     
PPL EnergyPlus, LLC
       
PPL Energy Services Group, LLC
         
PPL Land Holdings, LLC
         
PPL Telcom, LLC
         
PPL Synfuel Investments, LLC
           
PPL Somerset, LLC
           
Avon Lake Synfuels, LLC (limited partner interest in Tyrone Synfuels, LP)
         
PPL Energy Services Holdings, LLC
     
PPL Generation, LLC
       
Lower Mount Bethel Energy, LLC
       
PPL Brunner Island, LLC
         
PPL Rights, LLC (jointly owned by PPL Brunner Island (67%) and PPL Martins Creek (33%))
       
PPL Coal Holdings Corporation
       
PPL Edgewood Energy, LLC
       
PPL Holtwood, LLC
       
PPL Maine, LLC
       
PPL Martins Creek, LLC
       
PPL Midwest Holdings, LLC (includes PPL University Park, LLC)
       
PPL Montana Holdings, LLC (includes PPL Montana)
       
PPL Montour, LLC
       
PPL Shoreham Energy, LLC
       
PPL Susquehanna, LLC
       
PPL Wallingford Energy LLC
EX-99.B 50 ppl10-k2006exhibit99b.htm EXHIBIT 99(B) Exhibit 99(b)
Exhibit 99(b)
Examples of Wholesale Energy, Fuel and Emission Allowance Price Fluctuations
2002 through 2006
Wholesale Energy:
PJM West Hub* Power Price - $/MWh
Year
High
Month
Low
Month
2002
$    733.72
July
$     0.00**
Feb., March, April, May,
June, July, Aug., Sept.
2003
$    252.38
March
$     0.00**
Jan., May, June,
July, Aug., Sept.
2004
$    181.66
December
$     0.00**
Jan., June, July,
Aug., Sept., Oct.
2005
$    315.65
July
$     0.00**
Jan., April, May,
June, July, Sept.
2006
$    769.90
August
$     0.00**
April, May, June, July,
Aug., Nov., Dec.
* A common trading hub for PJM.
** Occurs during times of low demand for electricity when generation levels of generating units are reduced to their normal minimums.

Mid-C* Power Price - $/MWh
Year
High
Month
Low
Month
2002
$     46.00
March
$       1.21
July
2003
$   113.89
February
$       9.13
May
2004
$     65.06
July
$     10.21
June
2005
$   139.76
December
$       7.68
May
2006
$   189.87
July
$     (2.00) 
May
* A common trading hub for Northwestern U.S.

Fuel:
NYMEX Coal (1% sulfur content, 12,000 Btu) Price - $/ton
Year
High
Month
Low
Month
2002
$     30.00
December
$     23.10
February
2003
$     39.92
December
$     27.75
March
2004
$     63.00
August
$     39.67
January
2005
$     62.75
September
$     51.10
June
2006
$     58.75
January
$     37.50
November

NYMEX Natural Gas Price - $/million Btu
Year
High
Month
Low
Month
2002
$       5.34
December
$       1.91
January
2003
$       9.58
February
$       2.66
August
2004
$       8.73
November
$       4.57
September
2005
$     15.38
December
$       5.83
January
2006
$     10.63
January
$       4.20
September

Residual Oil (1% sulfur content) Price @ NY Harbor - $/barrel
Year
High
Month
Low
Month
2002
$     29.10
December
$     14.03
February
2003
$     43.62
March
$     23.00
April
2004
$     35.38
October
$     22.12
December
2005
$     54.38
October
$     26.88
January
2006
$     54.25
April
$     35.00
October

Sulfur Dioxide Emission Allowances:
SO2 Emission Allowance Price - $/allowance
Year
High
Month
Low
Month
2002
$        177
March
$        126
November
2003
$        221
December
$        135
January
2004
$        730
November
$        210
January
2005
$     1,610
December
$        640
January
2006
$     1,598
January
$        445
November
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