def14c
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
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Preliminary Information Statement |
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Confidential, for Use of the Commission Only
(as permitted by Rule 14c-5(d)(2)) |
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Definitive Information Statement. |
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PPL Electric Utilities Corporation
(Name of Registrant as Specified in Its Charter)
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provided by Exchange Act Rule 0-11(a)(2) and identify the filing for
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by registration statement number, or the Form or Schedule and the date of
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PPL Electric Utilities Corporation
Notice of
Annual Meeting
May 24, 2007
and
Information Statement
(including appended
2006 Financial Statements)
PPL ELECTRIC
UTILITIES CORPORATION
Two North Ninth Street
Allentown, Pennsylvania 18101
Notice of Annual Meeting of
Shareowners
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Time and Date |
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9:00 a.m., Eastern Daylight Time, on Thursday, May 24,
2007. |
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Offices of PPL Electric Utilities Corporation
Two North Ninth Street
Allentown, Pennsylvania |
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Items of Business |
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To elect directors |
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Record Date |
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You can vote if you are a shareowner of record on
February 28, 2007. |
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Proxy Voting |
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Proxies are not being solicited from shareowners because a
quorum exists for the Annual Meeting based on the PPL Electric
Utilities Corporation stock held by its parent, PPL Corporation.
PPL Corporation owns all of the outstanding shares of common
stock and as a result 99% of the voting shares of PPL Electric
Utilities Corporation. PPL Corporation intends to vote all of
these shares in favor of the election of PPL Electric Utilities
Corporations nominees as directors. |
By Order of the Board of Directors,
Elizabeth Stevens Duane
Secretary
April 30, 2007
TABLE OF
CONTENTS
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Schedule A
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(i)
PPL ELECTRIC
UTILITIES CORPORATION
Two North Ninth Street
Allentown, Pennsylvania 18101
Information
Statement
Annual Meeting of
Shareowners
May 24, 2007
9:00 a.m. (Eastern Daylight Time)
We are providing this Information Statement in connection with
the Annual Meeting of Shareowners of PPL Electric Utilities
Corporation, or the company, to be held on May 24, 2007,
and at any adjournment of the Annual Meeting. PPL Corporation,
the parent of PPL Electric Utilities Corporation, owns all of
the shares of the companys outstanding common stock, which
represents 99% of the companys outstanding voting shares.
As a result, a quorum exists for the Annual Meeting based on PPL
Corporations stock ownership. ACCORDINGLY, WE ARE NOT
ASKING THE SHAREOWNERS FOR A PROXY, AND SHAREOWNERS ARE
REQUESTED NOT TO SEND US A PROXY. We first released this
Information Statement to shareowners on April 30, 2007.
GENERAL
INFORMATION
What am I
voting on?
There is one proposal scheduled to be voted on at the meeting:
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the election of six directors for a term of one year.
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Who can
vote?
Holders of PPL Electric Utilities Corporation common stock,
41/2%
Preferred Stock and Series Preferred Stock as of the close
of business on the record date, February 28, 2007, may vote
at the Annual Meeting. Each share of common stock,
41/2%
Preferred Stock and Series Preferred Stock is entitled to
one vote on each matter properly brought before the Annual
Meeting.
What is the
difference between holding shares as a shareowner of record and
as a beneficial owner?
If your shares are registered directly in your name with PPL
Electric Utility Corporations transfer agent, Wells Fargo
Bank, N.A., you are considered, with respect to those shares,
the shareowner of record. The Notice of Annual
Meeting and Information Statement have been sent directly to you
by PPL Electric Utilities Corporation.
If your shares are held in a stock brokerage account or by a
bank or other holder of record, you are considered the
beneficial owner of shares held in street name. The
Notice of Annual Meeting and Information Statement has been
forwarded to you by your broker, bank or other holder of record
who is considered, with respect to those shares, the shareowner
of record.
How do I
vote?
You can vote in person at the Annual Meeting. We are not asking
shareowners for a proxy by mail. You may come to the Annual
Meeting and cast your vote there by ballot. Please bring your
admission ticket with you to the Annual Meeting.
Abstentions and broker non-votes are not counted as either
yes or no votes.
We do not expect that any other matters will be brought before
the Annual Meeting.
Who can attend
the Annual Meeting?
If you are a shareowner of record, your admission ticket is
enclosed with the Notice of Annual Meeting and Information
Statement. You will need to bring your admission ticket, along
with picture identification, to the meeting. If you own shares
in street name, please bring your most recent brokerage
statement, along with
1
picture identification, to the meeting. The company will use
your brokerage statement to verify your ownership of
41/2%
Preferred Stock or Series Preferred Stock and admit you to
the meeting.
What
constitutes a quorum?
As of the record date of February 28, 2007, there were a
total of 66,873,245 shares outstanding and entitled to
vote, consisting of 66,368,056 shares of common stock all
owned by PPL Corporation, 247,524 shares of
41/2%
Preferred Stock and 257,665 shares of Series Preferred
Stock. The 2,500,000 outstanding shares of Preference Stock are
not entitled to vote. In order to conduct the Annual Meeting, a
majority of the outstanding shares entitled to vote must be
present in order to constitute a quorum. Abstentions and
broker non-votes will be counted as present and
entitled to vote for purposes of determining a quorum. A
broker non-vote occurs when a broker, bank or other
holder of record who holds shares for another person has not
received voting instructions from the beneficial owner of the
shares and, under New York Stock Exchange, or NYSE, listing
standards, does not have discretionary authority to vote on a
proposal.
What vote is
needed for the directors to be elected?
Shareowners have the unconditional right of cumulative voting.
Shareowners may vote in this manner by multiplying the number of
shares registered in their respective names on the record date
by the total number of directors to be elected at the Annual
Meeting and casting all of such votes for one nominee or
distributing them among any two or more nominees. The nominees
who receive the highest number of votes, up to the number of
directors to be elected, will be elected. Authority to vote for
any individual nominee can be withheld by striking a line
through that persons name in the list of nominees on the
ballot. Shares will be voted for the remaining nominees on a pro
rata basis.
How does the
company keep voter information confidential?
To preserve voter confidentiality, we voluntarily limit access
to shareowner voting records to certain designated employees of
PPL Services Corporation. These employees sign a confidentiality
agreement that prohibits them from disclosing the manner in
which a shareowner has voted to any employee of company
affiliates or to any other person (except to the Judges of
Election or the person in whose name the shares are registered),
unless otherwise required by law.
What is
householding, and how does it affect me?
Beneficial owners of PPL Electric Utilities Corporation
Preferred Stock and Series Preferred Stock held in street
name may receive a notice from their broker, bank or other
holder of record stating that only one Information Statement
and/or other
shareowner communications and notices will be delivered to
multiple security holders sharing an address. This practice,
known as householding, will reduce the
companys printing, shipping, and postage costs. If any
beneficial owner wants to revoke consent to this practice and
wishes to receive his or her own documents and other
communications, however, then he or she must contact the broker,
bank or other holder of record with a notice of revocation. Any
shareowner may obtain a copy of such documents from the company
at the address and phone number listed on the back cover page of
this Information Statement.
PROPOSAL:
ELECTION OF DIRECTORS
The nominees this year are Dean A. Christiansen,
David G. DeCampli, Paul A. Farr, Robert J. Grey,
James H. Miller and William H. Spence, all of whom are
currently serving as directors. The Board of Directors has no
reason to believe that any of the nominees will become
unavailable for election, but, if any nominee should become
unavailable prior to the meeting, PPL Corporation intends to
vote its shares of PPL Electric Utilities Corporation common
stock for the election of such other person as the Board of
Directors may recommend in place of that nominee. John F.
Sipics, who served on the Board and was President of the
company, retired on January 1, 2007. John R. Biggar, who
also served on the Board and was Executive Vice President and
Chief Financial Officer of PPL Corporation, retired on
March 31, 2007.
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The Board of
Directors
recommends that shareowners vote FOR this
Proposal
Nominees for
Directors:
DEAN A. CHRISTIANSEN, 47, is Managing Director of Sales
and Marketing for Capital Markets Engineering and Trading, LLC
(CMET), a New York-based investment banking boutique
providing, among other services, structured finance
securitization and financial engineering solutions to the
capital markets. Prior to joining CMET in August 2004,
Mr. Christiansen was the President of Acacia Capital, Inc.,
a New York City-based corporate finance advisory firm founded in
1990. From October 2000 to July 2003, he also served as
President and a Director of Lord Securities Corporation of New
York, a financial services and administration company with
operations world-wide. Mr. Christiansen received a degree
in government from the University of Notre Dame and has
completed additional studies in Aerospace engineering.
Mr. Christiansen is also a member of the board of PPL
Transition Bond Company, LLC. He has been a director since 2001.
DAVID G. DeCAMPLI, 49, is President of the company.
Before being named to his current position in April 2007,
Mr. DeCampli served as Senior Vice President-Transmission
and Distribution Engineering and Operations since December 2006.
Prior to joining the company in December 2006, Mr. DeCampli
served in the following positions for Exelon Energy Delivery in
Chicago: as Vice President-Asset Investment Strategy and
Development from April 2004; as Vice President and Chief
Integration Officer from June 2003; as Vice
President-Distribution Operations from April 2002; and as Vice
President-Merger Implementation & Operations Strategy
from October 2000. He also previously held various other
engineering and management positions at PECO Energy.
Mr. DeCampli earned a bachelors degree in electrical
engineering from Drexel University and a masters in
organizational dynamics from the University of Pennsylvania. He
has been a director since April 2007.
PAUL A. FARR, 40, is Executive Vice President and Chief
Financial Officer of the companys parent,
PPL Corporation. Prior to his current position in April of
2007, Mr. Farr was named Senior Vice President-Financial in
August 2005, Vice President and Controller in August 2004 and
served as Controller until January 2006. Prior to serving in his
PPL Corporation positions, Mr. Farr served as Senior Vice
President of PPL Global, LLC, a subsidiary of PPL Corporation
that owns and operates electricity businesses in Latin America
and the United Kingdom, from January 2004, as well as Vice
President-International Operations from June 2002 and Vice
President since October 2001. Mr. Farr also served for
several years as the chief financial officer of PPL Montana,
LLC, and in other management positions at PPL Global. Before
joining PPL in 1998, Mr. Farr served as international
project finance manager at Illinova Generating Company, as
international tax manager for Price Waterhouse LLP and as an
international tax senior at Arthur Andersen. Mr. Farr
earned a bachelors degree in accounting from Marquette
University and a masters degree in management from Purdue
University. He is a certified public accountant and also serves
on the Boards of PPL Energy Supply, LLC and PPL Transition Bond
Company, LLC. Mr. Farr has been a director since April 2007.
ROBERT J. GREY, 56, serves as Senior Vice President,
General Counsel and Secretary of the companys parent, PPL
Corporation, and is on the board of PPL Energy Supply, LLC.
Mr. Grey earned his bachelors degree from Columbia
University, a law degree from Emory University and a Master of
Laws degree from George Washington University. Before being
named as Senior Vice President, General Counsel and Secretary of
PPL and the company in 1996, Mr. Grey served as Vice
President, General Counsel and Secretary. Before joining the
company in 1995, Mr. Grey served as General Counsel for
Long Island Lighting Company and was a partner with the law firm
of Preston Gates & Ellis, now known as
Kirkpatrick & Lockhart Preston Gates Ellis LLP. He has
been a director since 2000.
JAMES H. MILLER, 58, is Chairman, President and Chief
Executive Officer of the companys parent, PPL Corporation.
Prior to his current position in October of 2006,
Mr. Miller was named President and Chief Operating Officer
of PPL Corporation in August 2005, Executive Vice President in
January 2004, and Chief Operating Officer in September 2004, and
also served as President of PPL Generation, LLC, a PPL
subsidiary that operates power plants in the United States. He
also serves as a director of PPL Corporation and serves on the
board of PPL Energy Supply, LLC. Mr. Miller earned a
bachelors degree in electrical engineering from the
University of Delaware and served in the U.S. Navy nuclear
program. Before joining PPL Generation, LLC in February 2001,
Mr. Miller served as Executive Vice President and Vice
President, Production of USEC, Inc. from 1995 and prior to that
time as President of ABB Environmental Systems, President of UC
Operating Services, President of ABB Resource Recovery Systems
and in various engineering and management positions at the
former Delmarva Power and Light Co. Mr. Miller has been a
director since 2001.
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WILLIAM H. SPENCE, 50, is Executive Vice President and
Chief Operating Officer of the companys parent,
PPL Corporation. Prior to joining PPL in June 2006,
Mr. Spence had 19 years of service with Pepco
Holdings, Inc. and its heritage companies, Delmarva Power and
Conectiv. He served as Senior Vice President of Pepco Holdings
from August 2002 and as Senior Vice President of Conectiv
Holdings since September 2000. He joined Delmarva Power in 1987
in that companys regulated gas business, where he held
various management positions before being named Vice President
of Trading in 1996. Mr. Spence also serves on the board of
PPL Energy Supply, LLC. Mr. Spence earned a bachelors
degree in petroleum and natural gas engineering from Penn State
University and a masters degree in business administration
from Bentley College. Mr. Spence has been a director since
2006.
GOVERNANCE OF THE
COMPANY
Board of
Directors
Attendance. The Board of
Directors held one Board meeting and acted by unanimous written
consent 18 times during 2006. Each director attended 100% of the
meetings held by the Board and its Executive Committee during
2006. Directors are expected to attend all meetings of the
Board, its Executive Committee and shareowners. All of our
then-serving directors attended the 2006 Annual Meeting of
Shareowners.
Communications with the Board.
Shareowners or other parties interested in communicating with
the Board of Directors may write to the following address:
Board of Directors
c/o Corporate Secretarys Office
PPL Electric Utilities Corporation
Two North Ninth Street
Allentown, Pennsylvania 18101
The Secretary of the company forwards all correspondence to the
respective Board members, with the exception of commercial
solicitations, advertisements or obvious junk mail.
Concerns relating to accounting, internal controls or auditing
matters are to be brought immediately to the attention of the
companys Office of Business Ethics and Compliance and are
handled in accordance with procedures established by the Audit
Committee of PPL Corporation with respect to such matters.
Code of Ethics. The
companys parent maintains its
Standards of Conduct and
Integrity, which are applicable to all Board members and
employees of the company and its subsidiaries, including the
principal executive officer, the principal financial officer and
the principal accounting officer of the company. You can find
the full text of the
Standards in the Corporate
Governance section of PPL Corporations Web site
(www.pplweb.com/about/corporate+governance.htm). The
Standards are also available in print, without charge, to
any shareowner who requests a copy.
Board
Committees
The company does not have standing audit, nominating and
compensation committees of the Board of Directors.
Executive Committee. During the
periods between Board meetings, the Executive Committees
function is to act on behalf of the Board on appropriate matters
that do not require full Board approval under the Pennsylvania
Business Corporation Law or the companys articles of
incorporation and bylaws. This Committee did not meet during
2006 and acted by unanimous written consent once during 2006.
The members of the Executive Committee are Mr. Miller
(chair), and Messrs. DeCampli and Farr.
Nominations. The Board of
Directors of the company makes the nominations for election of
directors for the company and does not have a separate standing
nominating committee. As PPL Corporation owns all of the
outstanding shares of the companys common stock, which
represents 99% of the companys outstanding voting shares,
PPL Corporation has a quorum and voting power for the purpose of
election of directors of the company, and PPL Corporation
recommends to the Board of Directors of the company all of the
nominees for directors of the company. Therefore, the Board of
Directors of the company acts upon these recommendations and
actions of PPL Corporation.
Because the company does not list any common equity securities
with the NYSE and is a direct consolidated subsidiary of PPL
Corporation, the company is not required to have a majority of
independent directors nor an audit committee or audit committee
financial expert. Most of the directors nominated are officers
of PPL
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Corporation and its subsidiaries, including the company. In
addition, because the Amended and Restated Articles of
Incorporation require the company to have at all times a
director who is independent, the Board of Directors nominates
one independent director for election to the Board of Directors,
based on the independence requirements set forth in the Amended
and Restated Articles of Incorporation. The current independent
director, Mr. Christiansen, was chosen by the
companys board upon the recommendation of PPL Corporation.
Because PPL Corporation controls the vote and the nomination of
directors of the company, the company has not recently received
any director recommendations from owners of voting preferred
stock of the company. Shareowners interested in recommending
nominees for directors should submit their recommendations in
writing to: Secretary, PPL Electric Utilities Corporation, Two
North Ninth Street, Allentown, Pennsylvania 18101. In order to
be considered, nominations by shareowners must be received by
the company 75 days prior to the 2008 Annual Meeting and
must contain the information required by the Bylaws, such as the
name and address of the shareowner making the nomination and of
the proposed nominees and certain other information concerning
the shareowner and the nominee.
In considering the candidates recommended by PPL Corporation,
the Board of Directors seeks individuals who possess strong
personal and professional ethics, high standards of integrity
and values, independence of thought and judgment and who have
senior corporate leadership experience, including within PPL
Corporation. The company believes that prior business experience
is valuable and provides a necessary basis for consideration of
the many complicated issues associated with the companys
business and the impact of related decisions on PPL Corporation
and other shareowners, customers, employees and the general
public. In addition, the Board of Directors seeks individuals
who have a broad range of demonstrated abilities and
accomplishments beyond corporate leadership. These abilities
include the skill and expertise sufficient to provide sound and
prudent guidance with respect to all of the companys
operations and interests. After completing the evaluation
process, the Board of Directors votes on whether to approve the
nominees. Each nominee to be elected who is named in this
Information Statement was recommended by PPL Corporation in
accordance with the practices described above.
Compensation Processes and
Procedures. The Compensation, Governance and
Nominating Committee, or CGNC, of the Board of Directors of the
companys parent, PPL Corporation, determines compensation
for all officers who are deemed to be executive officers of PPL
Corporation. This group includes all of the named executive
officers who are included in the Summary Compensation
Table on page 25, except for David G. DeCampli before
he was named president of the company in April 2007.
Specifically, the CGNC has strategic and administrative
responsibility for a broad range of issues, including ensuring
that executive officers are compensated effectively and in a
manner consistent with the companys stated compensation
strategy. The CGNC also oversees the administration of executive
compensation plans, including the design, performance measures
and award opportunities for the executive incentive programs,
and certain employee benefits. The CGNC has the authority to
make restricted stock, restricted stock unit and option awards
of PPL Corporation stock under the PPL Incentive Compensation
Plan, or ICP. The Board of Directors of PPL Corporation appoints
each member of the CGNC and has determined that each is an
independent director.
For those officers of the company who are not deemed to be
executive officers of PPL Corporation, including
Mr. DeCampli prior to his being named president of the
company, compensation is recommended by the president of the
company to the PPL Corporate Leadership Council, or CLC, which
consists of the chief executive officer, chief financial
officer, chief operating officer and general counsel of PPL
Corporation. In addition to determining salary and cash
incentive compensation for such officers, the CLC also has the
authority to make restricted stock unit grants and stock option
awards of PPL Corporation stock under the PPL Incentive
Compensation Plan for Key Employees, or ICPKE. As a result of
Mr. DeCampli being elected president of the company on
April 1, 2007, the CGNC, rather than the CLC, will
determine his compensation going forward.
The CGNC periodically reviews executive officer compensation to
ensure that compensation is consistent with
PPL Corporations compensation philosophies, company
and personal performance, changes in market practices, and
changes in an individuals responsibilities. At the
CGNCs first regular in-person meeting each year, which it
holds in January, the CGNC reviews the performance of PPL
executive officers and makes awards for the just-completed
fiscal year. The CLC performs the same function for other
officers.
To assist in its efforts to meet the objectives outlined above,
the CGNC has retained Towers Perrin, a nationally known
executive compensation and benefits consulting firm, to advise
it on a regular basis on executive compensation and benefit
programs. Towers Perrin provides additional information to the
CGNC so that it can determine whether the executive compensation
programs of PPL Corporation and the company are reasonable
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and consistent with competitive practices. Representatives of
Towers Perrin regularly participate in CGNC meetings and provide
advice as to compensation trends and best practices, plan design
and peer group comparisons.
Annually, the CGNC requests Towers Perrin to develop an analysis
of current competitive compensation practices and levels. This
analysis begins with a general review at the committees
July meeting and continues with a detailed analysis of
competitive pay levels and practices at its year-end meeting.
The CGNC uses this analysis when it assesses performance and
considers salary levels and incentive awards at its January
meeting following the performance year.
Senior management of PPL Corporation and each of its
subsidiaries, including the company, develops the business plan
and recommends to the CGNC the related goals for the annual cash
incentive program and the strategic goals for the long-term
incentive program for the upcoming year, based on industry and
market conditions and other factors. All of the incentive and
strategic goals are reviewed and approved by the CGNC.
The CGNC has the authority to review and approve annually the
compensation structure, including goals and objectives, of the
president of the company and other executive officers who are
deemed to be executive officers of PPL Corporation and are
subject to Section 16 of the Securities Exchange Act of
1934. This group includes all of the executive officers named in
this Information Statement with the exception of
Mr. DeCampli. The chief executive officer of PPL
Corporation reviews with the CGNC his evaluation of the
performance and leadership of the executive officers who report
directly to him and, with input from the chief operating officer
of PPL Corporation, evaluates the presidents of the major
business lines who report to the chief operating officer, which
includes the president of the company. The CGNC approves the
annual compensation, including salary, incentive compensation
and other remuneration of such executive officers. The CLC
approves the annual compensation of the other officers.
Compensation of
Directors
Directors who are employees of the company or its affiliates do
not receive any separate compensation for service on the Board
of Directors or its Executive Committee. The company pays Lord
Securities Corporation an annual fee of $7,000 for providing the
services of its independent director, Dean A. Christiansen.
STOCK
OWNERSHIP
As noted above, all of the outstanding shares of common stock of
the company are owned by PPL Corporation. No directors or
executive officers of the company own any PPL Electric Utilities
Corporation preferred, series preferred or preference stock.
SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To our knowledge, our directors and executive officers met all
filing requirements under Section 16(a) of the Securities
Exchange Act of 1934 during 2006.
TRANSACTIONS WITH
RELATED PERSONS
The Board of Directors of the companys parent, PPL
Corporation, adopted a written related-person transaction policy
in January 2007 to recognize the process its Board will use in
identifying potential conflicts of interest arising out of
financial transactions, arrangements or relations between PPL
Corporation or its subsidiaries (including the company) and any
related persons. This policy applies to any transaction or
series of transactions in which PPL Corporation or a
subsidiary is a participant, the amount exceeds $120,000 and a
related person has a direct or indirect material
interest. A related person includes not only the companys
directors and executive officers, but others related to them by
certain family relationships, as well as shareowners who own
more than 5% of any class of PPL Corporations voting
securities.
Under the policy, each related-person transaction must be
reviewed and approved or ratified by the disinterested
independent members of the Board of PPL Corporation, other than
any employment relationship or transaction involving an
executive officer and any related compensation, which must be
approved by the CGNC. PPL Corporation collects information
about potential related-person transactions in annual
questionnaires completed by directors and executive officers,
including those of the company. PPL Corporation also
reviews any payments made by PPL Corporation or its
subsidiaries (including the company) to each director and
executive officer and their immediate family members, and to or
from those companies that either employ a director or an
6
immediate family member of any director or executive officer.
PPL Corporations Office of General Counsel determines
whether a transaction requires review by the Board of PPL
Corporation or the CGNC. Transactions that fall within the
definition of the policy are reported to the Board of PPL
Corporation or the CGNC. The disinterested independent members
of the Board of PPL Corporation, or the CGNC, as applicable,
reviews and considers the relevant facts and circumstances and
determines whether to approve, deny or ratify the related-person
transaction. Since January 1, 2006, except for compensation
for executive officers that has been approved by the CGNC, there
have been no related-person transactions that were required
either to be approved under the policy or reported under the
Securities and Exchange Commission, or SEC, related-person
transaction rules.
EXECUTIVE
COMPENSATION
Compensation
Committee Report
The Board of Directors has reviewed the following Compensation
Discussion and Analysis and discussed it with management. Based
on its review and discussions with management, the Board
authorized the Compensation Discussion and Analysis to be
incorporated by reference into the companys Annual Report
on
Form 10-K
for 2006 and included in this Information Statement.
Board of Directors
David G. DeCampli
Paul A. Farr
Robert J. Grey
James H. Miller
William H. Spence
Compensation
Discussion and Analysis (CD&A)
The named executive officers who are included in the
Summary Compensation Table on page 25
participate in the executive compensation program offered to
officers of the major operating subsidiaries of PPL Corporation
as well as the officers of PPL Corporation. Three of the named
executive officers, Paul A. Farr, James E. Abel and J. Matt
Simmons, Jr., are not paid separately as officers of the
company but are employees of PPL Services Corporation, an
affiliate of the company. John F. Sipics was an employee of the
company prior to his retirement on January 1, 2007, and
David G. DeCampli is an employee of the company. The company is
a participating employer and has adopted all of the executive
compensation plans offered by PPL Corporation. Each named
executive officer participates in the executive compensation
plans for their particular company, but all of the benefits
offered and the terms of each plan are the same for all
participating companies.
The Compensation, Governance and Nominating Committee of the PPL
Corporation Board of Directors, referred to throughout this
CD&A as the CGNC, is responsible for overseeing the
executive compensation program and approves all executive
compensation awards to those officers who are deemed to be
executive officers of PPL Corporation. This group includes all
of the named executive officers except Mr. DeCampli before
he was named president of the company in April 2007. In the case
of Mr. DeCampli, the president of the company recommended
all compensation awards to the CLC, and the CLC approved his
compensation. The Board of Directors of the company concurs with
the decisions of the CGNC and CLC.
Objectives of
Executive Compensation Program
The executive compensation program of PPL Corporation and its
subsidiaries, including the company and referred to throughout
this CD&A as PPL, is designed to recruit, retain and
motivate executive leadership and align compensation with the
companys performance. Since executive officer performance
has the potential to affect PPLs profitability, the key
elements of PPLs executive compensation program seek to
achieve PPLs business goals appropriately by encouraging
and retaining leadership excellence and expertise, rewarding
executive officers for sustained financial and operating
performance, and realizing both short-term and long-term value
for shareowners of PPL and the company.
A key component of the program is direct
compensationsalary and a combination of annual cash and
equity incentive awardswhich is intended to provide an
appropriate, competitive level of compensation, to reward
7
recent performance results and to motivate long-term
contributions to achieving PPLs strategic business
objectives. PPL evaluates the direct compensation program as a
whole and intends to deliver a balance of current cash
compensation and stock-based compensation. The program also
balances a level of fixed compensation paid
regularlysalarywith incentive compensation that
varies with the performance of PPL. The incentive compensation
program focuses executive awards on annual and longer-term
performance and, for executive officers including the named
executive officers in the Summary Compensation Table on
page 25, provides the major portion of direct compensation
in the form of PPL Corporation stock, ensuring that management
and shareowner interests are aligned.
Other elements of the total compensation program provide: the
ability of executives to accumulate capital, predominately in
the form of equity to align executive interests with those of
the shareowners; a level of retirement income; and, in the event
of special circumstances like termination of employment in
connection with a change in control of PPL Corporation, special
severance protection to help ensure executive retention during
the change in control process and to ensure executive focus on
serving the company and shareowner interests without the
distraction of possible job and income loss.
To ensure appropriate alignment with business strategy and
objectives and shareowner interests, the CGNC reviews the
executive compensation program and each of its components
regularly.
Compensation
Elements
Our executive compensation program consists of: (1) direct
compensation; (2) indirect compensation; and
(3) special compensation.
Direct
Compensation
Broadly stated, the direct compensation program is intended to
reward:
|
|
|
|
|
Expertise and experience through competitive salaries;
|
|
|
|
Short-term financial and operational performance through annual
cash incentive awards, which are tied to specific, measurable
goals;
|
|
|
|
Achievement of annual strategic objectives through
performance-based PPL Corporation restricted stock and stock
unit awards;
|
|
|
|
Long-term financial and operational performance through
performance-based PPL Corporation restricted stock or stock unit
awards; and
|
|
|
|
Stock price growth through awards of stock options for shares of
PPL Corporation common stock.
|
The direct compensation program includes salary, an annual cash
incentive award and long-term incentive awards. Long-term
incentive awards are granted in two forms of equity: restricted
stock units and stock options.
In general, the company offers a competitive direct compensation
program that is intended to align with companies of similar size
and complexity, which are also the companies with which we
compete for talent. The CGNC and the company target direct
compensation to be generally at the median of the competitive
market. Each year, competitive data are developed by the
CGNCs compensation consultant, Towers Perrin, based on
companies of similar size both in the energy services industry
and general industry companies other than energy services or
financial services companies. In developing this competitive
data, Towers Perrin uses its published compensation surveys
(typically their current-year Executive Compensation Database
and Long-Term Incentive Report (approximately 900 corporate
participants), Energy Services Industry Executive Compensation
Database (approximately 100 corporate participants), and for PPL
EnergyPlus, LLC positions, Benchmark Compensation Survey of
Energy Trading and Marketing Positions (approximately 65
corporate participants)). When possible and appropriate,
analyses are performed to size-adjust the survey data to achieve
a closer correlation with the appropriate scope for the
applicable PPL business position. The result of this analysis
produces a competitive market reference point we refer to as the
PPL competitive data, which we believe appropriately
reflects the competitive marketplace in which we compete for
executive talent.
PPL competitive data are used as a tool for evaluating salary
levels as well as to set target incentive levels. For example,
salary amounts are determined based on the PPL competitive data
provided by the compensation consultants analysis for a
particular position and the PPL Corporation chief executive
officers and CGNCs assessment of the
individuals expertise and experience. Total direct
compensation in relation to other
8
executives, as well as prior year individual performance and
performance of the business lines for which the executive is
responsible, are also taken into consideration in determining
any adjustment by the CGNC or CLC.
In addition to assessing competitive pay levels, Towers Perrin
reports to the CGNC each July on recent industry trends and
emerging trends they perceive in the energy services industry.
The majority of direct compensation for executive officers
consists of incentive compensation that varies with the
performance of PPL. A portion of incentive compensation is
intended to reward annual or short-term performance;
the rest consists of restricted stock units, which are intended
to promote medium-term performance, and stock options, which are
intended to promote longer-term stock price growth.
Table 1 below illustrates the allocation of direct compensation
for the companys executive officers for 2006, which is
shown as a percentage of total direct compensation. For example,
the salary of the president of the company represents 32.3% of
total direct compensation. Incentive compensationannual
and long-termrepresents 67.7% of the presidents
direct pay, with 51.6% stock-based and linked to long-term
financial performance.
TABLE 1
Elements of
Compensation as a Percentage of Total Direct
Compensation2006(1)
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Percentage of
Total Direct Compensation
|
|
|
|
|
|
|
Senior Vice
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|
|
|
|
|
|
|
|
President-
|
|
|
Other
Executive
|
|
|
Direct
Compensation Element
|
|
|
President
|
|
|
Financial
|
|
|
Officers(2)
|
|
|
Salary
|
|
|
|
32.3
|
%
|
|
|
|
32.3
|
%
|
|
|
|
41
|
%
|
|
|
Target Annual Cash Incentive Award
|
|
|
|
16.1
|
%
|
|
|
|
16.1
|
%
|
|
|
|
16
|
%
|
|
|
Target Long-term Incentive Awards
|
|
|
|
51.6
|
%
|
|
|
|
51.6
|
%
|
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Percentages based on target award levels as a percentage of
total direct compensation. Values of restricted stock unit and
stock option awards shown in the tables throughout this
Information Statement may reflect compensation expense
recognized in 2006 for financial reporting purposes, rather than
fair market values calculated using the number of shares or
options actually awarded. See Tax and Accounting
ConsiderationsSFAS 123(R) at the end of this
CD&A at page 24 for further details on how equity
awards are expensed. |
|
(2) |
|
Includes the positions of Treasurer; Vice President and
Controller; and Senior Vice President-Transmission and
Distribution Engineering and Operations. |
Base
Salary
The CGNC or CLC sets base salaries to reward expertise and
experience. Salaries are not at risk in the sense
that, once established annually based on individual, and where
applicable, business line performance and market comparisons,
they are paid regularly and are not contingent on attainment of
specific goals. Executive salaries are adjusted based on the
expertise and experience of each executive, prior year
individual performance and performance of the business lines for
which the executive is responsible. Additionally, the critical
need for a particular executives skill, overall assessment
of an executives pay in relation to others within the
company and level of pay relative to the PPL competitive data
are considered in determining an individuals base salary.
Generally, the company seeks to align salaries to the median of
the market. Salaries are considered paid competitively if they
are within 15% of the PPL competitive data, or within the PPL
competitive range for a particular position. For example, if the
PPL competitive data for the president position is $380,000, we
consider appropriate market compensation for this position as
ranging between $323,000 and $437,000, or 15% less than and 15%
greater than the market reference point of $380,000.
Changes in base salary affect annual cash incentive awards and
equity incentive awards. Because target incentive award levels
are set as a percentage of salary, increases in salary also
affect annual cash incentive award and equity incentive award
opportunities.
9
In January of each year, the CGNC reviews base salary levels for
all executive officers of PPL Corporation. The CLC determined
Mr. DeCamplis base salary after discussing it with
the president of the company.
At its meeting on January 26, 2006, the CGNC approved the
following base salaries for the named executive officers, except
as noted:
TABLE 2
2006 Salary
Adjustments by Position
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|
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|
|
PPL
Competitive
|
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|
|
|
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|
Name
and Position
|
|
|
Prior
Salary
|
|
|
Range
|
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|
2006
Salary
|
|
|
%
Change
|
|
|
J. F. Sipics
|
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|
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|
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|
|
|
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|
|
|
|
|
|
President(1)
|
|
|
$
|
325,000
|
|
|
|
|
$323,000-$437,000
|
|
|
|
$
|
350,000
|
|
|
|
|
7.7
|
%
|
|
|
P. A. Farr
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice
President-Financial
|
|
|
|
350,000
|
|
|
|
|
$323,000-$437,000
|
|
|
|
|
390,000
|
|
|
|
|
11.4
|
%
|
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|
J. E. Abel
|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Treasurer
|
|
|
|
250,773
|
|
|
|
|
$221,000-$299,000
|
|
|
|
|
265,773
|
|
|
|
|
6.0
|
%
|
|
|
J. M. Simmons, Jr.
|
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|
|
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|
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|
Vice President and
Controller(2)
|
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|
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|
|
|
$221,000-$299,000
|
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|
|
225,000
|
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|
|
|
|
|
D. G.
DeCampli(3)
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|
|
|
|
|
Senior Vice President-T&D
Engineering and Operations
|
|
|
|
|
|
|
|
|
$221,000-$299,000
|
|
|
|
|
265,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(1) |
|
Mr. Sipics served as president for all of 2006, but retired
on January 1, 2007. |
|
(2) |
|
Mr. Simmons joined PPL on January 30, 2006 as Vice
President and Controller of the company and of the
companys parent, PPL Corporation. |
|
(3) |
|
Mr. DeCampli joined the company on December 4, 2006 at
the salary noted for 2006. |
Mr. Sipics salary was increased in 2006 in
recognition of his and the companys effective performance
in 2005. Overall, PPL Corporations financial performance
goals exceeded expectations and the company achieved 125% of
targeted or budgeted performance on its annual incentive goals.
In addition, Mr. Sipics was paid low relative to the PPL
competitive range and PPL Corporations chief executive
officer recommended, and the CGNC concluded, it was appropriate
to move Mr. Sipics further into the PPL competitive range.
The CGNC increased Mr. Farrs salary to reflect
effective performance during 2005 in his PPL Corporation
position, resulting in a salary just over the middle point of
the PPL competitive range. Mr. Farr was considered a
potential candidate for the position of chief financial officer
of PPL Corporation. Mr. Farr was promoted to Executive Vice
President and Chief Financial Officer of PPL Corporation
effective April 1, 2007, following the retirement of John
R. Biggar.
Mr. Abels salary was increased based on continuing
effective performance in his PPL Corporation position of Vice
President-Finance and Treasurer. The CGNC also concluded it was
appropriate to move Mr. Abels salary further into the
PPL competitive range.
Annual Cash
Incentive Awards
The annual cash incentive award program is designed to reward
annual performance compared to business goals established at the
beginning of the year. Unlike salary, where payment is a fixed
amount paid regularly, this compensation element is
at-risk because awards are based on achievement of
prescribed business results. Awards may vary from the target
award (that is, the result at which payouts would be at 100%) to
zero or to the program maximum of 150% of target established for
each position.
The CGNC makes annual cash incentive awards under PPL
Corporations shareowner-approved Short-Term Incentive Plan
to those executive officers who are deemed to be executive
officers of PPL Corporation and are subject to Section 16
of the Securities Exchange Act of 1934. Because
Mr. DeCampli was not considered an executive officer of PPL
Corporation during 2006, his annual cash incentive award was
approved by the CLC. All of the annual cash incentive awards are
based on objective corporate financial and operational measures.
Specific written performance objectives and business goals are
established by management and approved by the
10
CGNC during the first quarter of each calendar year. The CGNC
establishes target award levels, set as a percentage of salary
for each executive, based on a review of the PPL competitive
data and an internal comparison of executive positions.
The CGNC set the following target award levels for the positions
listed for the 2006 annual cash incentive awards:
TABLE 3
Annual Cash
Incentive Targets by Position for 2006
|
|
|
|
|
|
|
|
|
Targets as %
|
Position
|
|
|
of
Salary
|
President
|
|
|
|
50
|
%
|
Senior Vice President-Financial
|
|
|
|
50
|
%
|
Treasurer; Vice President and
Controller; and Senior Vice PresidentT&D
Engineering
and Operations
|
|
|
|
40
|
%
|
|
|
|
|
|
|
The corporate financial goal for 2006, which was a fully diluted
earnings per share, or EPS target described in
detail below, represented 40% of the total award for business
line presidents, including the President of the company as well
as the Senior Vice President-T&D Engineering and Operations.
EPS represented 60% of the total award for the other executive
officers as a result of their positions with PPL Corporation.
Various measures make up operational goals, including
business-line net income, customer service measures, operation
and maintenance expense and capital expenditure amounts, safety
and environmental performance, and other measures critical to
the success of the business lines.
The following table summarizes the weightings allocated to
financial and operational results, by executive officer
position, for determining 2006 annual cash incentive awards:
TABLE 4
Annual Cash
Incentive Weightings Applied to Financial and Operational
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SVPT&D
|
|
|
Treasurer and
|
|
|
|
|
|
|
|
|
|
Engineering
and
|
|
|
VP &
|
Category
|
|
|
President
|
|
|
SVP-Financial
|
|
|
Operations
|
|
|
Controller
|
Financial Results
|
|
|
|
40%
|
|
|
|
|
60%
|
|
|
|
|
40%
|
|
|
|
|
40%
|
|
Operational Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Generation
|
|
|
|
|
|
|
|
|
9%
|
|
|
|
|
|
|
|
|
|
9%
|
|
PPL EnergyPlus
|
|
|
|
10%
|
|
|
|
|
9%
|
|
|
|
|
|
|
|
|
|
9%
|
|
PPL Electric Utilities
|
|
|
|
38%
|
|
|
|
|
9%
|
|
|
|
|
35%
|
|
|
|
|
9%
|
|
PPL Gas Utilities
|
|
|
|
2%
|
|
|
|
|
|
|
|
|
|
5%
|
|
|
|
|
|
|
PPL Global
|
|
|
|
10%
|
|
|
|
|
9%
|
|
|
|
|
|
|
|
|
|
9%
|
|
PPL Energy Services Group
|
|
|
|
|
|
|
|
|
4%
|
|
|
|
|
|
|
|
|
|
4%
|
|
Individual Results
|
|
|
|
*
|
|
|
|
|
*
|
|
|
|
|
20%
|
|
|
|
|
20%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Annual cash incentive awards for these executive officers are
based on the financial and operational results of PPL for the
year and are not further adjusted for individual performance. |
11
At its January 2007 meeting, the CGNC reviewed 2006 performance
results to determine whether the named executive officers had
met or exceeded pre-established 2006 performance goals. Annual
cash incentive awards are determined as summarized below by
multiplying the results for financial and operational measures
by the weightings in Table 4 above to determine the total
performance result for each position. The total performance
result is then multiplied by the target award opportunity as
detailed in Table 3 above and then multiplied by salary as of
December 31, 2006, the end of the performance period.
Mr. DeCamplis award was approved by the CLC and not
the CGNC because he was not deemed to be an executive officer of
PPL Corporation during 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
annual
cash
incentive
award
|
|
=
|
|
result
|
|
×
|
|
weights
(Table 4)
|
|
×
|
|
target award
%
(Table 3)
|
|
×
|
|
year-end
salary
(Table 2)
|
|
|
As a result, the CGNC approved, except as noted, the following
annual cash incentive awards:
TABLE 5
Annual Cash
Incentive Awards for 2006 Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary Basis
for
|
|
|
Total Goal
|
|
|
2006 Annual
Cash
|
|
|
Name
|
|
|
Award
|
|
|
Results
|
|
|
Award(1)
|
|
|
J. F. Sipics
|
|
|
$
|
350,000
|
|
|
|
|
118.8%
|
|
|
|
$
|
207,900
|
|
|
|
P. A. Farr
|
|
|
|
390,000
|
|
|
|
|
131.3%
|
|
|
|
|
256,000
|
|
|
|
J. E. Abel
|
|
|
|
265,774
|
|
|
|
|
127.1%
|
(2)
|
|
|
|
135,100
|
|
|
|
J. M. Simmons, Jr.
|
|
|
|
225,000
|
|
|
|
|
129.1%
|
(3)
|
|
|
|
107,500
|
|
|
|
D. G. DeCampli
|
|
|
|
265,000
|
|
|
|
|
110.4%
|
(4)
|
|
|
|
117,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total award amounts may differ from the amounts included in the
Non-Equity Incentive Award column of the Summary Compensation
Table due to amounts exchanged under the Premium Exchange
Program, which is described on page 23 of this CD&A
under Ownership Guidelines. |
|
(2) |
|
Includes individual results achieved at 120% of target
performance. |
|
(3) |
|
Includes individual results achieved at 130% of target
performance. |
|
(4) |
|
Assumes 12 months in the position as provided by the terms
of Mr. DeCamplis employment offer letter. |
12
The following Table 6A and Table 6B provide further detail on
the goal results underlying the 2006 annual cash incentive
awards. Table 6A applies the weights from Table 4 to the various
results for Mr. Sipics position as president to
produce the total result for award purposes. Table 6B applies
the weights for Mr. Farrs award. Messrs. Abel,
Simmons and DeCamplis awards apply the weights from Table
4 to the applicable results, including results for individual
performance.
TABLE
6A
Annual Cash
Incentive Award for President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
|
|
|
Weight
|
|
|
Attainment
|
PPL Corporation EPS (60% weight)
|
|
|
|
140.9%
|
|
|
|
|
40%
|
|
|
|
|
56.4%
|
|
Operational:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL EnergyPlus (10%
weight)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EnergyPlus Energy Marketing Center
|
|
|
|
142.5%
|
|
|
|
|
10.0%
|
|
|
|
|
14.3%
|
|
Utility Operations (9%
weight)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Electric Utilities (95%)
|
|
|
|
82.0%
|
|
|
|
|
38.0%
|
|
|
|
|
31.1%
|
|
PPL Gas Utilities (5%)
|
|
|
|
107.2%
|
|
|
|
|
2.0%
|
|
|
|
|
2.1%
|
|
PPL Global (10%
weight)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
|
149.3%
|
|
|
|
|
10.0%
|
|
|
|
|
14.9%
|
|
Total Weight &
Attainment
|
|
|
|
|
|
|
|
|
100.0%
|
|
|
|
|
118.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TABLE
6B
Annual Cash
Incentive Awards for PPL Corporation-level Executive
Officers
(executive officers other than presidents of major business
lines)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
|
|
Weight
|
|
Attainment
|
|
|
|
PPL Corporation EPS (60% weight)
|
|
|
140.9%
|
|
|
|
60%
|
|
|
|
84.6%
|
|
|
|
Operational:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Generation (9%
weight)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Generation East Fossil/Hydro (50%)
|
|
|
95.4%
|
|
|
|
4.5%
|
|
|
|
4.3%
|
|
|
|
Susquehanna (30%)
|
|
|
97.1%
|
|
|
|
2.7%
|
|
|
|
2.6%
|
|
|
|
Generation West Fossil/Hydro (20%)
|
|
|
79.9%
|
|
|
|
1.8%
|
|
|
|
1.4%
|
|
|
|
PPL EnergyPlus (9%
weight)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EnergyPlus Energy Marketing Center
|
|
|
142.5%
|
|
|
|
9.0%
|
|
|
|
12.8%
|
|
|
|
Utility Operations (9%
weight)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Electric Utilities (95%)
|
|
|
82.0%
|
|
|
|
8.5%
|
|
|
|
7.0%
|
|
|
|
PPL Gas Utilities (5%)
|
|
|
107.2%
|
|
|
|
0.5%
|
|
|
|
0.5%
|
|
|
|
PPL Global (9%
weight)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
|
149.3%
|
|
|
|
9.0%
|
|
|
|
13.4%
|
|
|
|
PPL Energy Services Group (4%
weight)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services (30%)
|
|
|
125.0%
|
|
|
|
1.2%
|
|
|
|
1.5%
|
|
|
|
Synfuels (20%)
|
|
|
101.3%
|
|
|
|
0.8%
|
|
|
|
0.8%
|
|
|
|
Telcom (15%)
|
|
|
142.9%
|
|
|
|
0.6%
|
|
|
|
0.9%
|
|
|
|
PPLSolutions (15%)
|
|
|
94.1%
|
|
|
|
0.6%
|
|
|
|
0.6%
|
|
|
|
Development (20%)
|
|
|
117.9%
|
|
|
|
0.8%
|
|
|
|
0.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Weight &
Attainment
|
|
|
|
|
|
|
100.0%
|
|
|
|
131.3%
|
|
|
|
13
As noted above, the total goal results are based on a blend of
corporate, financial and operational results. The financial and
operational goals are based on PPLs business plan. The
financial goals are set to meet managements objectives and
financial market expectations, and the operational goals are
established to support financial results for both the short and
longer term.
Generally, the company expects awards, in the aggregate, to
range from 90% to 110% of target. Awards may range from zero to
150% of target, although attainment at the maximum award level
is not expected. Awards for the positions of the named executive
officers over the last five years have ranged from 101.3% to
131.3% of target.
Financial Results. Target EPS of PPL Corporation
for the annual cash incentive program was $2.20 per share
for 2006, with a 150% payout goal of $2.30 and a 50% payout goal
of $2.10. Results below $2.10 would result in a zero payout on
this portion of the incentive goal.
The target EPS used for goal purposes is corporate reported
earnings of PPL Corporation, net of specific items excluded at
the beginning of the year and approved by the CGNC in March
2006. The excluded items for 2006 were:
|
|
|
|
|
Any impact from changes in accounting resulting from FASB or SEC
determinations that, as of January 31, 2006, were not
scheduled to become applicable to current year financial
statements, or if the financial statement impact was not
determinable based on the issued or proposed guidance.
|
|
|
|
Costs associated with the refinancing of debt or senior equity
securities where refinancing results in a positive net present
value.
|
|
|
|
Asset impairments related to or resulting from a decision to
sell assets or discontinue operations where such sale or
discontinued operations results in a positive net present value.
|
|
|
|
Any
mark-to-market
(MTM) impact on earnings from energy marketing and trading
activities. The MTM changes of forward commitments are not
reflective of the ultimate profitability of the MTM
transactions. The ultimate financial impact of MTM transactions,
as well as related transactions that do not receive MTM
accounting, are reflected in earnings as contracted products and
services are delivered.
|
|
|
|
The outcome of the legal proceedings relating to a PJM billing
dispute at the Federal Energy Regulatory Commission. PJM, or PJM
Interconnection, L.L.C., is the independent operator of the
electric transmission network for the region in which PPL
Electric Utilities Corporation provides transmission service.
|
After adjusting PPLs reported corporate earnings for the
above excluded items, the EPS achieved for purposes of the
annual cash incentive program was $2.29 per share, or 140.9% of
the target EPS for 2006.
Operational Results. Operating goals are detailed,
quantifiable goals set specifically for each business line
annually. The operational goals are structured to attain the
target EPS of PPL Corporation for the year, while at the same
time promoting near-term activities that benefit the operating
assets in future years. Because the target EPS is a challenging
goal relative to the previous years target, many of the
supporting operational goals require
difficult-to-reach
elements in order to produce operating results that render the
target EPS.
Operating goals in 2006 included the following:
|
|
|
|
|
Safety goals are included in all units (limits on Occupational
Safety and Health Administration reportable events and motor
vehicle accidents).
|
|
|
|
Gross margin, net income or net operating profit after tax
(NOPAT) goals are included in each business lines goals.
Gross margin is a goal for PPL Generation and PPL EnergyPlus.
Net income is a goal for the delivery companiesPPL
Electric Utilities and PPL Gas Utilities and PPL Globaland
our smaller business lines. NOPAT is used by PPL Global. PPL
Generation, PPL Electric Utilities and PPL Gas Utilities also
have specific operations and maintenance and capital expenditure
goals that support their margin or income goals.
|
|
|
|
Energy marketing and trading goals are also included. PPL
EnergyPlus has specific goals pertaining to strategy to grow
value extracted from our generation assets, to refine a
marketing strategy and to hedge and expand margins in years 2007
and beyond.
|
14
|
|
|
|
|
Station generation goals are included for PPL Generation units,
including specific equivalent availability, prime time
availability and coal plant unplanned outage goals.
|
|
|
|
PPL Generations nuclear unit has a specific goal
pertaining to its extended power uprate project and
license renewal capital budget.
|
|
|
|
PPL Energy Services Groups development unit has goals
pertaining to asset growth.
|
|
|
|
Environmental compliance goals are determined for the fossil and
hydro generating units. Nuclear Regulatory Commission
Performance Indicators and Inspector Findings and Institute of
Nuclear Power Operations rating goals are determined for the
nuclear unit.
|
|
|
|
Customer service goals are included for the delivery
companiesPPL Electric Utilities, PPL Gas Utilities and PPL
Globals subsidiariestaking the form of customer
satisfaction surveys, interruption limits, lost minute limits
and non-storm lost minute measures.
|
|
|
|
Community impact goals are included for our fossil and hydro
units in the form of a favorable public perception evaluation.
|
Long-term
Incentive Awards (Equity Awards)
PPL grants long-term incentive awards to align the interests of
the executive officers with those of PPLs shareowners.
Long-term incentive awards for those officers who are deemed
executive officers of PPL Corporation are made annually under
the PPL Corporation shareowner-approved Incentive Compensation
Plan, or ICP. Key employees of PPL companies who are not deemed
to be executive officers of PPL Corporation, such as
Mr. DeCampli before he was named president of the company,
are eligible to receive long-term incentive awards under the PPL
Corporation shareowner-approved Incentive Compensation Plan for
Key Employees, or ICPKE. The CGNC approves all awards granted
under the ICP, and the CLC approves all grants under the ICPKE.
The long-term incentive program is designed to reward mid- and
long-term performance and is composed of three awards:
|
|
|
|
|
Restricted stock unit awards for sustained financial and
operational performance of PPL;
|
|
|
|
Restricted stock unit awards for PPL performance on specific,
strategic goals; and
|
|
|
|
Stock option awards for stock price growth of PPL Corporation
common stock.
|
General
PPL grants restricted stock unit awards based on the achievement
of prescribed business results. Restricted stock unit awards
provide executives the right to receive an equivalent number of
shares of PPL Corporation common stock after a restriction or
holding period. These grants are therefore at-risk
because awards may vary from zero to the program maximum of 150%
of target. Restricted stock unit awards are also
at-risk compensation because the awards are
denominated in shares of PPL Corporation stock and are subject
to vesting and potential forfeiture, and the ultimate value
realized by the executives is directly related to PPL
Corporations stock price performance.
Restricted stock unit awards made in 2007 for 2006 performance
have a three-year restriction period, with restrictions
scheduled to lapse in 2010. During the restriction period, each
restricted stock unit entitles the executive to receive
quarterly payments from the executives employer equal to
the quarterly dividends on one share of PPL Corporation stock,
thereby recognizing both current income generation and stock
price appreciation in line with PPL Corporation shareowners.
PPL also grants stock options. Stock options are granted at an
exercise price equal to the market value of PPL Corporation
stock on the grant date and will normally not be exercised by
the holder if the stock price does not increase after the grant
date. As a result, stock option awards are designed to reward
executives for increases in PPL Corporations stock price.
Stock options granted in 2006 become exercisable over three
yearsone-third at the end of each year following
grantand are exercisable for ten years from the grant
date, subject to earlier expiration following specified periods
after termination of employment.
15
Under the terms of the ICP and ICPKE, restricted stock units and
unvested stock options are forfeited if the executive
voluntarily leaves PPL, and are generally vested if the
executive retires from PPL prior to the scheduled vesting.
However, any stock options granted under the ICP within
12 months prior to an executive officers retirement
date will be forfeited. See Termination
BenefitsLong-term Incentive Awards for a description
of conditions of the provisions and expiration dates applicable
to awards.
From time to time, as an additional incentive to encourage and
reward an executives superior performance and service with
PPL and to retain key talent, PPL may also grant additional
restricted stock under the ICP or ICPKE. In January 2006, the
CGNC approved such an additional award to Mr. Farr of
15,400 shares of restricted stock under the ICP.
Mr. Farr now has a total of 40,000 shares of
restricted stock as part of his retention agreement. See
Retention Agreements on page 36 for a
description of the terms of Mr. Farrs retention
agreement.
Structure of
Awards
In order to balance equity-based incentives with underlying
medium- and longer-term goals for PPL performance, the CGNC
determined that the total value of shares of PPL Corporation
stock awarded should be divided equally between restricted stock
units and stock options for 2006. The restricted stock unit
portion of the long-term incentive program is further split,
with 50% of the award tied to sustained financial and
operational results and 50% of the award tied to strategic
goals. Equity awards are intended to balance incentive pay with
performance on specific business goals based on PPLs
multi-year business plan.
Target award levels for each component of the long-term
incentive program seek to balance executive focus on PPL
business goals, to balance the internal compensation levels of
executive positions and to reflect the PPL competitive data.
The target award levels for the named executive officers were
set by the CGNC as a percentage of salary for 2006 and are
provided below:
TABLE 7
Long-term
Incentive Award Targets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Units
|
|
|
Stock
Options
|
|
|
|
|
|
|
(Targets as % of
Salary)
|
|
|
|
|
|
|
Sustained
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial and
|
|
|
Strategic
|
|
|
|
|
|
|
|
|
|
Operational
|
|
|
Objective
|
|
|
Stock Price
|
|
|
|
Position
|
|
|
Results
|
|
|
Results
|
|
|
Performance
|
|
|
Total
|
President
|
|
|
|
40.00
|
%
|
|
|
|
40.00
|
%
|
|
|
|
80.0
|
%
|
|
|
|
160%
|
|
Senior Vice
PresidentFinancial
|
|
|
|
40.00
|
%
|
|
|
|
40.00
|
%
|
|
|
|
80.0
|
%
|
|
|
|
160%
|
|
Treasurer; Vice President and
Controller; and Senior Vice PresidentT&D Engineering
and Operations
|
|
|
|
26.25
|
%
|
|
|
|
26.25
|
%
|
|
|
|
52.5
|
%
|
|
|
|
105%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A restricted stock unit award is made by the CGNC (or the CLC as
to Mr. DeCampli) after the end of each year, based on the
most recent three-year average results of the annual cash
incentive program:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
number
of units
granted
|
|
=
|
|
target
award
%
|
|
×
|
|
salary
|
|
×
|
|
3-year
average
result
|
|
¸
|
|
market price of
PPL stock as
of award date
|
This award is designed to reward sustained financial and
operational performance of PPL.
A second restricted stock unit award is made after the end of
each year based on the achievement level of annually determined,
objective strategic goals developed by the company and approved
by the CGNC (or the CLC as to Mr. DeCampli):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
number
of units
granted
|
|
=
|
|
target
award
%
|
|
×
|
|
salary
|
|
×
|
|
goal
result
|
|
¸
|
|
market price of
PPL stock as
of award date
|
This award is designed to reward actions that drive achievement
of PPLs strategic objectives.
16
The strategic goals for 2006 included the following:
|
|
|
|
|
Influence the evolution of federal and state policies:
|
|
|
|
|
|
Toward more competitive markets
|
|
|
|
Toward use of prices to send economically efficient capital
allocation signals
|
|
|
|
Toward permitting generators greater latitude to bid into energy
markets
|
|
|
|
Toward permitting transmission owners greater latitude in
selection of an independent system operator or regional
transmission operator to operate the transmission owners
system
|
|
|
|
Away from price caps
|
|
|
|
Away from excessive market power mitigation initiatives
|
|
|
|
|
|
Internally structure PPL:
|
|
|
|
|
|
To position the energy marketing and trading organization to
take advantage of opportunities presented by the expiration of
the provider of last resort (POLR) contract
|
|
|
|
To develop and retain the management and technical skills and
the financial profile necessary to permit continued growth
|
|
|
|
|
|
Implement necessary actions to position PPL to successfully
benefit from the expiration of the current Pennsylvania
generation price cap.
|
A grant of stock options is made each year at each
executives target award level:
|
|
|
|
|
|
|
|
|
|
|
|
|
number
of options
granted
|
|
=
|
|
target
award
%
|
|
×
|
|
salary
|
|
¸
|
|
option value
as of award
date
|
The value of the long-term incentive awards as of the grant
date, based on the targets, delivers a level of compensation
intended to pay executive officers at a level that compares to
the median of the PPL competitive data. The ultimate value of
long-term incentive awards to executives is tied to the future
value of PPL Corporations total shareowner
returnstock price growth and dividends. To the extent
total shareowner value increases, executives may realize values
that exceed the values as determined on the grant date.
Similarly, should shareowner value deteriorate, executive
compensation levels for these awards could fall below the grant
values, possibly to zero.
Awards for
2006
At its meeting in January 2007, the CGNC reviewed and certified
the performance results for the 2006 cash incentive compensation
award. These results impact the long-term incentive program as
follows:
|
|
|
|
|
Restricted stock unit award for sustained financial and
operational results: the 2006 annual cash incentive results for
executives were averaged with similar results for 2005 and 2004
and formed the basis for the 2007 award. The total results were
120.5%; which represent the average of 2006 (131.3%), 2005
(109.9%) and 2004 (120.4%).
|
|
|
|
Restricted stock unit award for strategic goal attainment: goal
attained at 100%.
|
At its meeting in January 2007, the CGNC approved restricted
stock unit awards for 2006 performance (the CLC for
Mr. DeCampli), and at its January 2006 meeting approved
stock option awards for 2006. These awards are set forth in the
table below. The cost of the stock option awards expensed in
2006 is included in the Summary Compensation Table. However,
because the restricted stock unit awards for 2006 performance
were not expensed until granted in January 2007, any amount
expensed will not be included until next years Summary
Compensation Table. The restricted stock unit awards reflected
in this years Summary Compensation Table show the expense
for the awards made in January 2006 for 2005 performance. Such
awards were also included and discussed in last years
information statement as to Messrs. Sipics, Farr and Abel.
See Tax and Accounting
ConsiderationsSFAS 123(R) at the end of this
CD&A at page 24 for further details on how equity
awards are expensed.
17
TABLE 8
Long-Term
Incentive Awards for 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Units
|
|
|
Stock
Options
|
|
|
|
|
|
(Awards in
Dollars)
|
|
|
|
|
|
Sustained
|
|
|
|
|
|
|
|
|
|
|
|
Financial and
|
|
|
Strategic
|
|
|
|
|
|
|
|
|
Operational
|
|
|
Objective
|
|
|
Stock Price
|
|
|
Name
|
|
|
Results
|
|
|
Results
|
|
|
Performance
|
|
|
J. F. Sipics
|
|
|
$
|
168,747
|
|
|
|
$
|
140,000
|
|
|
|
$
|
260,000
|
|
|
|
P. A. Farr
|
|
|
|
188,032
|
|
|
|
|
156,000
|
|
|
|
|
280,000
|
|
|
|
J. E. Abel
|
|
|
|
84,091
|
|
|
|
|
69,766
|
|
|
|
|
131,656
|
|
|
|
J. M.
Simmons, Jr.(1)
|
|
|
|
65,088
|
|
|
|
|
54,000
|
|
|
|
|
118,125
|
|
|
|
D. G.
DeCampli(2)
|
|
|
|
83,800
|
|
|
|
|
69,600
|
|
|
|
|
139,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Mr. Simmons restricted stock unit awards are based on
11 months of actual service as the Vice President and
Controller of PPL Corporation. |
|
(2) |
|
Mr. DeCamplis restricted stock unit awards assume
12 months in the position as provided by the terms of his
employment offer letter. Because Mr. DeCampli was not
deemed to be an executive officer of PPL Corporation during
2006, his restricted stock unit and stock option awards were
approved by the CLC and not the CGNC. |
Changes to
Target Award Levels for 2007
At its January 2007 meeting, the CGNC amended the long-term
incentive targets for 2007. In addition, the CGNC decided to
rebalance the value of restricted stock units as compared with
stock options to 65% restricted stock units and 35% options,
from the prior 50%-50% mix. Both decisions were based on changes
noted in market practice and, in the case of the mix of
long-term awards, on the CGNCs view that stock options
should receive less weight. The revised targets are reflected
below:
TABLE 9
Long-term
Incentive Award Targets for 2007
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|
|
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|
Restricted Stock
Units
|
|
|
Stock
Options
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|
|
|
|
|
(Targets as % of
Salary)
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|
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Sustained
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|
Financial and
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Strategic
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Operational
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Objective
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Stock Price
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Position
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Results
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|
|
Results
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Performance
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Total
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President
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47%
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|
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|
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47%
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|
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50.75%
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|
|
145%
|
|
Senior Vice President-Financial*
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52%
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|
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52%
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|
|
|
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56.00%
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|
|
|
160%
|
|
Treasurer; Vice President and
Controller; and Senior Vice PresidentT&D Engineering
and Operations
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34%
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|
34%
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|
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37.00%
|
|
|
|
|
145%
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|
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* |
|
As of April 1, 2007, Mr. Farrs long-term
incentive award targets for 2007 became those of the chief
financial officer of PPL Corporation (71.5% for each restricted
stock unit target, 77% for the stock options, with a total
target of 220%). |
Perquisites and
Other Benefits
Officers of the company, including the named executive officers,
are eligible for company-paid financial planning services. These
services include financial planning, tax preparation support and
a one-time payment for estate documentation preparation. These
services are provided in recognition of time constraints on busy
executives and their more complex compensation program that
requires professional financial and tax planning. We believe
that good financial planning by experts reduces the amount of
time and attention that executive officers must spend on such
issues and maximizes the net financial reward to the employee of
compensation received from
18
the company. Such planning also helps ensure that the objectives
of our compensation programs are met and not frustrated by
unexpected tax or other consequences.
PPL also provides relocation benefits to newly hired employees,
including executive officers, when their primary residence
changes a substantial distance from their previous employment.
PPL relocation benefits include a cash allowance for house
hunting, temporary living expenses, day of moving expenses, and
miscellaneous expenses. The relocation benefits also include
assistance with: (1) the sale of the executives
residence, including closing costs and an equity advance option
to assist with the purchase of a new home; (2) home
purchase assistance, including closing costs; (3) moving
expenses; and (4) a
tax-gross-up
payment to offset the impact of the relocation benefits that are
taxable.
The value of all perquisites for 2006 is summarized in
Note 7 to the Summary Compensation Table.
Indirect
Compensation
Officers of the company, including the named executive officers,
participate in benefit programs offered to all company
employees. In addition, officers are eligible for the executive
benefit plans described below.
The companys retirement income benefits are designed to
provide a competitive level of income replacement in retirement
for career executives. The primary retirement income program for
executives consists of two plansthe PPL Supplemental
Executive Retirement Plan, or SERP, a nonqualified defined
benefit pension plan available for officers of the company, and
the PPL Retirement Plan, a tax-qualified, defined benefit
pension plan available to employees of the company generally.
The company, as well as other PPL companies, is a participating
employer in these two plans.
PPL has established a retirement income target for the SERP and
PPL Retirement Plan for executives at 55% of pay (defined as
five-year average total cash compensation) for a career employee
with 30 years of service. Additional details on these plans
are provided under Retirement Benefits.
The company believes that its SERP benefits are competitive
relative to companies with which it competes for talent and are
necessary to retain executives and to recruit new executives to
join the company.
The primary capital accumulation opportunities for executives
are: (1) stock gains under PPLs long-term incentive
program and employee stock ownership plan; and
(2) voluntary savings opportunities that, for 2006,
included savings through a tax-qualified employee savings plan,
which is a 401(k) plan (PPL Deferred Savings Plan), and the
Officers Deferred Compensation Plan, which is a nonqualified
deferred compensation arrangement.
Under the PPL Deferred Savings Plan, PPL provides matching cash
contributions of 3% of the participating employees pay
(defined as salary plus annual cash incentive award) up to
contribution limits imposed by federal tax rules. Participating
employees are vested in the PPL matching contributions after one
year of service. This plan provides a selection of core
investment options, including publicly available mutual funds,
institutionally managed funds, including the Stable Value Fund
managed by Fidelity Investments during 2006, and lifestyle
funds available from a mutual fund provider (for 2006, the
lifestyle funds were Fidelity Investments Freedom Funds).
The plan investment options also include a brokerage account
option that allows participants to select from a broad range of
publicly available mutual funds, including those of the plan
trustee as well as competitor funds. Participants may request
distribution of their accounts at any time following termination
of employment.
PPLs Officers Deferred Compensation Plan permits
participants to defer all but $75,000 of their base salary and
up to all of their annual cash incentive awards. A hypothetical
account is established for each participant who elects to defer,
and the participant selects one or more deemed investment
choices that generally mirror those that are available generally
to employees under the PPL Deferred Savings Plan. For additional
details on the Officers Deferred Compensation Plan, see
Executive Compensation TablesNonqualified Deferred
Compensation in 2006 table on page 34. Neither PPL
nor the company made any matching contributions under this plan
in 2006. Beginning in 2007, matching contributions will be made
under this plan on behalf of participating officers to make up
for matching contributions that would have been made on behalf
of such officers under the PPL Deferred Savings Plan but for the
imposition of certain maximum statutory limits imposed on
qualified plan benefits (for example, annual limits on eligible
pay and contributions). Executive officers who reach the maximum
limits in the PPL Deferred Savings Plan are generally eligible
for matching contributions under this plan. There is no vesting
requirement for the PPL matching contributions. Retirement
benefits and capital
19
accumulation contributions under the Officers Deferred
Compensation Plan are not affected by any long-term incentive or
equity awards.
PPL has a tax-qualified employee stock ownership plan, the PPL
Employee Stock Ownership Plan or ESOP, to which PPL makes an
annual contribution. Historically, PPL has contributed a dollar
amount to the ESOP that is equal to the tax benefit it receives
for a tax deduction on dividends paid on PPL Corporation common
stock held by the trustee of the ESOP. Contributions are then
allocated among the ESOP participants based on the following two
measures: (1) the amount of total dividends paid on the
participants account; and (2) a pro rata amount based
on salary up to a median salary amount. The total allocation
cannot exceed 5% of a participants compensation. The ESOP
trustee invests exclusively in PPL Corporation common stock. All
named executive officers participate in the ESOP, as well as
employees of PPLs major business lines. Shares held for a
minimum of 36 months are available for withdrawal, and
participants may request distribution of their account at any
time following termination of employment. There is no vesting
period for contributions made under the ESOP. The participant
has the option of receiving the actual shares of common stock or
the cash equivalent of such shares.
Special
Compensation
In addition to the annual direct and indirect compensation
described above, PPL provides special compensation in response
to specific situations.
Hiring and Retention. As part of the executive recruiting
process, the company makes offers of employment to new executive
candidates to attract talent to the company and to compensate
these candidates for compensation they may lose when terminating
employment with their prior employer.
Generally, annual compensation for new executive officers is
consistent with that of current executives in similar positions.
Incentive awards for the year of hire are generally prorated for
the period of service during the executives initial year
of employment and made after the close of the year, when awards
are made for other executives. Annual, long-term incentive
awards are not typically granted upon hire; however, one-time
awards may be made in cash or in restricted stock or units to
replace value a new executive may be losing from a former
employer or as part of a sign-on award to encourage an executive
to join the company.
In limited circumstances, generally involving mid-career hires,
PPL enters into retention agreements with key executives to
encourage their long-term employment with PPL. These agreements
typically involve the grant of restricted stock on which the
restrictions lapse upon the attainment of age 60, but may
vary on a
case-by-case
basis. During the term of the restrictions, the executive
receives dividends. The intention is to retain key executives
for the long term and to focus the executives attention on
stock price growth during the retention period.
Individual awards vary based on an executives level,
company service and the need for retention
and/or the
market demand for an executives talent. The amount of an
award is typically a multiple of salary converted to restricted
stock as of the grant date. For specific details on retention
agreements that are outstanding for named executive officers,
see Retention Agreements on page 36.
Severance. The company has not entered into traditional
employment agreements with executives, including the named
executive officers. There are no specific agreements pertaining
to length of employment that would commit the company to pay an
executive for a specific period. All executives are
employees-at-will
whose employment is conditioned on performance and subject to
termination by the company or a PPL affiliate at any time.
The company does not maintain a general severance policy for
executives. Separation benefits are determined, as needed, on a
case-by-case
basis. However, as discussed below, there is a structured
approach to separation benefits for involuntary (and select
voluntary or good reason as defined in
Change-in-Control
Arrangements below at page 34) terminations of
employment in connection with a change in control of PPL
Corporation.
The company, or a PPL affiliate, has entered into agreements
with certain executives, typically in connection with a
mid-career hire situation and as part of an offer of employment,
in which a years salary is promised in severance pay in
the event the executive is terminated for reasons other than
cause. In addition to severance pay, in some instances the
company, or a PPL affiliate, will continue active employee
health, dental and basic life insurance benefits during the
severance period. Severance benefits payable under these
arrangements are conditioned on the executive agreeing to
release the company from any liability arising from the
employment
20
relationship. Additional details on current arrangements for
named executive officers are discussed under Termination
Benefits below at page 36.
Change-in-Control
Protections. PPL believes executive officers who are
terminated or elect to resign for good reason (as
defined in
Change-in-Control
Arrangements below at page 34) in connection with a
change in control of PPL Corporation should be provided
separation benefits. These benefits are intended to ensure that
executives focus on serving PPL and shareowner interests without
the distraction of possible job and income loss.
The major components of PPLs
change-in-control
protections are:
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accelerated vesting of outstanding equity awards in order to
protect executives equity-based accrued value from an
unfriendly acquirer;
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|
severance benefits; and
|
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|
|
trusts to fund promised obligations in order to protect
executive compensation from an unfriendly acquirer.
|
PPLs
change-in-control
benefits are consistent with the practices of companies with
whom PPL competes for talent and assist in retaining executives
and recruiting new executives to the company.
Accelerated Vesting of Equity Awards. As of the
close of a transaction that results in a change in control of
PPL Corporation, all outstanding equity grants awarded as part
of PPLs compensation program (excluding restricted stock
and restricted stock units issued pursuant to retention
agreements) become available to executives. As a result, stock
awards granted as part of the long-term incentive program
acceleratein other words, restrictions on all outstanding
restricted stock units lapse and all unexercisable stock options
become exercisable. Stock options granted prior to 2007 are
exercisable for 36 months following a qualifying
termination of employment in connection with a change in
control; options granted in 2007 and after are, after a change
in control, exercisable for the remaining term of the stock
option.
Severance Benefits. PPL Corporation has entered
into severance agreements with each of the named executive
officers that provide benefits to the executives upon specified
terminations of employment in connection with a change in
control of PPL Corporation. The benefits provided under these
agreements replace any other severance benefits provided to
these officers by PPL Corporation, or any prior severance
agreement. Additional details on the terms of these severance
agreements are described in
Change-in-Control
Arrangements at page 34.
Rabbi Trust. PPL Corporation has entered into a
trust arrangement which currently covers the SERP and the
Officers Deferred Compensation Plan and provides that specified
trusts are to be funded when a change in control
occurs. See
Change-in-Control
Arrangements at page 34 for a description of
change-in-control
events.
The trusts would become irrevocable upon the occurrence of a
potential change in control and are currently unfunded. As a
result of action taken by the PPL Corporation Board of Directors
in October 2006, PPL Corporation is in the process of adopting
an additional trust for executive benefits to cover the
severance agreements and modifying the current trust arrangement
to provide for immediate funding of benefits upon the occurrence
of a potential change in control and to provide that the trusts
can be revoked and the contributions returned if a change in
control in fact does not occur. The new trust arrangement would
have the same funding and revocation with refund provisions as
the modifications made to the existing trust arrangement. There
are no current plans to fund any of the trusts.
All benefit protection trusts would be funded in the event of a
change in control.
Timing of
Awards
The CGNC determines the timing of incentive awards for those
officers who are deemed to be executive officers of PPL
Corporation. During 2006, all named executive officers were
considered to be executive officers of PPL Corporation except
for Mr. DeCampli. As a result of his election as president
of the company on April 1, 2007, Mr. DeCampli is now
deemed to be an executive officer of PPL Corporation.
Incentive awards for executive officers, including annual cash
incentive awards and long-term incentive awards, are made as
soon as practical following the performance period. It has been
PPLs long-time practice to make
21
annual cash incentive awards and stock-based grants at the
January CGNC meeting, which occurs the day before the January
PPL Corporation Board of Directors meeting on the fourth Friday
of January.
PPL does not have, nor does PPL plan to have, any program, plan
or practice to time equity grants with the release of material
non-public information other than the practice of making such
awards annually and regularly at the January CGNC meeting.
Off-cycle restricted stock or restricted stock unit grants, if
provided to newly hired executives as part of the hiring
package, are made from time to time, normally as of the new
executives hiring date. Prices for such stock awards are
determined as of the day of hire or, if later, the day the CGNC
approves the grant, based on the closing price as of the date of
grant. Stock option grants are not otherwise made during the
year; stock option awards, including awards for newly hired
executives, are made annually at the January CGNC meeting.
For awards made in 2006, the market price for restricted equity
award grants was the average of the high and the low price of
PPL Corporation common stock on the date of grant. The market
price for shares issued when the restrictions lapse is
determined as the average of the high and low price on the date
the restrictions expire. The exercise prices for stock option
awards are determined as the average of the high and low price
on the day of the grant. The CGNC approved an amendment to the
ICP and the ICPKE, effective January 1, 2007, to provide
for the market price of grants made after that date is now equal
to the closing price, rather than the average of the high and
the low price.
Restricted stock and stock option grants to eligible employees
other than executive officers of PPL Corporation, including
Mr. DeCampli, are made on March 1, as part of
PPLs annual salary review process, which is usually
conducted in January and February each year. Employee salary
adjustments and annual cash incentive award payments are made in
the first paycheck in March.
The CGNC approved Mr. Abels 2006 restricted stock
unit grant for Premium Units under the Premium Exchange Program
as of March 1, 2006. Mr. Abel had previously elected
to exchange a portion of his 2005 annual cash incentive award
and was awarded Premium Units. The CLC approved
Mr. Abels 2005 annual cash incentive award (his 2006
award was approved by the CGNC due to a change in practice) and
approved, with CGNC delegated authority, the exchange at its
meeting in February 2006. Awards for Mr. DeCampli, before
he was named president of the company, were approved by the CLC.
Employee restricted stock unit awards are also made as of
March 1 of every year. The number of stock units granted to
eligible employees is determined as the employees target
percentage times salary divided by the PPL Corporation stock
market price (determined the same as for executive officer
awards). Stock options granted to employees other than executive
officers of PPL Corporation, including Mr. DeCampli, are
granted at the same time and same exercise price as determined
for executive officers.
Ownership
Guidelines
Meaningful ownership of PPL Corporation common stock by
executive officers has always been an important part of
PPLs compensation philosophy. In 2003, the CGNC adopted
specific ownership requirements under the Executive Equity
Ownership Program (Equity Guidelines). The Equity
Guidelines provide that named executive officers should maintain
levels of ownership of PPL Corporation common stock ranging in
value from one times to five times base salary, as follows
during 2006:
|
|
|
|
|
|
|
Multiple of
|
|
|
Base
|
Executive
Officer
|
|
Salary
|
|
Chairman, President and CEO of PPL
Corporation
|
|
|
5x
|
|
Executive Vice Presidents of PPL
Corporation
|
|
|
3x
|
|
Senior Vice Presidents of PPL
Corporation (including Mr. Farr)
|
|
|
2x
|
|
Presidents of major operating
subsidiaries (including Mr. Sipics)
|
|
|
2x
|
|
Vice Presidents of PPL companies
(including Messrs. Abel, Simmons and DeCampli)
|
|
|
1x
|
|
Executive officers at a particular guideline level must attain
their minimum Equity Guidelines level by the end of their
five-year anniversary at that level. Until the minimum ownership
amount is achieved, executive officers are required to retain in
PPL Corporation common stock (or common stock units) 100% of the
gain realized from the vesting of restricted stock and stock
units and the exercise of options (net of taxes and, in the case
of options,
22
the exercise price). If an executive does not attain the
guideline level within the applicable period, annual cash
incentives awarded after that date may be in restricted
stock/unit grants (without a premium) until actual ownership
meets or exceeds the guideline level.
To assist executive officers in achieving or surpassing their
minimum ownership amount, the CGNC adopted the Cash Incentive
Premium Exchange Program (Premium Exchange Program).
Under this program, executives may elect to defer all or a
portion of the annual cash incentive award to which they would
be otherwise entitled and to receive instead restricted stock
units equal to 140% of the amount so deferred (an
Exchange). The restricted stock units are subject to
a three-year vesting period, with only the 40% premium portion
subject to forfeiture during the restriction period. Executive
officers forfeit the premium amount if they terminate employment
during the restriction period. A pro rata portion of the premium
is payable for executive officers who retire after attaining
age 60. The full premium is payable if employment is
terminated during the restriction period due to the death or
disability of the executive officer. The full premium is also
payable in connection with a change in control of PPL
Corporation.
The Equity Guidelines and the Premium Exchange Program encourage
increased stock ownership on the part of the executive officers,
which further aligns the interests of management and
shareowners. All named executive officers were in compliance
with the Equity Guidelines as of the end of 2006.
Tax and
Accounting Considerations
Section 162(m). Section 162(m) of the Internal
Revenue Code of 1986 generally provides that publicly held
corporations may not deduct in any taxable year specified
compensation in excess of $1,000,000 paid to the chief executive
officer and the next four most highly compensated executive
officers. Performance-based compensation in excess of $1,000,000
is deductible if specified criteria are met, including
shareowner approval of applicable plans. In this regard, the PPL
Corporation Short-term Incentive Plan is designed to enable PPL
to make cash awards to officers that are deductible under
Section 162(m). Similarly, the ICP and ICPKE enable PPL to
make stock option awards that are deductible under
Section 162(m). Restricted stock awards granted based on
sustained financial and operational results may also qualify as
performance-based compensation under the terms of
Section 162(m). The CGNC generally seeks ways to limit the
impact of Section 162(m). However, the committee believes
that the tax deduction limitation should not compromise
PPLs ability to establish and implement incentive programs
that support the compensation objectives discussed above.
Accordingly, achieving these objectives and maintaining required
flexibility in this regard may result in compensation that is
not deductible for federal income tax purposes.
Sections 280G and 4999. PPL Corporation has entered
into separation agreements with each of the named executive
officers that provide benefits to the executives upon certain
terminations of employment in connection with a change in
control of PPL Corporation. The agreements with
Messrs. Sipics, Farr and DeCampli provide for tax
protection in the form of a
gross-up
payment to reimburse the executive for any excise tax under
Internal Revenue Code Section 4999 as well as any
additional income and employment taxes resulting from such
reimbursement. Code Section 4999 imposes a 20%
non-deductible excise tax on the recipient of an excess
parachute payment, and Code Section 280G disallows
the tax deduction to the payor of any amount of an excess
parachute payment. Payments as a result of a change in control
must exceed three times the executives average annual
compensation for tax purposes in order to be considered excess
parachute payments, and then the excise tax is imposed on the
parachute payments that are in excess of such amount. The intent
of the tax
gross-up is
to provide a benefit without a tax penalty to PPL executives who
are displaced in the event of a change in control. PPL believes
the provision of tax protection for the adverse tax consequences
imposed on the executive under these rules is consistent with
market practice, is an important executive retention component
of PPLs program and is consistent with PPLs
compensation objectives. The separation agreements for
Messrs. Abel and Simmons do not provide for any
gross-up
payments, but they do permit PPL Corporation to adjust any
payments to be made to them so that the severance payments will
be reduced, to the extent necessary, so that the severance
payments, together with all other potential parachute payments
to the executive, will not trigger an excise tax, unless paying
the full severance benefits would result in a greater net
after-tax benefit to the executive.
Section 409A. The CGNC also considers the impact of
Section 409A on PPLs compensation programs.
Section 409A of the Internal Revenue Code was enacted as
part of the American Jobs Creation Act of 2004 and substantially
impacts the federal income tax rules applicable to nonqualified
deferred compensation arrangements, as defined. In general,
Section 409A governs when elections for deferrals of
compensation may
23
be made, the form and timing permitted for payment of such
deferred amounts, and the ability to change the form and timing
of payments initially established. Section 409A imposes
sanctions for failure to comply, including current income
inclusion, a 20% penalty tax and interest on the recipient
employee. PPL and the company operate their covered arrangements
in a manner intended to avoid the adverse tax treatment under
Section 409A. Certain amendments have already been made to
the covered arrangements in this regard, and it is likely that
PPL and the company will make additional amendments to their
covered arrangements as future guidance is issued.
SFAS 123(R). In December 2004, the Financial
Accounting Standard Board issued SFAS 123 (revised 2004),
Share-Based Payment, which is known as
SFAS 123(R)and prescribes the accounting for all
stock-based awards. PPL Corporation adopted SFAS 123(R)
effective January 1, 2006. SFAS 123(R) requires PPL to
recognize compensation cost for stock-based awards using a fair
value method. PPL Corporation uses the market price of its
common stock at the date of grant to value its restricted stock
and restricted stock unit awards and uses the Black-Scholes
stock option pricing model to determine the fair value of its
stock option awards. The adoption of SFAS 123(R) did not
have a significant impact on the accounting for PPL
Corporations stock-based awards, as PPL Corporation began
expensing stock options on January 1, 2003 under the fair
value method and the expense recognition for restricted stock
and restricted stock units was not significantly changed.
For additional information on PPLs accounting methods and
assumptions for stock-based awards, refer to Notes 1, 12
and 23 of the companys financial statements in the Annual
Report on
Form 10-K
for the year ended December 31, 2006, as filed with the SEC.
PPLs stock-based compensation plans allow for accelerated
vesting upon an employees retirement. As a result, PPL
recognizes the expense immediately for employees who are
retirement eligible when stock-based awards are granted. 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 employees attainment of retirement age. PPL considers
retirement eligible as the early retirement age of
55.
Because the SEC requires that the value of stock-based awards
that are included in the tables throughout this Information
Statement be based on SFAS 123(R)expense recognition, and
because of the accelerated vesting that is based on an
employees age as described above, amounts disclosed in
these tables will differ from amounts calculated for
compensation purposes and described in this CD&A.
In addition, because the restricted stock unit awards granted
for 2006 performance were not granted until January 2007, any
expense for these awards will be reflected in next years
and not this years Summary Compensation Table or Grants of
Plan-Based Awards table and will not tie directly to the values
determined by PPLs compensation grant methodology. For
example, the restrictions on an annual grant of restricted stock
units lapse after three years. The grant value is determined
using the methodology described as of the award date. Under
SFAS 123(R), the grant is accounted for as an expense over
the period of time the restrictions are in place. Therefore,
only a portion of the annual grant value is expensed in the
grant year. Even though the grant is for 2006 performance,
because it was granted in January 2007, the expensed amount will
not appear in the Summary Compensation Table until next year.
Also expensed in the grant year is a portion of prior grants on
which restrictions have not lapsed. If the executive officer who
receives the award is age 55 or older, 100% of the award is
expensed in the year of the grant because the officer is
eligible for retirement.
24
Executive
Compensation Tables
The following table summarizes all compensation for the
companys president, our principal financial officer and
our next three most highly compensated executive officers for
the last fiscal year or named executive officers.
Messrs. Farr, Abel and Simmons are not paid separately as
officers of the company, but are employees of PPL Services
Corporation. Mr. Simmons joined PPL on January 30,
2006, at which time Mr. Farr resigned as Controller.
Mr. DeCampli joined the company on December 4, 2006.
Mr. Sipics retired on January 1, 2007, and
Mr. DeCampli was subsequently named president of the
company on April 1, 2007. Restricted stock awards and stock
options are for shares of PPL Corporation common stock.
SUMMARY
COMPENSATION TABLE
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Change in
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Pension Value
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and
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Nonqualified
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Non-Equity
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Deferred
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Name and
Principal
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Stock
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Option
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Incentive Plan
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Compensation
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All Other
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Position
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Year
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Salary(1)
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Bonus(2)
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Awards(3)
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Awards(4)
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Compensation(5)
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Earnings(6)
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Compensation(7)
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Total
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John F. Sipics
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2006
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$349,040
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$355,593
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$279,304
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$207,900
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$1,144,680
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$23,655
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$
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2,360,172
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President
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Paul A. Farr
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2006
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388,462
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265,027
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209,167
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256,000
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76,291
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10,063
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1,205,010
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Senior Vice PresidentFinancial
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James E. Abel
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2006
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263,466
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152,819
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141,426
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135,100
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206,408
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8,465
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907,683
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Treasurer
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J. Matt Simmons, Jr.
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2006
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199,040
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$
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100,000
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38,402
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38,773
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107,500
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24,886
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171,434
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680,035
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Vice President and Controller
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David G. DeCampli
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2006
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10,192
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225,000
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5,546
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117,000
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24,699
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382,437
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Senior Vice
PresidentTransmission and Distribution Engineering and
Operations
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(1) |
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Salary includes cash compensation deferred to the PPL
Corporation Officers Deferred Compensation Plan. Mr. Farr
deferred $30,831 of salary. |
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(2) |
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Reflects one-time cash sign-on bonuses for Mr. Simmons when
he joined PPL Corporation as Vice President and Controller on
January 30, 2006, and for Mr. DeCampli when he joined
the company on December 4, 2006. |
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(3) |
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This column represents the compensation expense recognized in
2006 for financial statement reporting purposes on all
outstanding shares of restricted stock and restricted stock
units in accordance with SFAS 123(R), other than restricted
stock unit awards granted in lieu of the annual cash incentive
award foregone by the named executive officer. See Note 5
below. Pursuant to SEC rules, the amounts shown exclude the
impact of estimated forfeitures related to service-based vesting
conditions. No forfeitures of restricted stock or restricted
stock units actually occurred during 2006. Because
Messrs. Sipics and Abel were eligible for retirement during
2006, the fair value of their awards has been fully expensed.
This column also includes the value of the premium restricted
stock units granted in January 2006 and the restricted stock
units granted as part of the exchanges made by
Messrs. Sipics, Farr and Abel of their cash incentive
compensation awarded in January 2007 for 2006 performance under
the Premium Exchange Program. See description of the Premium
Exchange Program in CD&AOwnership
Guidelines. For shares of restricted stock and restricted
stock units granted in 2006 and earlier years, fair value is
calculated using the average of the high and low sale prices of
PPL Corporations common stock on the date of grant. For
additional information, refer to Note 12 to the
companys financial statements in the Annual Report on
Form 10-K
for the year ended December 31, 2006, as filed with the
SEC. See the Grants of Plan-Based Awards During 2006
table below for information on awards made in 2006. These
amounts reflect the companys accounting expense for these
restricted stock and restricted stock unit awards, and do not
correspond to the actual value that will be recognized by the
named executive officers. |
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(4) |
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This column represents the dollar amount recognized for
financial statement reporting purposes with respect to the 2006
fiscal year for stock options granted to each of the named
executive officers in 2006 as well as prior fiscal years, in
accordance with SFAS 123(R). Pursuant to SEC rules, the
amounts shown exclude the impact of estimated forfeitures
related to service-based vesting conditions. No forfeitures of
any stock options actually occurred during 2006. As
Messrs. Sipics and Abel were eligible for retirement during
2006, the fair values of their stock option awards have been
fully expensed. For additional information on the valuation |
25
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assumptions with respect to the 2006 stock option grants, refer
to Note 12 to the companys financial statements in
the Annual Report on
Form 10-K
for the year ended December 31, 2006, as filed with the
SEC. For information on the valuation assumptions with respect
to option grants made prior to 2006, refer to the Note entitled
Stock-Based Compensation in the companys
financial statements in the Annual Report on
Form 10-K
for the respective year-end. See the Grants of Plan-Based
Awards During 2006 table for information on options
granted in 2006. These amounts reflect the accounting expense
for these stock option awards and do not correspond to the
actual value that will be recognized by the named executive
officers. |
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(5) |
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This column represents cash awards granted in January 2007 under
the Short-term Incentive Plan for performance in 2006.
Mr. Farr elected to exchange $166,400 of his cash awarded
in January 2007, for 2006 performance, for restricted stock
units under the Premium Exchange Program. See description of the
Premium Exchange Program in CD&AOwnership
Guidelines. The value of this award is included in this
column and not in the Stock Awards column. The grant
of restricted stock units under the Premium Exchange Program for
the cash award foregone by Mr. Farr will be reflected in
next years Grants of Plan-Based Awards table. |
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(6) |
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This column represents the sum of the changes in value in the
Retirement Plan and Supplemental Executive Retirement Plan
during 2006 for each of the named executive officers. No change
in value is shown for Mr. DeCampli because he was not
eligible to participate in these plans until January 1,
2007. See the Pension Benefits in 2006 table on
page 31 for additional information. No above-market
earnings under the Officers Deferred Compensation Plan are
reportable for 2006. See the Nonqualified Deferred
Compensation in 2006 table on page 34 for additional
information. |
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(7) |
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The table below reflects the components of this column, which
include the companys matching contribution for each
individuals 401(k) plan contributions under the Deferred
Savings Plan, annual allocations under the Employee Stock
Ownership Plan, and certain perquisites, including financial
counseling and tax preparation services and relocation
reimbursements. |
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ESOP
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Financial
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Benefits
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Name
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401(k)
Match
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Allocation
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Counseling
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Relocation
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Paid
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Total
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J. F. Sipics
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$7,116
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$4,228
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$5,000
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$
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$7,311
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(b)(c)(d)
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$
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23,655
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P. A. Farr
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5,633
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330
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4,000
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100
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(d)
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10,063
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J. E. Abel
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6,677
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1,688
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100
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(d)
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8,465
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J. M. Simmons, Jr.
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5,452
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316
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9,000
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152,339
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(a)
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4,327
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(b)
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171,434
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D. G. DeCampli
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24,699
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(a)
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24,699
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_
_
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(a)
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The expenses listed for Messrs. Simmons and DeCampli include tax
gross-up
payments of $29,582 to Mr. Simmons and $11,523 to
Mr. DeCampli. Relocation expenses for Mr. Simmons are
computed on the basis of the amounts of reimbursements to him
for costs of movement and storage of household goods; house
hunting costs; temporary living costs; costs associated with the
purchase of a home in the new location; costs associated with
the sale of his former residence; relocation company
administrative costs; home sale incentives; and other
miscellaneous fees.
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(b)
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Includes the following payments to executive officers for
vacation earned but not taken: Mr. Sipics ($6,731) and
Mr. Simmons ($4,327).
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(c)
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Each management employee receives an annual allocation of funds
that can be used to purchase health and welfare benefits, such
as health insurance, life insurance and additional vacation up
to 40 hours. If an employee does not use all of the
allocated funds for company benefits, the employee can elect to
receive the remaining cash. Mr. Sipics received such a
payment of $480 in 2006.
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(d)
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Each employee who completed a health risk appraisal as part of
PPLs wellness program received $100 in their paycheck.
Messrs. Sipics, Farr and Abel received this payment.
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26
GRANTS OF
PLAN-BASED AWARDS DURING 2006
The following table provides information about equity and
non-equity awards granted to the named executive officers in
2006, specifically: (1) the grant date; (2) estimated
possible payouts under the 2006 annual cash incentive award
program; (3) the number of shares of PPL Corporation common
stock underlying all stock awards, which consist of restricted
stock units awarded to the named executive officers in 2006 for
2005 performance under PPLs Incentive Compensation Plan
(the ICPKE for Mr. DeCampli), and restricted stock units
granted pursuant to the Premium Exchange Program described under
the Stock Ownership section of this Information
Statement; (4) the number of shares underlying stock
options awarded to the named executive officers; (5) the
exercise price of the stock option awards, which was calculated
using the average of the high and low sale prices of PPL
Corporation stock on the date of grant; and (6) the grant
date fair value of each equity award computed under
SFAS 123(R).
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All Other
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All Other
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Stock
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Option
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Estimated
Possible Payouts
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Awards:
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Awards:
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Exercise or
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Under Non-Equity
Incentive
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Number of
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Number of
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Base Price of
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Grant Date
Fair
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Plan
Awards(1)
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Shares of
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Securities
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Option
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Value of Stock
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Grant
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Stock or
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Underlying
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Awards(4)
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and Option
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Name
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Date
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Threshold
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Target
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Maximum
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Units(2)
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Options(3)
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($/Sh)
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Awards(5)
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J. F. Sipics
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3/17/2006
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$0
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$
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175,000
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$
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262,500
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1/26/2006
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18,660
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$562,412
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1/26/2006
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57,470
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$30.14
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279,304
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P. A. Farr
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3/17/2006
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0
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195,000
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292,500
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1/26/2006
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14,230
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428,892
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1/26/2006
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61,890
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30.14
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300,785
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1/27/2006
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15,400
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463,232
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J. E. Abel
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3/17/2006
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0
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106,309
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159,464
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1/26/2006
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4,590
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138,343
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1/26/2006
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29,100
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30.14
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141,426
|
|
|
|
|
|
3/01/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,385
|
|
J. M. Simmons, Jr.
|
|
|
|
3/17/2006
|
|
|
|
|
0
|
|
|
|
|
82,500
|
|
|
|
|
123,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,177
|
|
|
|
|
|
1/26/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,110
|
|
|
|
|
30.14
|
|
|
|
|
126,895
|
|
D. G. DeCampli
|
|
|
|
3/17/2006
|
|
|
|
|
0
|
|
|
|
|
106,000
|
|
|
|
|
159,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/04/2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This column shows the potential payout range under the 2006
annual cash incentive award program. For additional information,
see CD&ACompensation ElementsDirect
CompensationAnnual Cash Incentive Awards at
page 10. The cash incentive payout range is from 0% to
150%. The actual 2006 payout is found in the Summary
Compensation Table on page 25 in the column entitled
Non-Equity Incentive Plan Compensation. |
|
(2) |
|
This column shows the total number of restricted stock units
granted in 2006 to the named executive officers. In general,
restrictions will lapse three years from the date of grant (on
January 26, 2009 for the awards granted on January 26,
2006; on March 1, 2009 for the awards granted on
March 1, 2006 to Mr. Abel under the Premium Exchange
Program; and on December 4, 2009 for the awards granted on
December 4, 2006 to Mr. DeCampli on his first day of
employment with the company). During the restricted period, each
restricted stock unit entitles the individual to receive
quarterly payments from PPL Corporation equal to the quarterly
dividends on one share of PPL Corporation stock. As a result of
Mr. Sipics retirement and under the terms of
PPLs Incentive Compensation Plan, the restrictions on
31,400 restricted stock units will lapse on July 1, 2007
for units granted in January 2006 for 2005 performance, which is
six months after his retirement. Mr. Sipics would have
forfeited 3,920 Premium Units granted under the Premium Exchange
Program, but the CGNC waived the forfeiture as part of his
retirement package. See Termination
BenefitsTermination Benefits for Mr. Sipics on
page 38 for more information on his retirement package. |
|
|
|
This column also shows the number of restricted stock units
granted to the following named executive officers who exchanged
a portion of their cash incentive compensation awarded in
January 2006 for 2005 performance under the Premium Exchange
Program (called Exchanged Units) and the number of premium
restricted stock units granted in January 2006 as result of the
Exchanges made (called Premium Units): Sipics (6,860 Exchanged
Units and 2,740 Premium Units); Farr (3,190 Exchanged Units and
1,280 Premium Units); and Abel (730 Exchanged Units and 290
Premium Units). The Exchanged Units are not included in the
Stock Award column of the Summary Compensation Table because
they would have been required to be |
27
|
|
|
|
|
reported as cash incentive awards for 2005. The Premium Units
are included in this years Summary Compensation Table to
the extent they were expensed during 2006. |
|
(3) |
|
This column shows the number of stock options granted in 2006 to
the named executive officers. These options vest and become
exercisable in three equal annual installments, beginning on
January 26, 2007, which is one year after the grant date. |
|
(4) |
|
This column shows the exercise price for the stock options
granted in 2006, which was the average of the high and low sale
prices of PPL Corporation common stock on the date the CGNC
granted the options. This exercise price is greater than the
closing price of $29.85 on the grant date. |
|
(5) |
|
This column shows the full grant date fair value of restricted
stock units and stock options under SFAS 123(R) granted to
the named executive officers. Generally, the full grant date
fair value is the amount that the company would expense in its
financial statements over the awards vesting schedule.
Because Messrs. Sipics and Abel were eligible for
retirement, the full grant date fair value of their stock awards
was expensed in 2006. For restricted stock units, fair value is
calculated using the average of the high and low sale prices of
PPL Corporation stock on the grant date, as follows: $30.14 for
the grants made on January 26, 2006; $30.08 for the
retention shares granted to Mr. Farr on January 27,
2006; $31.75 for the grants made on March 1, 2006 to
Mr. Abel under the Premium Exchange Program; and $37.15 for
the grants made on December 4, 2006 to Mr. DeCampli on
his first day of employment. For stock options, fair value is
calculated using the Black-Scholes value on the grant date of
$4.86. For additional information on the valuation assumptions,
see Note 12 of the companys financial statements in
the Annual Report on
Form 10-K
for the year ended December 31, 2006, as filed with the
SEC. These amounts reflect the accounting expense, and do not
correspond to the actual value that will be recognized by the
named executive officers when restrictions lapse on the
restricted stock units or when the options are exercised. |
28
OUTSTANDING
EQUITY AWARDS AT FISCAL-YEAR END 2006
The following table provides information on all unexercised
stock option awards, as well as all unvested restricted stock
and restricted stock unit awards for each named executive
officer. Each stock option grant is shown separately for each
named executive and the restricted stock or restricted stock
units that have not vested are shown in the aggregate. The
vesting schedule for each grant is shown following this table,
based on the option or stock award grant date. The market value
of the stock awards is based on the closing market price of PPL
Corporation stock as of Friday, December 29, 2006, which
was $35.84. For additional information about the stock option
and stock awards, see CD&ACompensation
ElementsDirect CompensationLong-term Incentive
Awards (Equity Awards) at page 15.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Awards
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Securities
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Market Value
|
|
|
|
|
Underlying
|
|
|
|
Underlying
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
|
of Shares or
|
|
|
|
|
Unexercised
|
|
|
|
Unexercised
|
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
|
Units of
|
|
|
|
Units of
|
|
|
|
|
Options
|
|
|
|
Options
|
|
|
|
Unexercised
|
|
|
|
Option
|
|
|
|
Option
|
|
|
|
Stock That
|
|
|
|
Stock That
|
|
|
|
|
(#)
|
|
|
|
(#)
|
|
|
|
Unearned
|
|
|
|
Exercise
|
|
|
|
Expiration
|
|
|
|
Have Not
|
|
|
|
Have Not
|
|
Name
|
|
|
Exercisable(1)
|
|
|
|
Unexercisable(1)
|
|
|
|
Options
|
|
|
|
Price
|
|
|
|
Date
|
|
|
|
Vested(2)
|
|
|
|
Vested
|
|
J. F. Sipics
|
|
|
|
28,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$21.58
|
|
|
|
|
1/24/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.12
|
|
|
|
|
1/22/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,533
|
|
|
|
|
15,767
|
|
|
|
|
|
|
|
|
|
22.59
|
|
|
|
|
1/21/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,254
|
|
|
|
|
36,506
|
|
|
|
|
|
|
|
|
|
26.66
|
|
|
|
|
1/26/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,470
|
|
|
|
|
|
|
|
|
|
30.14
|
|
|
|
|
1/25/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,420
|
|
|
|
|
$1,592,013
|
|
P. A. Farr
|
|
|
|
|
|
|
|
|
7,427
|
|
|
|
|
|
|
|
|
|
22.59
|
|
|
|
|
1/21/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,994
|
|
|
|
|
33,986
|
|
|
|
|
|
|
|
|
|
26.66
|
|
|
|
|
1/26/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,890
|
|
|
|
|
|
|
|
|
|
30.14
|
|
|
|
|
1/25/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,130
|
|
|
|
|
2,585,139
|
|
J. E. Abel
|
|
|
|
3,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.12
|
|
|
|
|
1/22/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,900
|
|
|
|
|
8,900
|
|
|
|
|
|
|
|
|
|
22.59
|
|
|
|
|
1/21/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,060
|
|
|
|
|
20,120
|
|
|
|
|
|
|
|
|
|
26.66
|
|
|
|
|
1/26/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,100
|
|
|
|
|
|
|
|
|
|
30.14
|
|
|
|
|
1/25/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,450
|
|
|
|
|
589,568
|
|
J. M. Simmons, Jr.
|
|
|
|
|
|
|
|
|
26,110
|
|
|
|
|
|
|
|
|
|
30.14
|
|
|
|
|
1/25/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,120
|
|
|
|
|
147,661
|
|
D. G. DeCampli
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,060
|
|
|
|
|
217,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All stock options for the named executive officers vest, or
become exercisable, over three years one-third at
the end of each year following grant. Under the terms of
PPLs Incentive Compensation Plan, all of
Mr. Sipics unvested outstanding stock options granted
prior to 2006 vested as of his retirement date, which was
January 1, 2007. The 57,470 stock options granted to
Mr. Sipics on January 26, 2006 were forfeited when he
retired because the grant date was less than 12 months
before his retirement date. |
29
As of December 31, 2006, the vesting dates of unvested
stock option awards for the named executive officers were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting
Dates
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
Date
|
|
|
1/22
|
|
|
1/26
|
|
|
1/27
|
|
|
1/26
|
|
|
1/27
|
|
|
1/26
|
J. F. Sipics
|
|
|
|
1/22/04
|
|
|
|
|
15,767(a
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,253(a
|
)
|
|
|
|
|
|
|
|
|
18,253(a
|
)
|
|
|
|
|
|
|
|
|
|
1/26/06
|
|
|
|
|
|
|
|
|
|
19,157(b
|
)
|
|
|
|
|
|
|
|
|
19,156(b
|
)
|
|
|
|
|
|
|
|
|
19,157(b
|
)
|
P. A. Farr
|
|
|
|
1/22/04
|
|
|
|
|
7,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,993
|
|
|
|
|
|
|
|
|
|
16,993
|
|
|
|
|
|
|
|
|
|
|
1/26/06
|
|
|
|
|
|
|
|
|
|
20,630
|
|
|
|
|
|
|
|
|
|
20,630
|
|
|
|
|
|
|
|
|
|
20,630
|
|
J. E. Abel
|
|
|
|
1/22/04
|
|
|
|
|
8,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,060
|
|
|
|
|
|
|
|
|
|
10,060
|
|
|
|
|
|
|
|
|
|
|
1/26/06
|
|
|
|
|
|
|
|
|
|
9,700
|
|
|
|
|
|
|
|
|
|
9,700
|
|
|
|
|
|
|
|
|
|
9,700
|
|
J. M. Simmons, Jr.
|
|
|
|
1/26/06
|
|
|
|
|
|
|
|
|
|
8,704
|
|
|
|
|
|
|
|
|
|
8,703
|
|
|
|
|
|
|
|
|
|
8,703
|
|
D. G.
DeCampli(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These unvested stock options vested on the day Mr. Sipics
retired, which was January 1, 2007. |
|
(b) |
|
These unvested stock options were forfeited on the day Mr.
Sipics retired. |
|
(c) |
|
Mr. DeCampli did not receive any stock option awards in
2006. |
|
|
|
(2) |
|
The dates that restrictions lapse for each restricted stock or
unit award granted to the named executive officers are as
follows: |
|
|
|
|
|
|
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|
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|
|
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|
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|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dates
Restrictions Lapse
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
Officer
|
|
|
Date
|
|
|
1/22
|
|
|
3/1
|
|
|
1/27
|
|
|
3/1
|
|
|
1/26
|
|
|
3/1
|
|
|
12/4
|
|
|
4/27/27
|
J. F. Sipics
|
|
|
|
1/22/04
|
|
|
|
|
10,480(a
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,280(b
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/26/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,660(b
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P. A. Farr
|
|
|
|
4/22/02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,600
|
|
|
|
|
|
3/01/04
|
|
|
|
|
|
|
|
|
|
5,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/01/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/26/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,400
|
|
J. E. Abel
|
|
|
|
1/22/04
|
|
|
|
|
3,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/01/04
|
|
|
|
|
|
|
|
|
|
2,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/26/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/01/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
J. M. Simmons, Jr.
|
|
|
|
1/26/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. G. DeCampli
|
|
|
|
12/4/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The restrictions on 10,420 of these restricted stock unit awards
lapsed on January 1, 2007, the day Mr. Sipics retired. |
|
(b) |
|
The restrictions on 14,640 of the 15,280 restricted stock units
granted on January 27, 2005, and on 16,760 of the 18,660
restricted stock units granted on January 26, 2006 will
lapse on July 1, 2007 as a result of Mr. Sipics
retirement. The remaining options were forfeited as of his
retirement on January 1, 2007. |
30
OPTION EXERCISES
AND STOCK VESTED IN 2006
The following table provides information for each of the named
executive officers on (1) stock option exercises during
2006, including the number of shares acquired upon exercise and
the value realized and (2) the number of shares acquired
upon the vesting of stock awards in the form of restricted stock
units and the value realized, each before payment of any
applicable withholding tax and broker commissions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Awards
|
|
|
|
Stock
Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
|
Value Realized
|
|
|
|
Acquired
|
|
|
|
Value Realized
|
|
Name
|
|
|
Acquired
on Exercise
|
|
|
|
on
Exercise(1)
|
|
|
|
on
Vesting
|
|
|
|
on
Vesting(2)
|
|
J. F. Sipics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,200
|
|
|
|
|
$101,600
|
|
P. A. Farr
|
|
|
|
15,139
|
|
|
|
|
$214,787
|
|
|
|
|
3,640
|
|
|
|
|
114,484
|
|
J. E. Abel
|
|
|
|
6,000
|
|
|
|
|
77,100
|
|
|
|
|
3,700
|
|
|
|
|
114,404
|
|
J. M. Simmons, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. G. DeCampli
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts reflect the difference between the exercise price of the
stock option and the market price at the time of exercise. |
|
(2) |
|
Amounts reflect the market value of the restricted stock units
on the day the restrictions lapsed. |
PENSION BENEFITS
IN 2006
The following table sets forth information on the pension
benefits for the named executive officers under each of the
following pension plans:
|
|
|
|
|
PPL Retirement Plan. The PPL Retirement Plan is a funded
and tax-qualified defined benefit retirement plan that covers
approximately 5,750 active employees of PPL as of
December 31, 2006. As applicable to the named executive
officers, the plan provides benefits based primarily on a
formula that takes into account the executives earnings
for each fiscal year. Benefits under the PPL Retirement Plan for
eligible employees are determined as the greater of the
following two formulas:
|
|
|
|
|
|
The first is a career average pay formula of 2.25%
of annual earnings for each year of credited service under the
plan.
|
|
|
|
The second is a final average pay formula as follows:
|
1.3% of final average earnings up to the average Social Security
Wage Base ($48,816 for 2006)
plus
1.7% of final average earnings in excess of the average
Social Security Wage Base
multiplied by
the sum of years of credited service (up to a maximum of
40 years).
Under the final average pay formula, final average earnings
equal the average of the highest 60 months of pay during
the last 120 months of credited service. The Social
Security Wage Base is the average of the taxable social security
wage base for the 35 consecutive years preceding an
employees retirement date or, for employees retiring at
the end of 2006, $48,816. The executives annual earnings
taken into account under each formula include base salary, plus
cash incentive awards, less amounts deferred under the PPL
Officers Deferred Compensation Plan, but may not exceed an
IRS-prescribed limit applicable to tax-qualified plans ($220,000
for 2006).
The benefit an employee earns is payable starting at retirement
on a monthly basis for life. Benefits are computed on the basis
of the life annuity form of pension, with a normal retirement
age of 65. Benefits are reduced for retirement prior to
age 60 for employees with 20 years of credited
service, and reduced prior to age 65 for other employees.
Employees vest in the PPL Retirement Plan after five years
of credited service. In addition, the plan provides for joint
and survivor annuity choices, and does not require employee
contributions.
31
Benefits under the PPL Retirement Plan are subject to the
limitations imposed under Section 415 of the Internal
Revenue Code. The Section 415 limit for 2006 is
$175,000 per year for a single life annuity payable at an
IRS-prescribed retirement age.
|
|
|
|
|
PPL Supplemental Executive Retirement Plan. PPL offers
the PPL Supplemental Executive Retirement Plan, or SERP, to
approximately 27 active officers in PPL companies as of
December 31, 2006, including all of the named executive
officers, to provide for retirement benefits above amounts
available under the PPL Retirement Plan described above. The
SERP is unfunded and is not qualified for tax purposes. Accrued
benefits under the SERP are subject to claims of PPLs
creditors in the event of bankruptcy.
|
The SERP formula is 2.0% of earnings for the first 20 years
of credited service plus 1.5% of earnings for the next
10 years. Earnings include base salary and
annual cash incentive awards.
Benefits are computed on the basis of the life annuity form of
pension, with a normal retirement age of 65. Generally,
absent a specifically authorized exception, such as upon a
qualifying termination in connection with a change in control,
no benefit is payable under the SERP if the executive officer
has less than 10 years of service. Benefits under the SERP
are paid, in accordance with a participants advance
election, as a single sum or as an annuity, including choices of
a joint and survivor or years-certain annuity. At age 60,
or at age 50 with 10 years of service, accrued
benefits are vested and may not be reduced by an amendment to
the SERP or termination by the company. After the completion of
10 years of service, participants are eligible for death
benefit protection.
|
|
|
|
|
PPL Subsidiary Retirement Plan. From December 1999 until
September 2001, Mr. Farr participated in the PPL Subsidiary
Retirement Plan while he was employed by a generation subsidiary
of PPL Corporation. This plan is a defined benefit pension plan
that provides an annuity form of benefit payable on retirement
at age 50 or older. Mr. Farrs benefit amount under this
plan was frozen when he became an employee of PPL Services
Corporation. The present value of his accumulated benefit under
this plan is reflected in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present Value
of
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Years
|
|
|
|
Accumulated
|
|
|
|
Payments
During
|
|
Name
|
|
|
Plan
Name
|
|
|
|
Credited
Service
|
|
|
|
Benefit(1)(2)
|
|
|
|
Last
Fiscal Year
|
|
J. F. Sipics
|
|
|
|
PPL Retirement Plan
|
|
|
|
|
35.4
|
|
|
|
|
1,349,223
|
|
|
|
|
|
|
|
|
|
|
SERP
|
|
|
|
|
28.4
|
|
|
|
|
1,769,089
|
|
|
|
|
|
|
P. A. Farr
|
|
|
|
PPL Retirement Plan
|
|
|
|
|
2.3
|
|
|
|
|
41,362
|
|
|
|
|
|
|
|
|
|
|
SERP
|
|
|
|
|
8.6
|
|
|
|
|
186,735
|
|
|
|
|
|
|
|
|
|
|
PPL Subsidiary Retirement Plan
|
|
|
|
|
4.8
|
|
|
|
|
20,538
|
|
|
|
|
|
|
J. E. Abel
|
|
|
|
PPL Retirement Plan
|
|
|
|
|
32.3
|
|
|
|
|
1,009,908
|
|
|
|
|
|
|
|
|
|
|
SERP
|
|
|
|
|
25.9
|
|
|
|
|
612,750
|
|
|
|
|
|
|
J. M. Simmons, Jr.
|
|
|
|
PPL Retirement Plan
|
|
|
|
|
.9
|
|
|
|
|
17,954
|
|
|
|
|
|
|
|
|
|
|
SERP
|
|
|
|
|
.9
|
|
|
|
|
6,932
|
|
|
|
|
|
|
D. G. DeCampli
|
|
|
|
PPL Retirement Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_
_
|
|
|
(1) |
|
The accumulated benefit is based on service and earnings (base
salary and annual cash incentive award) considered by the plans
for the period through December 31, 2006. The present value
has been calculated assuming the named executive officers will
remain in service until age 60, the age at which retirement
may occur without any reduction in benefits, and that the
benefit is payable under the available forms of annuity
consistent with the assumptions as described in Note 13 to
the financial statements in the companys Annual Report on
Form 10-K
for the year ended December 31, 2006, as filed with the
SEC. As described in such Note, the interest assumption is
5.94%. The post-retirement mortality assumption is based on the
most recently available retirement plan table published by the
Society of Actuaries, known as RP 2000, which is a widely used
table for determining accounting obligations of pension plans.
Only Messrs. Sipics and Abel are vested in the SERP as of
December 31, 2006. |
32
|
|
|
(2) |
|
The present values in the table above are prescribed by the SEC.
The table below illustrates the benefits payable under the
listed events assuming termination of employment occurred as of
December 31, 2006. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERP Payments
upon Termination
|
|
as of
December 31,
2006(a)
|
|
Named
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
Officer
|
|
|
Retirement
|
|
|
|
Death
|
|
|
|
Disability
|
|
J. F. Sipics
|
|
|
$
|
1,769,089
|
|
|
|
$
|
791,667
|
|
|
|
$
|
1,769,089
|
|
P. A.
Farr(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. E. Abel
|
|
|
|
961,997
|
|
|
|
|
397,918
|
|
|
|
|
961,997
|
|
J. M.
Simmons, Jr.(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. G.
DeCampli(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Messrs. Sipics and Abel have elected to receive benefits
payable under the SERP as a lump-sum payment, subject to
applicable law. The amounts shown in this table represent the
values that would have become payable based on a
December 31, 2006 termination of employment. Actual payment
would be made following December 31, subject to plan rules
and compliance with Section 409A of the Internal Revenue
Code. |
|
(b) |
|
Mr. Farr is not eligible to retire or receive other
benefits under the SERP. If he had left PPL on December 31,
2006, voluntarily or as a result of death or a disability, he
would have been vested in deferred benefits on a reduced basis
under the PPL Retirement Plan, first payable at age 55, and
under the PPL Subsidiary Retirement Plan, first payable at age
50. |
|
(c) |
|
Messrs. Simmons and DeCampli are not eligible to retire or
receive other benefits under the SERP. |
33
NONQUALIFIED
DEFERRED COMPENSATION IN 2006
The PPL Officers Deferred Compensation Plan allows participants
to defer all but $75,000 of their base salary and up to all of
their annual cash incentive awards. PPL did not make any
matching contributions to this plan during 2006. A hypothetical
account is established for each participant who elects to defer,
and the participant selects one or more deemed investment
choices that generally mirror those that are available generally
to employees under PPLs 401(k) plan at Fidelity
Investments, also known as the PPL Deferred Savings Plan.
Earnings and losses on each account are determined based on the
performance of the investment funds selected by the participant.
PPL maintains each account as a bookkeeping entry.
In general, the named executive officers cannot withdraw any
amounts from their deferred accounts under this plan until they
either leave or retire from a PPL company. The CLC has the
discretion to make a hardship distribution if there
is an unforeseeable emergency that causes a severe financial
hardship to the participant. Participants may elect one or more
annual installments for a period up to 15 years, provided
the participant complies with the election and timing rules of
Section 409A of the Internal Revenue Code. No withdrawals
or distributions were made by the named executive officers in
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
Registrant
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
|
|
|
Contributions
in
|
|
|
Contributions
in
|
|
|
Earnings in
|
|
|
Withdrawals/
|
|
|
Aggregate
Balance
|
Name
|
|
|
Last
FY(1)
|
|
|
Last FY
|
|
|
Last
FY(2)
|
|
|
Distribution
|
|
|
at Last
FYE(3)
|
J. F. Sipics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P. A. Farr
|
|
|
$
|
30,831
|
|
|
|
|
|
|
|
|
|
14,439
|
|
|
|
|
|
|
|
|
|
189,334
|
|
J. E. Abel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
27,113
|
|
J. M. Simmons, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. G. DeCampli
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount deferred by Mr. Farr during 2006 is included in
the Salary column of the Summary Compensation Table. |
|
(2) |
|
Aggregate earnings for 2006 are not reflected in the Summary
Compensation Table because such earnings are not considered to
be above-market earnings. |
|
(3) |
|
Represents the total balance of each named executive
officers account as of December 31, 2006. All amounts
previously deferred by the named executive officers under the
Officers Deferred Compensation Plan were reported in previous
years in either the Salary or Bonus
column of prior Summary Compensation Tables. |
Change-in-Control
Arrangements
PPL Corporation has entered into severance agreements with each
of the named executive officers, which provide benefits to these
officers upon qualifying terminations of employment in
connection with a change in control of PPL Corporation. A
change in control is defined as the occurrence of
any five specific events. These events are summarized as follows:
|
|
|
|
|
a change in the majority of the members of the PPL Corporation
Board of Directors occurs through contested elections;
|
|
|
|
an investor or group acquires 20% or more of PPL
Corporations common stock;
|
|
|
|
a merger occurs that results in less than 60% control of PPL
Corporation or surviving entity by the current shareowners;
|
|
|
|
shareowner approval of the liquidation or dissolution of PPL
Corporation; or
|
|
|
|
the Board of Directors of PPL Corporation declares that a change
in control is anticipated to occur or has occurred.
|
A voluntary termination of employment by the named executive
officer would only result in the payment of benefits if there
was good reason for leaving. Good reason
includes a number of circumstances where the named executive
officer has a substantial adverse change in the employment
relationship or the duties assigned. For example, a reduction in
salary, a relocation of the place of work more than
30 miles away, or a cutback or exclusion from a
compensation plan, pension plan, or welfare plan would be
good reason. The benefits
34
provided under these agreements replace any other severance
benefits that PPL Corporation or any prior severance agreement
would provide to these named executive officers.
There is no benefit payable before or after a change in control
if the officer is discharged for cause.
Cause generally means willful conduct that can be
shown to cause material injury to the company or the willful
refusal to perform duties after written demand by the PPL
Corporation Board of Directors.
Each of the severance agreements continues in effect until
December 31, 2008, and the agreements generally are
automatically extended for additional one-year periods. If a
change in control occurs, the agreements will expire no earlier
than 36 months after the month in which the change in
control occurs. Each agreement provides that the named executive
officer will be entitled to the severance benefits described
below if, in connection with a change in control, the company
terminates the named executive officers employment for any
reason other than death, disability, retirement or
cause, or the officer terminates employment for
good reason.
These benefits include:
|
|
|
|
|
a lump-sum payment equal to three times (for
Messrs. Sipics, Farr, Abel and DeCampli) or two times (for
Mr. Simmons) the sum of (1) the named executive
officers base salary in effect immediately prior to the
date of termination, or if higher, immediately prior to the
first occurrence of an event or circumstance constituting
good reason, and (2) the highest annual bonus
in respect of the last three fiscal years ending immediately
prior to the fiscal year in which the change in control occurs,
or if higher, the fiscal year immediately prior to the fiscal
year in which first occurs an event or circumstance constituting
good reason;
|
|
|
|
a lump-sum payment having an actuarial present value equal to
the additional pension benefits the officer would have received
had the officer continued to be employed by the company for an
additional 36 months (for Messrs. Sipics, Farr, Abel
and DeCampli) or 24 months (for Mr. Simmons);
|
|
|
|
the continuation of welfare benefits for the officer and his or
her dependents for the applicable
36-month or
24-month
period following separation (reduced to the extent the officer
receives comparable benefits from another employer);
|
|
|
|
unpaid incentive compensation that has been allocated or awarded
for a previous performance period;
|
|
|
|
all contingent incentive compensation awards for all then
uncompleted periods, calculated on a prorated basis of months of
completed service, assuming performance achievement at 100% of
the target level;
|
|
|
|
outplacement services for up to three years;
|
|
|
|
for Messrs. Sipics, Farr and DeCampli only, a
gross-up
payment for any excise tax imposed under the golden parachute
provisions of the Internal Revenue Code; and
|
|
|
|
post-retirement health care and life insurance benefits to
officers who would have become eligible for such benefits within
the applicable
36-month or
24-month
period following the change in control.
|
See the Potential Payments upon Termination or Change in
Control of PPL Corporation table on page 40 for the
estimated value of benefits to be paid if a named executive
officer was terminated after a change in control of PPL
Corporation for qualifying reasons.
In addition to the benefits the severance agreements provide,
the following events would occur in the event of a change in
control under PPLs compensation arrangements:
|
|
|
|
|
the restriction period applicable to any outstanding restricted
stock or restricted stock unit awards lapses for those awards
granted as part of PPLs compensation program (excluding
restricted stock granted under any retention agreements);
|
|
|
|
all restrictions on the exercise of any outstanding stock
options lapse; and
|
|
|
|
all participants in the SERP immediately vest in their accrued
benefit, even if not yet vested due to age and service.
|
The value of the SERP enhancements is included under the
Change in Control Termination column of the
Potential Payments upon Termination or Change in Control
of PPL Corporation table provided below at page 40.
PPL Corporation has trust arrangements in place to facilitate
the funding of benefits under the SERP and the Officers Deferred
Compensation Plan if a change in control were to occur. PPL
Corporation is in the process of
35
adding additional trusts for the funding of the severance
agreements. Currently, the trusts are not funded. The trusts
provide that immediately prior to a change in
control, the chief executive officer of PPL Corporation
must authorize an irrevocable cash contribution sufficient to
pay all benefits under these plans as of the date of the change
in control. PPL Corporation is in the process of amending the
old and new trust arrangements to provide for PPL Corporation to
fund the trusts at the time a potential change in
control occurs. The funds are refundable to PPL
Corporation if the change in control does not actually take
place.
A potential change in control is triggered when:
|
|
|
|
|
PPL Corporation enters into an agreement that would result in a
change in control;
|
|
|
|
PPL Corporation or any investor announces an intention to enter
into a change in control;
|
|
|
|
the Board of Directors of PPL Corporation declares that a
potential change in control has occurred; or
|
|
|
|
an investor obtains 5% or more of PPL Corporations common
stock and intends to control or influence management (requiring
a Schedule 13D to be filed by the investor with the SEC).
|
Within 60 days of the end of each year after the change in
control occurs, PPL Corporation is required to irrevocably
deposit additional cash or property into the trusts in an amount
sufficient to pay participants or beneficiaries the benefits
that are payable under terms of the plans that are being funded
by the trusts as of the close of each year. Any income on the
trust assets would be taxed to PPL Corporation and not to the
beneficiaries of the trusts, and such assets would be subject to
the claims of general creditors in the event of PPL
Corporations insolvency or bankruptcy.
Retention
Agreements
PPL has executed a retention agreement with Mr. Farr that
grants to him 40,000 shares of restricted PPL common stock.
The restriction period will lapse on April 27, 2027. In the
event of death or disability, the restriction period on a
prorated portion of these shares will lapse immediately. In the
event of a change in control of PPL Corporation, the
restriction period on all of these shares will lapse immediately
if there is an involuntary termination of employment that is not
for cause. In the event Mr. Farr is terminated
for cause or he terminates his employment with all
PPL-affiliated companies prior to April 27, 2027, all
shares of this restricted stock will be forfeited.
Termination
Benefits
The named executive officers are entitled to various benefits in
the event of a termination of employment, but the value of this
entitlement and its components varies depending upon the
circumstances. A qualifying termination in connection with a
change in control of PPL Corporation triggers contractual
benefits under the severance and equity agreements described
above. A retirement provides benefits and payments in cash or
stock that are set forth in various executive plans referred to
above. A termination resulting from death or disability also has
a number of benefit consequences under various benefit plans.
The table entitled Potential Payments upon Termination or
Change in Control of PPL Corporation below sets forth best
estimates of the probable incremental value of benefits that are
payable assuming a termination of employment as of
December 31, 2006, for reasons of voluntary termination,
retirement, death, disability or qualifying termination in
connection with a change in control. However, as permitted by
SEC disclosure rules, the table does not reflect any amounts
provided to a named executive officer that are generally
available to all management employees. Also, the table does not
repeat information disclosed in the Nonqualified Deferred
Compensation in 2006 table or, except to the extent that
vesting or payment may be accelerated, the Pension
Benefits in 2006 table or the Outstanding Equity
Awards at Fiscal-Year End 2006 table. If a named executive
officer does not yet qualify for full retirement benefits or
other benefits requiring longer service, that additional benefit
is not reflected below. If a named executive officer has the
ability to elect retirement and thereby avoid a forfeiture or
decreased benefits, the tables assume that retirement was
elected and is noted as such in the footnotes to the table.
In the event that an executive is terminated for
cause by PPL, no additional benefits are due under
the applicable plans and agreements.
Severance. See
CD&ACompensation ElementsSpecial
CompensationSeverance on page 20 for a
discussion of PPLs practice on severance benefits. The
company or PPL affiliates have entered into agreements
36
with some executives, typically in connection with a mid-career
hire situation and as part of an offer of employment, in which
the executive has been promised a years salary in
severance pay in the event the executive is terminated by PPL
for reasons other than cause. Severance benefits
payable under these arrangements are conditioned on the
executive agreeing to release the employer company from any
liability arising from the employment relationship.
Specifically, with regard to the named executive officers, PPL
Services Corporation (as to Mr. Simmons) and the company
(as to Mr. DeCampli), agreed at the time of hiring to
provide up to 52 weeks of salary should the respective
executive be terminated after one year of employment. Payment
would stop if such executive became re-employed during the
52-week
period. In addition, the company further agreed to provide to
Mr. DeCampli, for a period equal to the severance payment
period, continued active employee health, dental and basic life
insurance benefits in the event of such termination of
employment.
As discussed above in
Change-in-Control
Arrangements, there is a structured approach to separation
benefits for involuntary and select good reason
terminations of employment in connection with a change in
control of PPL Corporation. PPL Corporation has entered into
agreements with each of the named executive officers that
provide benefits to the officers upon qualifying terminations of
employment in connection with a change in control of PPL
Corporation. The benefits provided under these agreements
replace any other severance benefits provided to these officers
by PPL Corporation, or any prior severance agreement.
The table below includes the severance payments, the value of
continued welfare benefits and outplacement benefits as
Other separation benefits, and as to
Messrs. Sipics and Farr, the value of
gross-up
payments for required Federal excise taxes on excess parachute
payments as Tax
gross-up
amount payable. Although Mr. DeCampli became entitled
to gross-up
protection when he became president of the company on
April 1, 2007, the table does not reflect any of these
amounts because all values are provided as of December 31,
2006. Mr. DeCampli did not have
gross-up
protection at that time. The value of additional pension
benefits provided under the severance agreements is discussed
above in
Change-in-Control
Arrangements and is included as SERP in the
table below.
SERP and ODCP. See Pension
Benefits in 2006 above for a discussion of the SERP and
Change-in-Control
Arrangements for a discussion of enhanced benefits that
are triggered if the named executive officer is terminated in
connection with a change in control of PPL Corporation. The
Potential Payments upon Termination or Change in Control
of PPL Corporation table below only includes enhancements
to benefits previously disclosed in the Pension Benefits
in 2006 table available as a result of the circumstances
of termination of employment.
Account balances under the Officers Deferred Compensation Plan
become payable as of termination of employment for any reason.
Current balances are included in the Nonqualified Deferred
Compensation in 2006 table on page 34 above and are
not included in the table below.
Annual Cash Incentive Awards. It
is PPLs practice to pay a pro rata portion of the accrued
but unpaid annual cash incentive award to executives who retire
or who are eligible to retire and (1) die while employed or
(2) terminate employment due to a disability during the
performance year. Of the named executive officers, only
Messrs. Sipics and Abel were eligible to retire as of
December 31, 2006. If the executive officers who are not
eligible to retire were to die or terminate employment due to a
disability, the CGNC has the power to consider an award. If such
executive officers were to leave voluntarily, they would not be
entitled to an annual cash incentive award.
In the event of a qualifying termination in connection with a
change in control, annual cash incentive awards that have been
determined, but not yet paid, are payable under the terms of the
severance agreements. Also in the case of a change in control,
if a termination under the severance agreement occurs during the
performance year, accrued incentive cash awards are payable on a
pro rata basis for the period worked during the year using the
assumptions that performance goals were attained at target.
The annual cash incentive awards discussed in the CD&A and
detailed for the 2006 year would be payable, without
enhancement, in the event of retirement, death, disability or
involuntary termination for reasons other than cause for the
retirement-eligible executive officers. In the event of a
qualifying termination in connection with a change in control,
all executives would be eligible for the award detailed in the
CD&A. Annual cash incentive awards payable upon termination
of employment are not included in the table below.
37
Long-term Incentive Awards.
Restrictions on restricted stock units generally lapse upon
retirement, death or termination of employment due to disability
or in the event of a change in control. Restricted stock units
are generally forfeited in the event of voluntary termination;
however, for executives eligible to retire, which includes
Messrs. Sipics and Abel as of December 31, 2006, the
assumption for the table below is that the executive retires and
restrictions lapse. Likewise, in the table below the assumption
is, in the event of involuntary termination for reasons other
than cause for executives eligible to retire, that
the restrictions lapse. Premium units granted under the Premium
Exchange Program are forfeited in the event of voluntary
termination or retirement prior to age 60, are prorated in
the event of retirement or termination of employment without
cause on or after age 60, and in the event of death or
disability all restrictions lapse. Premium units are included in
the table below based on these assumptions.
For Mr. Farrs retention agreement, the restrictions
on the retention shares lapse if his employment is terminated:
(1) involuntarily for reasons other than for cause;
(2) for qualifying reasons in connection with a change in
control; or (3) in the event of death or disability. The
value of these units for Mr. Farr is included in the
appropriate column.
The table below also includes the value, as of December 31,
2006 (based on a PPL Corporation stock price of $35.84), of
accelerated restricted stock units under each termination event.
Stock options that are not yet exercisable, other than those
granted within 12 months before termination of employment,
become exercisable upon retirement. In the event of death or
termination of employment due to disability, stock options not
yet exercisable continue to become exercisable in accordance
with the vesting schedule (in one-third increments on each
anniversary of the grant). Options that are not yet exercisable
are generally forfeited in the event of voluntary termination;
however, for executives eligible to retire (Messrs. Sipics
and Abel), the assumption is that the executive retires.
Likewise, the table assumes that in the event of involuntary
termination for reasons other than cause, options
not yet exercisable for executives eligible to retire become
exercisable. In the event of voluntary termination of employment
for reasons other than noted above, all executives have a
minimum of 60 days to exercise options that are exercisable
but that have not yet been exercised before they are forfeited.
Options granted under the ICP within 12 months of
termination of employment are normally forfeited. In the event
of a change in control, all options, including those granted
within the last 12 months, become exercisable upon close of
the transaction that results in the change in control.
The term of all PPL Corporation stock options is 10 years.
In the event of retirement, the executive has the full term to
exercise the options. In the event of termination of employment
as a result of death or disability, the term is reduced to the
earlier of the remaining term of the option or 36 months.
In the event of a qualifying termination of employment in
connection with a change in control, the term is reduced to
36 months for all outstanding options. Effective for grants
of options made in 2007 and after, the exercise periods in the
event of a change in control will be extended to the full term.
The table below includes the value (based on a PPL Corporation
stock price of $35.84) of options that are not yet exercisable,
assuming the options were exercised as of December 31, 2006
under each termination event. For the table below, options
already exercisable as of the termination event are excluded.
The value of these options is provided in the Outstanding
Equity Awards at Fiscal-Year End 2006 table above.
Termination
Benefits for Mr. Sipics
Mr. Sipics retired as of January 1, 2007, due to
health reasons. In January 2007, for 2006 performance, the CGNC
granted Mr. Sipics an annual cash award and restricted
stock unit awards as described in the CD&A. The annual cash
incentive award is also included in the Summary Compensation
Table. Because the 8,790 restricted stock unit awards were
granted in January 2007, they were not expensed in 2006 and are
not included in this years Summary Compensation Table. The
restrictions will lapse on July 25, 2007, which is six
months after the grant date.
The CGNC approved an enhanced retirement benefit for
Mr. Sipics equal to the difference between what his benefit
would have been under the SERP if he had completed 30 years
of service and retired at age 60, and what his benefit
actually was under the terms of the SERP and the PPL Retirement
Plan at his retirement date of January 1, 2007. On his
retirement date, Mr. Sipics was 58 years old and he
had completed approximately 28.5 years of service. This
enhanced retirement benefit will be paid in the same form and at
the time as benefits payable under the SERP. The CGNC also
approved treating Mr. Sipics as if he had retired at
age 60 for
38
purposes of determining his eligibility for retaining restricted
stock units granted to him as the premium component of prior
grants made under PPLs Premium Exchange Program. As a
result of this enhanced retirement arrangement, Mr. Sipics
retained 3,920 of the 6,520 PPL Corporation restricted
stock units that he otherwise would have forfeited.
Mr. Sipics elected to receive his SERP benefit in the form
of a lump-sum payment. The company paid Mr. Sipics
SERP benefits in two installments in order to avoid adverse tax
consequences under Section 409A of the Internal Revenue
Code. He received the first payment of $765,367 as of
January 1, 2007, the day he retired. He will receive the
second payment of $1,003,728 as of July 1, 2007, six months
after his retirement date, with interest determined by the
interest rate applicable to the Stable Value Fund of the PPL
Deferred Savings Plan for the period from January 1, 2007
to July 1, 2007. The SERP benefit was calculated assuming
Mr. Sipics had attained age 60 and completed
30 years of service as a result of the CGNC authorization
described above.
As of his retirement, Mr. Sipics was eligible to receive a
total of 44,420 restricted stock units, including 3,920 Premium
Units granted under the Premium Exchange Program that would have
otherwise been forfeited as of retirement. The CGNC waived the
forfeiture of the Premium Units as part of his retirement
package. Restrictions lapsed on his retirement date of January 1
on 10,420 units granted in 2004, at a value of $374,182.
Restrictions will lapse on an additional 31,400 units on
July 1, 2007, six months after his retirement. Restrictions
on 8,790 restricted stock units granted in January 2007 for 2006
performance will lapse on July 25, 2007, which is six
months after the grant date. When the restrictions lapse in
July, the value will be determined based on the closing price
for PPL Corporation shares of common stock as of such dates.
As of his retirement, Mr. Sipics had a total of 101,867
exercisable stock options, which are exercisable for their
stated terms. An additional 52,273 options (granted in 2004 and
2005) became exercisable as of his retirement.
Mr. Sipics forfeited 57,470 options that were granted in
January 2006, as 12 months had not elapsed since the grant
date.
39
POTENTIAL
PAYMENTS UPON TERMINATION OR
CHANGE IN CONTROL OF PPL CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement or
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
Change in
|
|
|
|
Voluntary
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Control
|
|
Executive
Name
|
|
Termination
|
|
|
Death
|
|
|
Disability
|
|
|
Not
for Cause
|
|
|
Termination
|
|
|
J. F. Sipics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance payable in
cash(1)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
(7)
|
|
|
$
|
1,673,706
|
|
Other separation
benefits(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(7)
|
|
|
|
119,619
|
|
Tax
gross-up
amount
payable(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,128,929
|
|
SERP(4)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
980,000
|
|
Restricted
stock/units(5)
|
|
|
1,498,829
|
|
|
|
1,592,013
|
|
|
|
1,592,013
|
|
|
|
1,498,829
|
|
|
|
1,592,013
|
|
Stock
options(6)
|
|
|
544,038
|
|
|
|
0
|
|
|
|
0
|
|
|
|
544,038
|
|
|
|
871,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P. A. Farr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance payable in
cash(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(7)
|
|
|
|
1,938,000
|
|
Other separation
benefits(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(7)
|
|
|
|
126,467
|
|
Tax
gross-up
amount
payable(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,165,403
|
|
SERP(4)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
620,000
|
|
Restricted
stock/units(5)
|
|
|
0
|
|
|
|
2,585,139
|
|
|
|
2,585,139
|
|
|
|
1,433,600(8)
|
|
|
|
2,585,139
|
|
Stock
options(6)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
763,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. E. Abel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance payable in
cash(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(7)
|
|
|
|
1,202,622
|
|
Other separation
benefits(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(7)
|
|
|
|
114,671
|
|
Tax
gross-up
amount
payable(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
SERP(4)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,090,000
|
|
Restricted
stock/units(5)
|
|
|
580,608
|
|
|
|
589,568
|
|
|
|
589,568
|
|
|
|
580,608
|
|
|
|
589,568
|
|
Stock
options(6)
|
|
|
302,627
|
|
|
|
0
|
|
|
|
0
|
|
|
|
302,627
|
|
|
|
468,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. M.
Simmons, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance payable in
cash(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
225,000
|
|
|
|
665,004
|
|
Other separation
benefits(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(7)
|
|
|
|
100,623
|
|
Tax
gross-up
amount
payable(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
SERP(4)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
100,000
|
|
Restricted
stock/units(5)
|
|
|
0
|
|
|
|
147,661
|
|
|
|
147,661
|
|
|
|
(8)
|
|
|
|
147,661
|
|
Stock
options(6)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
148,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. G. DeCampli
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance payable in
cash(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
265,000
|
|
|
|
764,000
|
|
Other separation
benefits(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12,800
|
|
|
|
90,479
|
|
Tax
gross-up
amount
payable(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
SERP(4)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
115,000
|
|
Restricted
stock/units(5)
|
|
|
0
|
|
|
|
217,190
|
|
|
|
217,190
|
|
|
|
(8)
|
|
|
|
217,190
|
|
Stock
options(6)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
0
|
|
|
|
|
(1) |
|
Messrs. Simmons and DeCampli each have an agreement to
receive up to 52 weeks of pay following involuntary
termination for reasons other than cause. The full 52 weeks
of pay are illustrated as Severance payable in cash
under the Involuntary Termination Not for Cause
column. |
|
|
|
In the event of termination of employment in connection with a
change in control, the named executive officers are eligible for
severance benefits if termination occurs within 36 months
of a change in control (a) due to termination for reasons
other than cause or (b) by the executive on the basis of
good reason as that term is defined in the agreement. |
|
|
|
For purposes of the illustration, we have assumed executives are
eligible for benefits under the severance agreements. Amounts
illustrated as Severance payable in cash under the
Change in Control Termination column are three times
(for Messrs. Sipics, Farr and Abel) and two times (for
Mr. DeCampli) the sum of (a) the executives
annual salary as of the termination date plus (b) the
highest annual cash incentive payment made in the last three
years as provided under the agreements. Mr. Simmons
severance pay was determined on the same basis as
Mr. DeCamplis; however the benefit was reduced by
$63,598 in order to avoid an excise tax, which would be payable
by the executive. Mr. DeCampli became eligible for three
times the sum described above when he was elected President of
the company on April 1, 2007. |
|
(2) |
|
Under the terms of each named executive officers severance
agreement, the executive is eligible for continued medical and
dental benefits, life insurance and disability protection for
the period equal to the severance payment, and outplacement
benefits. The amounts illustrated as Other separation
benefits are |
40
|
|
|
|
|
the estimated present values of these benefits. In addition, for
Mr. DeCampli, under the terms of his employment offer
letter the company agreed to provide one year of medical, dental
and life insurance coverage. An estimate of this cost is
included under the Involuntary Termination Not for
Cause column. |
|
(3) |
|
In the event excise taxes become payable under Section 280G
and Section 4999 of the Internal Revenue Code as a result
of any excess parachute payments, as that phrase is
defined by the Internal Revenue Service, the severance
agreements of Messrs. Sipics and Farr provide that the
company will pay the excise tax as well as
gross-up the
executive for the impact of the excise tax payment. (The tax
payment and
gross-up
does not extend to normal income taxes due on any separation
payments.) The amounts illustrated as Tax
gross-up
amount payable include the companys best estimate of
the excise tax and
gross-up
payments that would be made if each named executive officer had
been terminated on December 31, 2006, under the terms of
the severance agreement. |
|
(4) |
|
Amounts illustrated as SERP under the Change
in Control Termination column include the value of the
incremental benefits payable under the terms of the severance
agreements and the SERP. Under the agreements, each named
executive officer is eligible for a severance payment equal to
the value of the SERP benefit that would be determined by adding
an additional three years (for Messrs. Sipics, Farr and
Abel) and two years (for Messrs. Simmons and DeCampli) of
service. Under the SERP, upon a change in control, benefits vest
immediately. |
|
(5) |
|
Total outstanding restricted stock and restricted stock unit
awards are shown in the Outstanding Equity Awards at
Fiscal-Year End 2006 table above at page 29. The
table above includes only the value of the restricted stock and
stock units that would become payable as a result of each event
as of December 31, 2006. In the table below, the number of
units accelerated and payable as of the event, as well as the
number forfeited, is shown. The gross value in the above table
would be reduced by the amount of taxes required to be withheld;
and the net shares, determined based on the stock price as of
December 31, 2006, would be distributed based on a PPL
Corporation stock price of $35.84. For purposes of the table
below, the total number of shares is included without regard for
the tax impact. |
|
|
|
For Mr. Farr, the totals shown below for death, disability,
involuntary termination not for cause and change in control
termination include the acceleration of outstanding retention
shares. |
Restricted Stock
and Restricted Stock Units
(#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement or
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
Change in
|
|
|
|
Voluntary
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Control
|
|
Named
Executive Officer
|
|
Termination
|
|
|
Death
|
|
|
Disability
|
|
|
Not
for Cause
|
|
|
Termination
|
|
|
J. F. Sipics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accelerated
|
|
|
41,820
|
|
|
|
44,420
|
|
|
|
44,420
|
|
|
|
41,820
|
|
|
|
44,420
|
|
forfeited
|
|
|
2,600
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,600
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P. A. Farr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accelerated
|
|
|
0
|
|
|
|
72,130
|
|
|
|
72,130
|
|
|
|
40,000
|
(8)
|
|
|
72,130
|
|
forfeited
|
|
|
72,130
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. E. Abel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accelerated
|
|
|
16,200
|
|
|
|
16,450
|
|
|
|
16,450
|
|
|
|
16,200
|
|
|
|
16,450
|
|
forfeited
|
|
|
250
|
|
|
|
0
|
|
|
|
0
|
|
|
|
250
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. M.
Simmons, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accelerated
|
|
|
0
|
|
|
|
4,120
|
|
|
|
4,120
|
|
|
|
(8)
|
|
|
|
4,120
|
|
forfeited
|
|
|
4,120
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. G. DeCampli
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accelerated
|
|
|
0
|
|
|
|
6,060
|
|
|
|
6,060
|
|
|
|
(8)
|
|
|
|
6,060
|
|
forfeited
|
|
|
6,060
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
0
|
|
|
|
|
(6) |
|
Total outstanding stock options are shown in the
Outstanding Equity Awards at Fiscal-Year End 2006
table. The table above includes only the value of the options
not yet exercisable that would become exercisable as a result of
each event as of December 31, 2006. Exercisable options as
of December 31, 2006, are excluded from this table. The
table below details the number of options that accelerate and
become exercisable as of the termination event, the number of
options that become exercisable in the future in the events of
death or disability and the number forfeited. |
41
|
|
|
|
|
For illustrative purposes, it is assumed that all options not
yet exercisable that become exercisable as of the event are
exercised as of December 31, 2006, based on a PPL
Corporation stock price of $35.84. |
Stock Options Not
Yet Exercisable
(#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement or
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
Change in
|
|
|
|
Voluntary
|
|
|
|
|
|
|
|
|
Termination
|
|
|
Control
|
|
Named
Executive Officer
|
|
Termination
|
|
|
Death
|
|
|
Disability
|
|
|
Not
for Cause
|
|
|
Termination
|
|
|
J. F. Sipics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
|
|
|
52,273
|
|
|
|
0
|
|
|
|
0
|
|
|
|
52,273
|
|
|
|
81,373
|
|
Forfeited
|
|
|
57,470
|
|
|
|
0
|
|
|
|
0
|
|
|
|
57,470
|
|
|
|
0
|
|
Become exercisable over next
36 months
|
|
|
0
|
|
|
|
81,373
|
|
|
|
81,373
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P. A. Farr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
103,303
|
|
Forfeited
|
|
|
103,303
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
0
|
|
Become exercisable over next
36 months
|
|
|
0
|
|
|
|
103,303
|
|
|
|
103,303
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. E. Abel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
|
|
|
29,020
|
|
|
|
0
|
|
|
|
0
|
|
|
|
29,020
|
|
|
|
58,120
|
|
Forfeited
|
|
|
29,100
|
|
|
|
0
|
|
|
|
0
|
|
|
|
29,100
|
|
|
|
0
|
|
Become exercisable over next
36 months
|
|
|
0
|
|
|
|
58,120
|
|
|
|
58,120
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J. M. Simmons, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
26,110
|
|
Forfeited
|
|
|
26,110
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
0
|
|
Become exercisable over next
36 months
|
|
|
0
|
|
|
|
26,110
|
|
|
|
26,110
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D. G. DeCampli
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accelerated
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
0
|
|
Forfeited
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(8)
|
|
|
|
0
|
|
Become exercisable over next
36 months
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
(7) |
|
In the event of involuntary termination for reasons other than
for cause, any severance payable in cash (except for
Messrs. Simmons and DeCampli)
and/or other
separation benefits (except for Mr. DeCampli), if any,
would be determined as of the date of termination and would
require the approval of the CNGC. |
|
(8) |
|
In the event of involuntary termination for reasons other than
for cause, Messrs. Farr, Simmons and DeCampli would forfeit
all outstanding restricted stock units and stock options because
they are not eligible to retire, with the exception of
40,000 shares of retention stock held by Mr. Farr. Any
exceptions to the automatic forfeitures would require the
approval of the CGNC. |
42
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Fees to
Independent Auditor for 2006 and 2005
For the fiscal year ended December 31, 2006,
Ernst & Young LLP (E&Y) served as independent
registered public accounting firm, or independent
auditor for PPL Corporation and its subsidiaries,
including the company. For the fiscal year ended
December 31, 2005, PricewaterhouseCoopers LLP (PwC) served
as PPLs independent auditor. The following table presents
an allocation of fees billed by E&Y and PwC for the fiscal
years ended December 31, 2006 and 2005, respectively, for
professional services rendered for the audit of our
companys annual financial statements and for fees billed
for other services rendered.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Audit
fees(a)
|
|
$
|
725
|
|
|
$
|
515
|
|
Audit-related
fees(b)
|
|
|
27
|
|
|
|
27
|
|
Tax
fees(c)
|
|
|
|
|
|
|
|
|
All other
fees(d)
|
|
|
4
|
|
|
|
|
|
|
|
|
(a) |
|
Includes audit of annual financial statements and review of
financial statements included in the companys Quarterly
Reports on
Form 10-Q
and services in connection with statutory and regulatory filings
or engagements, including comfort letters and consents for
financings and filings made with the SEC. |
|
(b) |
|
Fees for performance of specific
agreed-upon
procedures. |
|
(c) |
|
The independent auditor does not provide tax consulting and
advisory services to the company or any of its affiliates. |
|
(d) |
|
Fees relating to access to an E&Y online accounting research
tool. |
Approval of Fees. PPL
Corporations Audit Committee 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 our companys independent auditor
to perform either audit or non-audit services is prohibited
unless specifically approved in advance by the PPL Corporation
Audit Committee. As a result of this approval process, PPL
Corporations Audit Committee 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 PPL
Corporations Audit Committee, 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 PPL Corporation
Audit Committee at its next meeting.
PPL Corporations Audit Committee approved all of the audit
and non-audit related fees for 2006 and 2005.
Representatives of E&Y are not expected to be present at the
Annual Meeting.
OTHER
MATTERS
Shareowner Proposals for the Companys
2008 Annual Meeting. To be included in the information
statement for the 2008 Annual Meeting, any proposal intended to
be presented at that Annual Meeting by a shareowner must be
received by the Secretary of the company no later than
January 1, 2008. To be properly brought before the Annual
Meeting, any proposal must be received not later than
75 days in advance of the date of the 2008 Annual Meeting.
43
Schedule A
PPL Electric Utilities
Corporation
2006 Financial
Statements
Contents
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A-1
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A-3
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A-18
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A-20
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A-21
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A-22
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A-24
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A-25
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A-26
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A-52
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A-53
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A-54
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A-55
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GLOSSARY OF TERMS
AND ABBREVIATIONS
PPL
Corporation and its current and former
subsidiaries
PPLPPL Corporation, the parent holding
company of PPL Electric, PPL Energy Funding and other
subsidiaries.
PPL Capital FundingPPL Capital Funding,
Inc., a wholly owned financing subsidiary of PPL.
PPL Capital Funding Trust Ia Delaware
statutory business trust created to issue the Preferred Security
component of the PEPS Units. This trust was terminated in June
2004.
PPL ElectricPPL 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 FundingPPL Energy Funding
Corporation, a subsidiary of PPL and the parent company of PPL
Energy Supply.
PPL EnergyPlusPPL 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 SupplyPPL 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 UtilitiesPPL 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 GenerationPPL Generation, LLC, a
subsidiary of PPL Energy Supply that owns and operates
U.S. generating facilities through various subsidiaries.
PPL GlobalPPL 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 ServicesPPL Services Corporation, a
subsidiary of PPL that provides shared services for PPL and its
subsidiaries.
PPL Transition Bond CompanyPPL Transition
Bond Company, LLC, a subsidiary of PPL Electric that was formed
to issue transition bonds under the Customer Choice Act.
Other terms
and abbreviations
1945 First Mortgage Bond IndenturePPL
Electrics 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 IndenturePPL
Electrics 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.
APBAccounting Principles Board.
ARBAccounting Research Bulletin.
AROasset retirement obligation.
Black Lung Trusta trust account maintained
under federal and state Black Lung legislation for the payment
of claims related to disability or death due to pneumoconiosis.
CTCcompetitive transition charge on customer
bills to recover allowable transition costs under the Customer
Choice Act.
Customer Choice Actthe Pennsylvania
Electricity Generation Customer Choice and Competition Act,
legislation enacted to restructure the states electric
utility industry to create retail access to a competitive market
for generation of electricity.
DEPDepartment of Environmental Protection, a
state government agency.
DOEDepartment of Energy, a
U.S. government agency.
EITFEmerging 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.
EMFelectric and magnetic fields.
EPAEnvironmental Protection Agency, a
U.S. government agency.
A-1
ESOPEmployee Stock Ownership Plan.
FASBFinancial Accounting Standards Board, a
rulemaking organization that establishes financial accounting
and reporting standards.
FERCFederal Energy Regulatory Commission,
the federal agency that regulates interstate transmission and
wholesale sales of electricity and related matters.
FINFASB Interpretation.
FitchFitch, Inc.
FSPFASB Staff Position.
GAAPgenerally accepted accounting principles.
ICPIncentive Compensation Plan.
ICPKEIncentive Compensation Plan for Key
Employees.
IRSInternal Revenue Service, a
U.S. government agency.
ISOIndependent System Operator.
ITCintangible transition charge on customer
bills to recover intangible transition costs associated with
securitizing stranded costs under the Customer Choice Act.
kWhkilowatt-hour,
basic unit of electrical energy.
LIBORLondon Interbank Offered Rate.
MoodysMoodys Investors Service,
Inc.
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.
PCBpolychlorinated 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.
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&Eproperty, plant and equipment.
Preferred Securitiescompany-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.
PUCPennsylvania Public Utility Commission,
the state agency that regulates certain ratemaking, services,
accounting and operations of Pennsylvania utilities.
PUC Final Orderfinal order issued by the PUC
on August 27, 1998, approving the settlement of PPL
Electrics restructuring proceeding.
PUHCAPublic Utility Holding Company Act of
1935, legislation passed by the U.S. Congress. Repealed
effective February 2006 by the Energy Policy Act of 2005.
PURPAPublic Utility Regulatory Policies Act
of 1978, legislation passed by the U.S. Congress to
encourage energy conservation, efficient use of resources and
equitable rates.
PURTAthe Pennsylvania Public Utility Realty
Tax Act.
SABStaff Accounting Bulletin.
SECSecurities and Exchange Commission, a
U.S. government agency whose primary mission is to protect
investors and maintain the integrity of the securities markets.
SFASStatement of Financial Accounting
Standards, the accounting and financial reporting rules issued
by the FASB.
S&PStandard & Poors
Ratings Services.
SPEspecial purpose entity.
Superfundfederal environmental legislation
that addresses remediation of contaminated sites; states also
have similar statutes.
VEBAVoluntary Employee Benefit Association
Trust, trust accounts for health and welfare plans for future
benefit payments for employees, retirees or their beneficiaries.
A-2
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PPL
ELECTRIC UTILITIES CORPORATION
Terms and abbreviations appearing here are explained in the
glossary. Dollars are in millions, unless otherwise noted.
Forward-looking
Information
Statements contained in these financial statements 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 Electric
believes 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 the Managements
Discussion and Analysis of Financial Condition and Results of
Operations section herein, 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;
|
|
|
|
weather conditions affecting customer energy usage and operating
costs;
|
|
|
|
the effect of any business or industry restructuring;
|
|
|
|
PPL Electrics profitability and liquidity, including
access to capital markets and credit facilities;
|
|
|
|
new accounting requirements or new interpretations or
applications of existing requirements;
|
|
|
|
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 other expenses;
|
|
|
|
market prices of commodity inputs for ongoing capital
expenditures;
|
|
|
|
collective labor bargaining negotiations;
|
|
|
|
development of new markets and technologies;
|
|
|
|
political, regulatory or economic conditions in regions where
PPL Electric conducts business;
|
|
|
|
any impact of hurricanes or other severe weather on PPL Electric;
|
|
|
|
receipt of necessary governmental permits, approvals and rate
relief;
|
|
|
|
new state or federal legislation, including new tax legislation;
|
|
|
|
state and federal regulatory developments;
|
|
|
|
the impact of any state or federal investigations applicable to
PPL Electric and the energy industry;
|
|
|
|
capital market conditions, including changes in interest rates,
and decisions regarding capital structure;
|
|
|
|
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;
|
|
|
|
the outcome of litigation against PPL Electric;
|
|
|
|
potential effects of threatened or actual terrorism or war or
other hostilities; and
|
|
|
|
PPL Electrics commitments and liabilities.
|
Any such forward-looking statements should be considered in
light of such important factors and in conjunction with other
documents of 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 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 Electric undertakes no
obligation to update the information contained in such statement
to reflect subsequent developments or information.
A-3
Overview
PPL Electric provides electricity delivery service in eastern
and central Pennsylvania. Its headquarters are in Allentown, PA.
PPL Electrics 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 Electrics 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 Electrics PLR obligation and the associated recovery
from customers of its energy supply costs after 2009, when PPL
Electrics 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
Electrics 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.
The purpose of Managements Discussion and Analysis
of Financial Condition and Results of Operations is to
provide information concerning PPL Electrics past and
expected future performance in implementing the strategy and
challenges mentioned above. Specifically:
|
|
|
|
|
Results of Operations provides an overview of PPL
Electrics operating results in 2006, 2005 and 2004,
including a review of earnings. It also provides a brief outlook
for 2007.
|
|
|
|
Financial ConditionLiquidity and Capital
Resources provides an analysis of PPL Electrics
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 Electrics past and future
liquidity position and financial condition. This subsection also
includes a listing of PPL Electrics current credit ratings.
|
|
|
|
Financial ConditionRisk Management includes an
explanation of PPL Electrics 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 Managements Discussion
and Analysis of Financial Condition and Results of
Operations should be read in conjunction with PPL
Electrics Financial Statements and the accompanying Notes.
Results of
Operations
Earnings
Income available to PPL was:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
$
|
180
|
|
|
$
|
145
|
|
|
$
|
74
|
|
A-4
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 2)
|
|
|
|
|
|
|
(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 Electrics
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
Electrics distribution rates of $137 million (based
on a return on equity of 10.7%), and approved PPL
Electrics 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 Electrics
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
Electrics 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
Electrics 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
recoveryHurricane Isabel (Note 1)
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
Realization of benefits related to
Black Lung Trust assets (Note 8)
|
|
|
21
|
|
|
|
|
|
|
|
|
|
PJM billing dispute (Note 9)
|
|
|
21
|
|
|
$
|
(27
|
)
|
|
|
|
|
Acceleration of stock-based
compensation expense for periods prior to 2005 (Note 1)
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35
|
|
|
$
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PPL Electrics earnings beyond 2006 are subject to various
risks and uncertainties. See Forward-Looking
Information, the rest of Managements Discussion and
Analysis of Financial Condition and Results of Operations and
A-5
Note 9 to the Financial Statements for a discussion of the
risks, uncertainties and factors that may impact PPL
Electrics 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 9 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.
A-6
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 Electrics 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 8 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 8)
|
|
|
4
|
|
|
|
1
|
|
Increase in allocation of certain
corporate service costs (Note 10)
|
|
|
2
|
|
|
|
1
|
|
Reversal of cost
recoveryHurricane 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 6 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
Incomenet
See Note 11 to the Financial Statements for details of
other income and deductions.
A-7
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 4)
|
|
$
|
12
|
|
|
|
|
|
Interest on PLR contract
collateral (Note 10)
|
|
|
5
|
|
|
$
|
9
|
|
Decrease in long-term debt
interest expense
|
|
|
(20
|
)
|
|
|
(24
|
)
|
Interest accrued for PJM billing
dispute (Note 9)
|
|
|
(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 2 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
Electrics 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 Electrics
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 Electrics current and past business
activities; and
|
|
|
|
a downgrade in PPL Electrics or its subsidiarys
credit ratings that could negatively affect their ability to
access capital and increase the cost of maintaining credit
facilities and any new debt.
|
A-8
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 Electrics 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 Electrics 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 Electrics 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
Electrics 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
Electrics 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 6 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
A-9
preference stock was used to fund the repurchase of common stock
from PPL. See Note 4 to the Financial Statements for
details regarding the preference stock. PPL Electric did not
issue any long-term debt in 2006. See Note 5 to the
Financial Statements for more detailed information regarding PPL
Electrics 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 Electrics 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 Electrics plans to pay dividends on its
common and preferred securities, as well as maturities of PPL
Electrics 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 Electrics total committed
borrowing capacity under its credit facility and the use of this
borrowing capacity were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
|
|
|
|
|
Committed
|
|
|
|
of Credit
|
|
Available
|
|
|
Capacity
|
|
Borrowed
|
|
Issued (b)
|
|
Capacity
|
|
PPL Electric Credit
Facility (a)
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
$
|
200
|
|
|
|
|
(a) |
|
Borrowings under PPL Electrics credit facility bear
interest at LIBOR-based rates plus a spread, depending upon the
companys 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 Electrics 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
A-10
2005, the loan balance outstanding was $42 million, all of
which was used to cash collateralize letters of credit. See
Note 5 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 Electrics 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 Electrics 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Than 1
|
|
|
1-3
|
|
|
4-5
|
|
|
After 5
|
|
Contractual
Cash Obligations
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
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 Electrics 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. |
A-11
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 4 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 Electrics 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 PPLs
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
Moodys, 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
Moodys, 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 Electrics
or PPL Transition Bond Companys 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.
|
|
|
|
|
|
|
|
|
Moodys
|
|
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, Moodys 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 Electrics issuance of preference
stock in April 2006, S&P affirmed all of PPL Electrics
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.
A-12
Off-Balance Sheet
Arrangements
PPL Electric has entered into certain guarantee agreements that
are within the scope of FIN 45, Guarantors
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 9 to the
Financial Statements for a discussion on guarantees.
Risk
Management
Market
Risk
Commodity Price
RiskPLR 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 Electrics 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 10 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 Electrics 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 10 to the Financial Statements.
Environmental
Matters
See Note 9 to the Financial Statements for a discussion of
environmental matters.
New Accounting
Standards
See Note 17 to the Financial Statements for a discussion of
new accounting standards recently adopted or pending adoption.
Application of
Critical Accounting Policies
PPL Electrics 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.)
PPLs senior management has reviewed these critical
accounting policies, and the estimates and assumptions regarding
them, with its Audit Committee. In addition, PPLs 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
Electrics critical accounting policy related to
Pension and Other Postretirement Benefits. See
Note 17 to the Financial Statements for additional
information regarding SFAS 157.
A-13
1) Pension
and Other Postretirement Benefits
As described in Note 8 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 8 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 RateThe 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 AssetsManagement 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 IncreaseManagement projects
employees annual pay increases, which are used to project
employees pension benefits at retirement.
|
|
|
|
Health Care Cost Trend RateManagement 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 Moodys 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 Moodys 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, PPLs 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, PPLs 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, PPLs 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 PPLs 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.
A-14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
Change in
|
|
Impact on
|
|
Impact on
|
|
Impact on
|
Actuarial
Assumption
|
|
Assumption
|
|
Liabilities
|
|
Cost
|
|
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 Electrics 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 8 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 Electrics 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 Electrics 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 Electrics 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 Electrics
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,
A-15
the amount of PECOs claim, in the first quarter of 2005.
See Note 9 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 9 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 Electrics 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 9 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 PECOs 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 Electrics
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
Electrics contingencies, or reserves, for income taxes and
valuation allowances for deferred tax assets. The ongoing
assessment of tax contingencies is intended to
A-16
result in managements 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 managements 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 17 to the
Financial Statements for a more detailed discussion of
FIN 48 and for information regarding the expected impact of
adoption.
Other
Information
PPLs 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.
A-17
Report of
Independent Registered Public Accounting Firm
The Board of
Directors and Shareowners 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. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements 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.
As discussed in Note 17 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.
Philadelphia, Pennsylvania
February 26, 2007
A-18
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareowner
of PPL Electric Utilities Corporation:
In our opinion, the accompanying consolidated balance sheet and
consolidated statement of long-term debt and the related
consolidated statements of income, of shareowners common
equity and of cash flows 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. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements 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 15 to the consolidated financial
statements, the Company adopted FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations,
in 2005.
Philadelphia, Pennsylvania
February 24, 2006
A-19
CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31,
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 10)
|
|
|
157
|
|
|
|
148
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,259
|
|
|
|
3,163
|
|
|
|
2,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operation
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy purchases
|
|
|
175
|
|
|
|
256
|
|
|
|
207
|
|
Energy purchases from affiliate
(Note 10)
|
|
|
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 2)
|
|
|
189
|
|
|
|
185
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,841
|
|
|
|
2,786
|
|
|
|
2,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
418
|
|
|
|
377
|
|
|
|
259
|
|
Other Incomenet
(Note 11)
|
|
|
31
|
|
|
|
21
|
|
|
|
15
|
|
Interest Expense
|
|
|
134
|
|
|
|
170
|
|
|
|
187
|
|
Interest Expense with Affiliate
(Note 10)
|
|
|
17
|
|
|
|
12
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income
Taxes
|
|
|
298
|
|
|
|
216
|
|
|
|
84
|
|
Income Taxes (Note 2)
|
|
|
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.
A-20
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31,
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
|
|
Amortizationsrecoverable
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 10)
|
|
|
|
|
|
|
|
|
|
|
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 taxesnet
|
|
$
|
122
|
|
|
$
|
21
|
|
|
$
|
(69
|
)
|
The accompanying Notes to Consolidated Financial Statements
are an integral part of the financial statements.
A-21
CONSOLIDATED
BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
150
|
|
|
$
|
298
|
|
Restricted cash (Note 13)
|
|
|
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 10)
|
|
|
300
|
|
|
|
300
|
|
Prepayments
|
|
|
3
|
|
|
|
4
|
|
Prepayment on PLR energy supply
from affiliate (Note 10)
|
|
|
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 14)
|
|
|
118
|
|
|
|
114
|
|
Prepayment on PLR energy supply
from affiliate (Note 10)
|
|
|
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.
A-22
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 5)
|
|
$
|
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 10)
|
|
|
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 2)
|
|
|
814
|
|
|
|
771
|
|
Other
|
|
|
206
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Credits and Other
Noncurrent Liabilities
|
|
|
1,020
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingent
Liabilities (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareowners
Equity
|
|
|
|
|
|
|
|
|
Preferred securities (Note 4)
|
|
|
301
|
|
|
|
51
|
|
Common stockno 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.
A-23
CONSOLIDATED
STATEMENTS OF SHAREOWNERS EQUITY
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 Electrics 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.
A-24
CONSOLIDATED
STATEMENTS OF LONG-TERM DEBT AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Maturity (a)
|
|
|
|
|
|
First Mortgage Bonds
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.55%
|
|
|
|
|
|
$
|
146
|
|
|
|
March 1, 2006
|
|
|
|
|
|
73/8%
|
|
$
|
10
|
|
|
|
10
|
|
|
|
March 1, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Bonds
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57/8%
|
|
|
255
|
|
|
|
255
|
|
|
|
August 15, 2007
|
|
|
|
|
|
61/4%
|
|
|
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 5 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.
A-25
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Terms and abbreviations appearing in Notes to Consolidated
Financial Statements are explained in the glossary. Dollars are
in millions, unless otherwise noted.
|
|
1.
|
Summary of
Significant Accounting Policies
|
General
Business
and Consolidation
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, PPLs principal
direct subsidiaries are PPL Energy Funding, PPL Electric, PPL
Gas Utilities, PPL Services and PPL Capital Funding.
PPL Electric is a rate-regulated subsidiary of PPL. PPL
Electrics 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.
The consolidated financial statements of PPL Electric include
the accounts of PPL Electric and its wholly owned subsidiaries.
All significant intercompany transactions have been eliminated.
Regulation
PPL Electric accounts 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.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Recoverable transition
costs (a)
|
|
$
|
884
|
|
|
$
|
1,165
|
|
Taxes recoverable through future
rates
|
|
|
256
|
|
|
|
242
|
|
Recoverable costs of defined
benefit plans
|
|
|
61
|
|
|
|
|
|
Costs associated with severe ice
stormsJanuary 2005
|
|
|
12
|
|
|
|
12
|
|
Storm restoration
costsHurricane Isabel
|
|
|
|
|
|
|
10
|
|
Other
|
|
|
3
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
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
A-26
PPL Electric, 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 Electric established a regulatory
asset 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
Plansan amendment of FASB Statements No. 87, 88, 106
and 132(R). This regulatory asset does not represent cash
expenditures already incurred; consequently, this asset is not
earning a current return. This regulatory asset represents the
costs that would have otherwise been recorded in other
comprehensive income in accordance with SFAS 158, as
follows:
|
|
|
|
|
Transition obligation
|
|
$
|
16
|
|
Prior service cost
|
|
|
87
|
|
Net actuarial gain
|
|
|
(42
|
)
|
|
|
|
|
|
Recoverable costs of defined
benefit plans
|
|
$
|
61
|
|
|
|
|
|
|
Of these costs, $15 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 8 for the disclosures related to the adoption of
SFAS 158.
In January 2005, severe ice storms hit PPL Electrics
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 Electrics 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 Electrics next distribution base rate
case, which is expected to be filed in late March 2007. PPL
Electric believes that recovery of the remaining portion of
these costs is probable.
In August 2006, the Commonwealth Court of Pennsylvania
overturned the PUCs 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 PUCs 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 Courts
decision, PPL Electric recorded a charge of $11 million, or
$7 million after tax, 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.
Accounting
Records
The system of accounts for PPL Electric is maintained in
accordance with the Uniform System of Accounts prescribed by the
FERC and adopted by the PUC.
Use
of Estimates
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
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 Electric continuously
A-27
assesses potential loss contingencies for environmental
remediation, litigation claims, income taxes, regulatory
penalties and other events. PPL Electric discounts its loss
accruals for environmental remediation when appropriate.
PPL Electric 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 Electrics generation business was deregulated.
Changes
in Classification
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.
Revenue
Revenue
Recognition
Operating revenues 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.
PPL Electric participates in PJM as a transmission owner and PLR.
Allowance
for Doubtful Accounts
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.
Cash
and Investments
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 Electric 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 on the
Balance Sheets in Current AssetsOther.
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 13 for the components of
restricted cash.
A-28
Long-Lived
and Intangible Assets
Property,
Plant and Equipment
PP&E is recorded at original cost, unless impaired. 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 Electric 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.
Included in PP&E on the balance sheet are capitalized costs
of software projects that were developed or obtained for
internal use. At both December 31, 2006 and 2005, the
carrying amount of capitalized software costs was
$21 million. At December 31, 2006 and 2005, the
accumulated amortization was $16 million and
$12 million. These capitalized costs are amortized ratably
over the expected lives of the projects when they become
operational, generally not to exceed 5 years.
PPL Electrics capitalized software costs amortized during
2006, 2005 and 2004 were $4 million.
Depreciation
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 Electric periodically reviews the useful lives of its fixed
assets.
Following are the weighted-average rates of depreciation at
December 31.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Transmission and distribution
|
|
|
2.25
|
%
|
|
|
2.23
|
%
|
General
|
|
|
3.35
|
%
|
|
|
2.87
|
%
|
The annual provisions for depreciation have been computed
principally in accordance with the following ranges of assets
lives: transmission and distribution,
15-60 years,
and general, 5-60 years.
Acquired
Intangible Assets
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.
Asset
Impairment
PPL Electric reviews 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.
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.
Asset
Retirement Obligations
PPL Electric accounts 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
A-29
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 15 for a discussion of accounting for AROs.
Compensation
and Benefits
Pension
and Other Postretirement Benefits
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 plans 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 plans 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 8 for the impact of the adoption of SFAS 158
and a discussion of pension and other postretirement benefits.
Stock-Based
Compensation
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 17 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
CompensationTransition 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 PPLs 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 PPLs common stock on the date of grant. See
Note 7 for a discussion of stock-based compensation.
Stock-based compensation is included in Other operation
and maintenance expense on the Statements of Income.
A-30
PPL Electrics 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.
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 employees retirement. Such
guidance is relevant to prior accounting for stock-based
compensation under other accounting guidance. PPLs
stock-based compensation plans allow for accelerated vesting
upon an employees 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 employees
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).
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
The income tax provision for PPL and its subsidiaries is
calculated in accordance with SFAS 109, Accounting
for Income Taxes. PPL Electric and its subsidiaries are
included in the consolidated U.S. federal income tax return
of PPL. The provision for PPL Electric is calculated in
accordance with an intercompany tax sharing policy which
provides that taxable income be calculated as if PPL Electric
and its subsidiaries filed a separate consolidated return. PPL
Electrics intercompany tax receivable was $2 million
at December 31, 2006, and its intercompany tax liability
was $6 million at December 31, 2005.
Significant management judgment is required in developing PPL
Electrics provision for income taxes, including the
determination of deferred tax assets and liabilities and
valuation allowances required against deferred tax assets. PPL
Electric and its subsidiaries record valuation allowances to
reduce deferred tax assets to the amounts that are more likely
than not to be realized. PPL Electric and its subsidiaries
consider future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for valuation
allowances. If PPL Electric 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
Electric 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 Electrics
financial statements in the future. In evaluating the exposure
associated with various tax filing positions, PPL Electric and
its subsidiaries accrue charges for probable exposures based on
managements best estimate of the amount of benefit that
should be recognized in the financial statements in accordance
with SFAS 5, Accounting for Contingencies.
PPL Electric deferred investment tax credits when the credits
were utilized and is amortizing the deferred amounts over the
average lives of the related assets. See Note 2 for
additional discussion regarding income taxes.
The provision for PPL Electrics 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 AssetsOther on the Balance Sheet.
A-31
Taxes,
Other Than Income
PPL Electric presents sales taxes in Accounts
Payable on its Balance Sheets. These taxes are not
reflected on the Statements of Income. See Note 2 for
details on taxes included in Taxes, other than
income on the Statements of Income.
Leases
PPL Electric applies the provisions of SFAS 13,
Accounting for Leases, as amended and interpreted,
to all transactions that qualify for lease accounting. See
Note 6 for a discussion of accounting for leases under
which PPL Electric is a lessee.
Materials
and Supplies
Materials and supplies are valued at the lower of cost or market
using the average-cost method.
Guarantees
In accordance with the provisions of FIN 45,
Guarantors 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 9 for further discussion of recorded and unrecorded
guarantees.
Treasury
Stock
Treasury shares are reflected on the balance sheet as an offset
to shareowners equity under the cost method of accounting.
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.
New
Accounting Standards
See Note 17 for a discussion of new accounting standards
recently adopted or pending adoption.
|
|
2.
|
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%.
The provision for PPL Electrics 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 AssetsOther on the Balance Sheets.
A-32
The tax effects of significant temporary differences comprising
PPL Electrics 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 plantnet
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
CurrentFederal
|
|
$
|
85
|
|
|
$
|
66
|
|
|
$
|
(33
|
)
|
CurrentState
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
61
|
|
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeferredFederal
|
|
|
19
|
|
|
|
12
|
|
|
|
79
|
|
DeferredState
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
11
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment tax credit,
netFederal
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
104
|
|
|
$
|
69
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax
expenseFederal
|
|
$
|
102
|
|
|
$
|
75
|
|
|
$
|
43
|
|
Total income tax expenseState
|
|
|
2
|
|
|
|
(6
|
)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
104
|
|
|
$
|
69
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Reconciliation of Income Tax
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicated federal income tax on
Income Before Income Taxes at statutory tax rate35%
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, the carrying value of cash
and cash equivalents, short-term investments, 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. 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,
|
|
December 31,
|
|
|
2006
|
|
2005
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Long-term debt
|
|
$
|
1,978
|
|
|
$
|
2,023
|
|
|
$
|
2,411
|
|
|
$
|
2,496
|
|
A-34
Details of PPL Electrics preferred securities, without
sinking fund requirements, as of December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
41/2%
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
|
|
Optional
Redemption
|
|
|
Shares
|
|
Authorized
|
|
Price
Per Share
|
|
41/2%
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
41/2%
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 Electrics
shareowners are entitled to vote. Preferred Stock ranks senior
to PPL Electrics 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
Electrics 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.
A-35
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 Electrics 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.
|
|
5.
|
Credit
Arrangements and Financing Activities
|
Credit
Arrangements
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 Electrics
$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
Electrics $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 subsidiarys borrowing
limit under this credit agreement is $150 million, and
interest under the credit agreement varies based on the
commercial paper conduits 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 Electrics 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 Electrics 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 subsidiarys financial results are
consolidated in PPL Electrics 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.
In 2001, PPL Electric completed a strategic initiative to
confirm its legal separation from PPL and PPLs 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
A-36
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 10 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 Electrics legal separation from
its affiliates are intended to minimize the risk that a court
would order PPL Electrics 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 Electrics assets and liabilities to be
consolidated with those of PPL or such other PPL affiliate.
The subsidiaries of PPL are separate legal entities. PPLs
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 PPLs 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 PPLs 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 Electric are separate legal
entities. These subsidiaries are not liable for the debts of PPL
Electric. Accordingly, creditors of PPL Electric may not satisfy
their debts from the assets of its 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 Electric is not
liable for the debts of its subsidiaries. Accordingly, creditors
of its subsidiaries may not satisfy their debts from the assets
of PPL Electric absent a specific contractual undertaking by PPL
Electric to pay the creditors of its subsidiaries or as required
by applicable law or regulation.
Financing
Activities
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 4 for a discussion of PPL Electrics issuance
of preference stock in 2006.
During 2006, PPL Electric received a capital contribution of
$75 million from PPL.
Dividends and
Dividend Restrictions
During 2006, PPL Electric paid common stock dividends of
$116 million to PPL.
PPL Electrics 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 PPLs
other subsidiaries. PPL Electric does not, at this time, expect
that any of such limitations would significantly impact its
ability to declare dividends.
A-37
As discussed in Note 4, 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 Electrics 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 Electrics Board of Directors, will be
dependent upon future earnings, cash flows, financial
requirements and other factors.
In September 2006, PPLs 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 $52 million.
Rent expense for all operating leases, including 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. Rent expense for 2006, 2005 and 2004 was
$11 million, $23 million and $21 million.
Due to the termination of the master lease agreements mentioned
above, PPL Electric has no substantial future minimum rental
payments.
|
|
7.
|
Stock-Based
Compensation
|
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 17 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 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. 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
A-38
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 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.
Actual income tax benefits realized from stock-based
arrangements for the year ended December 31, 2006, were not
significant.
Restricted stock and restricted stock unit activity for the year
ended December 31, 2006 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Average
|
|
|
Restricted
|
|
Grant Date
|
|
|
Shares
|
|
Fair
Value
|
|
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 years ended
December 31, 2005 and 2004, were $27.11 and $23.13.
As of December 31, 2006, unrecognized compensation cost
related to nonvested awards was $1 million and the weighted
average period for recognition was 1.3 years.
The total fair value of shares vesting during 2006, 2005 and
2004 was $1 million.
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 PPLs 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
Aggregate
|
|
|
Number of
|
|
Weighted-Average
|
|
Remaining
|
|
Total
Intrinsic
|
|
|
Options
|
|
Exercise
Price
|
|
Contractual
Term
|
|
Value
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A-39
The total intrinsic value of stock options exercised for 2006
was insignificant and was $3 million and $1 million
for 2005 and 2004.
As of December 31, 2006, unrecognized compensation costs
related to stock options were insignificant.
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
PPLs volatility in those prior periods. Managements
expectations for future volatility, considering potential
changes to PPLs business model and other economic
conditions, are also reviewed in addition to the historical data
to determine the final volatility assumption.
|
|
8.
|
Retirement and
Postemployment Benefits
|
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 registrants 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
SFAS 158, resulted in the following increases (decreases)
to the Balance Sheet at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
|
|
|
|
|
|
After
|
|
|
|
Application
|
|
|
|
|
|
Application
|
|
|
|
of
SFAS 158
|
|
|
Adjustments
|
|
|
of
SFAS 158
|
|
|
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-40
|
|
|
(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 Electrics employees are eligible for
pension benefits under non-contributory defined benefit pension
plans, sponsored by PPL Services, with benefits based on length
of service and final average pay, as defined by the plans.
PPL and certain of its subsidiaries also provide supplemental
retirement benefits to directors, executives and other key
management employees through unfunded nonqualified retirement
plans, sponsored by PPL Services.
The majority of employees of PPL Electric will become eligible
for certain health care and life insurance benefits upon
retirement through contributory plans. Postretirement benefits
under the PPL Retiree Health Plan sponsored by PPL Services are
paid from funded VEBA trusts.
Net periodic pension and other postretirement benefits costs
charged to operating expense, excluding amounts charged to
construction and other non-expense accounts were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Pension benefits (a)
|
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
1
|
|
Other postretirement
benefits (a)
|
|
|
9
|
|
|
|
7
|
|
|
|
9
|
|
|
|
|
(a) |
|
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. |
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 Electrics allocated
share of these pension liabilities was $45 million and
$77 million. The balance for PPL Electrics 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.
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
Electrics 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.
Savings
Plans
Substantially all employees of PPL Electric are eligible to
participate in a deferred savings plan (401(k)). Contributions
to the plan charged to operating expense approximated
$3 million for 2006, 2005 and 2004.
Employee Stock
Ownership Plan
PPL sponsors a non-leveraged ESOP in which substantially all
employees 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
PPLs 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 allocated to and charged as compensation expense by PPL
Electric for ESOP contributions were $2 million for 2006,
2005 and 2004.
A-41
Postemployment
Benefits
PPL Electric provides health and life insurance benefits to
disabled employees and income benefits to eligible spouses of
deceased employees. PPL Electric 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 $2 million, primarily
due to an updated valuation for Long-Term Disability benefits
completed in 2005, and not significant for 2004.
Pension
Protection Act of 2006
On August 17, 2006, the Pension Protection Act of 2006 (the
Act) was signed by President Bush. The Acts 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 PPLs 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 or PPL Electric in regard to
these plans.
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 Electrics Other operation and maintenance
expense of $21 million (net of tax expense of
$15 million).
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|
9.
|
Commitments and
Contingent Liabilities
|
Energy Purchases,
Energy Sales and Other Commitments
Energy Purchase
Commitments
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.
Legal
Matters
PPL Electric is involved in legal proceedings, claims and
litigation in the ordinary course of business. PPL Electric
cannot predict the outcome of such matters, or whether such
matters may result in material liabilities.
Regulatory
Issues
PJM Capacity
Litigation
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 JusticeAntitrust
Division, the FERC and the Pennsylvania Attorney General
conducted investigations regarding PPLs PJM capacity
market transactions in early 2001 and did not find any reason to
take action against PPL and any of its subsidiaries, including
PPL Electric.
A-42
PJM
Billing
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
Electrics Elroy substation transformer as belonging to
PECO and that, as a consequence, during times of congestion,
PECOs bills for transmission congestion from PJM
erroneously reflected energy that PPL Electric took from the
Elroy substation and used to serve PPL Electrics 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
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
FERCs acceptance was conditioned upon reimbursement to
PECO through a single credit to PECOs monthly PJM bill and
a corresponding charge on PPL Electrics 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 PECOs
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 Electric reduced the
recorded loss accrual by $5 million 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.
A-43
Energy Policy Act
of 2005
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:
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|
|
|
|
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 Electric 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 Electric
cannot predict the impact that compliance with the Reliability
Standards will have on PPL Electric, including its capital and
operating expenditures, but such compliance costs could be
significant.
PPL Electric also cannot predict with certainty the impact of
the other provisions of the 2005 Energy Act and any related
regulations on the Company.
Environmental
Matters
Due to the environmental issues discussed below or other
environmental matters, PPL Electric 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 Electric also may incur capital
expenditures or operating expenses in amounts which are not now
determinable, but could be significant.
Superfund and
Other Remediation
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 Electrics 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.
A-44
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 had accrued
$2 million, representing the estimated amounts it 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 Electric also could incur other
non-remediation costs at sites included in the consent orders or
other contaminated sites, the costs of which are not now
determinable, but could be significant.
The EPA is evaluating the risks associated with naphthalene, a
chemical by-product of coal gas manufacturing operations. As a
result of the EPAs evaluation, individual states may
establish stricter standards for water quality and soil
clean-up.
This could require several PPL subsidiaries, including PPL
Electric, to take more extensive assessment and remedial actions
at former coal gas manufacturing facilities. The costs to PPL
Electric of complying with any such requirements are not now
determinable, but could be significant.
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 Electric that cannot
be estimated at this time.
Electric and
Magnetic Fields
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 Electric believes the
current efforts to determine whether EMFs cause adverse health
effects should continue and is taking steps to reduce EMFs,
where practical, in the design of new transmission and
distribution facilities. PPL Electric is unable to predict what
effect, if any, the EMF issue might have on its operations and
facilities either in the U.S. or abroad, and the associated
cost, or what, if any, liabilities it might incur related to the
EMF issue.
Other
Guarantees and
Other Assurances
In the normal course of business, PPL Electric enters 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 of PPL Electric.
PPL Electric provides certain guarantees that are required to be
disclosed in accordance with FIN 45, Guarantors
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. PPL Electric had one
guarantee within the scope of FIN 45 as of
December 31, 2006. PPL Electrics exposure was
$7 million related to a portion of an unconsolidated
entitys debt. This amount represents the estimated maximum
potential amount of future payments that could be required to be
made under the guarantee and reflects principal payments only.
In September 2006, PPLs subsidiaries terminated master
lease agreements under which they leased equipment. Therefore,
the related residual value guarantees that had been previously
disclosed for PPL Electric no longer exist. See Note 6 for
additional information.
PPL Electric and its 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
A-45
estimated. Historically, PPL Electric and its 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:
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|
|
|
PPL Electrics leasing arrangements, including those
discussed above, contain certain indemnifications in favor of
the lessors (e.g., tax and environmental matters).
|
|
|
|
In connection with its issuances of securities, PPL Electric
engages underwriters, purchasers and purchasing agents to whom
it provides indemnification for damages incurred by such parties
arising from PPL Electrics material misstatements or
omissions in the related offering documents. In addition, in
connection with these securities offerings and other financing
transactions, PPL Electric also engages trustees or custodial,
escrow or other agents to act for the benefit of the investors
or to provide other agency services. PPL Electric typically
provides indemnification to these agents for any liabilities or
expenses incurred by them in performing their obligations.
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|
|
|
In connection with certain of their credit arrangements, PPL
Electric provides 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 Electrics
activities as servicer with respect to the pledged accounts
receivable and any dispute by PPL Electrics customers with
respect to payment of the accounts receivable.
|
PPL, on behalf of itself and certain of its subsidiaries,
including PPL Electric, 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.
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|
10.
|
Related Party
Transactions
|
PLR
Contracts
PPL Electric has power sales agreements with PPL EnergyPlus,
effective July 2000 and January 2002, to supply all of PPL
Electrics 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
Energy purchases from affiliate.
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 Supplys 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 from affiliate. 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.
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 Prepayment on PLR
energy supply from affiliate.
A-46
NUG
Purchases
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
Wholesale electric to affiliate.
Allocations of
Corporate Service Costs
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 Electric, including
amounts applied to accounts that are further distributed between
capital and expense.
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|
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|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Direct/Allocated Costs
|
|
$
|
133
|
|
|
$
|
121
|
|
|
$
|
119
|
|
Intercompany
Borrowings
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 Incomenet 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%.
Transmission
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
Electrics franchised territory in eastern and central
Pennsylvania. PJM in turn pays PPL Electric for the use of its
transmission system.
Other
See Note 1 for a discussion regarding the intercompany tax
sharing policy. See Notes 1 and 5 for discussions regarding
capital transactions. See Note 8 for discussions regarding
intercompany allocations of pension and other postretirement
benefits.
A-47
The breakdown of Other Incomenet was:
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|
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|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliated interest income
(Note 10)
|
|
$
|
20
|
|
|
$
|
14
|
|
|
$
|
3
|
|
Interest incomeIRS settlement
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Other interest income
|
|
|
12
|
|
|
|
7
|
|
|
|
5
|
|
Miscellaneous
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
33
|
|
|
|
23
|
|
|
|
16
|
|
Other Deductions
|
|
|
2
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Incomenet
|
|
$
|
31
|
|
|
$
|
21
|
|
|
$
|
15
|
|
|
|
|
|
|
|
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|
|
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PPL Electric has an exposure to PPL Energy Supply under the
long-term contract for PPL EnergyPlus to supply PPL
Electrics PLR load, as described in Note 10. 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
Electrics total exposure.
The following table details the components of restricted cash by
type.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Collateral for letters of
credit (a)
|
|
$
|
42
|
|
|
$
|
42
|
|
Miscellaneous
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cashcurrent
|
|
|
43
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
PPL Transition Bond Company
Indenture reserves (b)
|
|
|
33
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total restricted cash
|
|
$
|
76
|
|
|
$
|
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 5 for
further discussion on the asset-backed commercial paper program. |
|
(b) |
|
Credit enhancement for PPL Transition Bond Companys
$2.4 billion
Series 1999-1
Bonds to protect against losses or delays in scheduled payments. |
|
|
14.
|
Acquired
Intangible Assets
|
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
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
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.
A-48
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.
The annual provision for amortization has been computed
principally in accordance with a
64-year
weighted-average asset life.
|
|
15.
|
Asset Retirement
Obligations
|
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.
|
|
16.
|
Variable Interest
Entities
|
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 Electric adopted FIN 46
effective December 31, 2003, for entities created before
February 1, 2003, that are considered to be SPEs. This
adoption did not have any impact on PPL Electric. Also, as
permitted by FIN 46(R), PPL Electric 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 any impact on the
results of PPL Electric.
|
|
17.
|
New Accounting
Standards
|
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 Electric 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.
The primary impact of the adoption of FIN 48 is expected to
be a reclassification between current liabilities and noncurrent
liabilities. PPL Electric currently estimates that current
liabilities will decrease and noncurrent liabilities will
increase between $10$25 million.
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 Electric expects
that the adoption of FIN 48 will result in greater
volatility in its effective tax rate. PPL Electric does not
expect that the adoption of FIN 48 will result in an
inability to comply with financial covenants under its debt
agreements.
A-49
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 Electric adopted FSP No. FIN 46(R)-6
effective July 1, 2006. PPL Electric 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 Electric. 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 misstatements 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 companys 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 Electric adopted SAB 108 effective December 31,
2006. PPL Electric 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
Electric.
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 Electric adopted
SFAS 123(R) effective January 1, 2006. PPL Electric
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
Electric, since PPL Electric adopted the fair value method of
accounting for stock-based compensation, as described by
SFAS 123, effective January 1, 2003. See Note 7
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 Electric adopted SFAS 155 effective January 1,
2007. The initial adoption did not have an impact on PPL
Electric.
A-50
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 Electric 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 Electric must adopt SFAS 157
no later than January 1, 2008. PPL Electric is 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 Electric adopted the recognition and measurement date
provisions of SFAS 158 effective December 31, 2006.
See Note 8 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
Liabilitiesincluding 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 Electric must adopt SFAS 159 no later than
January 1, 2008. Early adoption is permitted as of
January 1, 2007, for PPL Electric provided that PPL
Electric (i) has not issued interim financial statements
for 2007 and chooses to early adopt SFAS 159 on or before
April 30, 2007, and (ii) also elects to apply the
provisions of Statement 157.
PPL Electric is 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.
A-51
SELECTED
FINANCIAL AND OPERATING DATA
PPL Electric Utilities Corporation (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Income
Itemsmillions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Itemsmillions (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipmentnet
|
|
|
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
|
|
Shareowners 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
deliveredmillions 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
PLRmillions 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 Managements 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. |
A-52
QUARTERLY
FINANCIAL DATA (Unaudited)
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 Electrics 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. |
A-53
EXECUTIVE
OFFICERS OF PPL ELECTRIC UTILITIES CORPORATION
Officers of PPL Electric are elected annually by its Board of
Directors to serve at the pleasure of the Board. 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.
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Positions
Held During the Past Five Years
|
|
Dates
|
|
John F. Sipics (a)
|
|
|
58
|
|
|
President
|
|
October 2003December 2006
|
|
|
|
|
|
|
Vice PresidentAsset
Management
|
|
August 2001September 2003
|
|
|
|
|
|
|
|
|
|
Paul A. Farr (b)
|
|
|
39
|
|
|
Senior Vice
PresidentFinancial
|
|
January 2006present
|
|
|
|
|
|
|
Senior Vice
PresidentFinancial and Controller
|
|
August 2005January 2006
|
|
|
|
|
|
|
Vice President and Controller
|
|
August 2004July 2005
|
|
|
|
|
|
|
Senior Vice PresidentPPL
Global
|
|
January 2004August 2004
|
|
|
|
|
|
|
Vice PresidentInternational
Operations-PPL Global
|
|
June 2002January 2004
|
|
|
|
|
|
|
Vice PresidentPPL Global
|
|
October 2001June 2002
|
|
|
|
|
|
|
|
|
|
David G. DeCampli (c)
|
|
|
49
|
|
|
Senior Vice
PresidentTransmission and Distribution Engineering and
Operations
|
|
December 2006present
|
|
|
|
|
|
|
Vice PresidentAsset
Investment Strategy and DevelopmentExelon Energy
Delivery-Exelon Corp.
|
|
April 2004December 2006
|
|
|
|
|
|
|
Vice President and Chief
Integration OfficerExelon Energy DeliveryExelon Corp.
|
|
June 2003March 2004
|
|
|
|
|
|
|
Vice President Distribution
OperationsExelon Energy DeliveryExelon Corp.
|
|
April 2002June 2003
|
|
|
|
|
|
|
Vice PresidentMerger
Implementation & Operations StrategyExelon Energy
Delivery-Exelon Corp.
|
|
October 2000April 2002
|
|
|
|
|
|
|
|
|
|
James E. Abel
|
|
|
55
|
|
|
Treasurer
|
|
July 2000present
|
|
|
|
|
|
|
|
|
|
J. Matt Simmons, Jr.
|
|
|
41
|
|
|
Vice President and Controller
|
|
January 2006present
|
|
|
|
|
|
|
Vice President-Finance and
ControllerDuke Energy Americas
|
|
October 2003January 2006
|
|
|
|
|
|
|
Chief Risk and Chief Accounting
OfficerReliant Energy Europe
|
|
February 2000October 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, and held
this position through March 31, 2007. David G.
DeCampli was elected President of PPL Electric effective
April 1, 2007. |
|
(b) |
|
Effective March 30, 2007, Mr. Farr resigned from this
position. |
|
(c) |
|
Effective December 4, 2006, Mr. DeCampli was appointed
Senior Vice President-Transmission and Distribution Engineering
and Operations, reporting to the President. Mr. DeCampli
was elected President of PPL Electric effective April 1,
2007. |
A-54
SHAREOWNER AND
INVESTOR INFORMATION
Annual Meeting: The 2007 annual meeting of
shareowners of PPL Electric will be held on Thursday,
May 24, 2007, at 9 a.m., at the offices of the company
at Two North Ninth Street, Allentown, Pennsylvania.
Information Statement Material: An information
statement and notice of PPL Electrics annual meeting is
mailed to all shareowners of record as of February 28, 2007.
Dividends: Subject to the declaration of
dividends on 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 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 Electric
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.
PPLs Web Site
(www.pplweb.com): Shareowners can access PPL
Electric 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
Electric or information concerning:
Lost Dividend Checks
Bond Interest Checks
Direct Deposit of Dividends
Bondholder Information
Please contact:
ManagerPPL 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:
PPLs Dividend Reinvestment Plan
Stock Transfers
Lost Stock Certificates
Certificate Safekeeping
A-55
Please contact:
Wells Fargo Bank, N.A.
Shareowner
ServicesSM
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 Electric preferred stock and
preference stock reinvested in PPL common stock instead of
receiving the dividend by check.
|
|
|
Listed Securities:
|
|
Fiscal Agents: |
|
|
|
New York Stock Exchange
|
| Stock Transfer Agent and Registrar; |
|
| Dividend Reinvestment Plan Agent |
PPL Corporation:
|
| Wells Fargo Bank, N.A. |
Common Stock (Code: PPL)
|
| Shareowner
ServicesSM |
|
| 161 North Concord Exchange |
PPL Electric Utilities Corporation:
|
| South St. Paul, MN 55075-1139 |
41/2%
Preferred Stock
|
| |
(Code: PPLPRB)
|
| Toll Free: 1-866-280-0245 |
4.40% Series Preferred Stock
|
| Outside U.S.:
651-453-2129 |
(Code: PPLPRA)
|
| |
|
| Dividend Disbursing Office |
Philadelphia Stock Exchange
|
| PPL Investor Services |
|
| Two North Ninth Street (GENTW8) |
PPL Corporation:
|
| Allentown, PA 18101 |
Common Stock (Code: PPL)
|
| |
|
| 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
|
A-56
PPL Electric Utilities Corporation, PPL Corporation and PPL
Energy Supply, LLC file a joint Annual Report on
Form 10-K
with the Securities and Exchange Commission. The
Form 10-K
for 2006 is available without charge by writing to the Investor
Services Department at Two North Ninth Street (GENTW8),
Allentown, PA 18101, by calling
1-800-345-3085,
or by accessing it through the Investor Center page of PPL
Corporations Internet Web site identified below.
For the latest information on PPL Electric Utilities Corporation
and PPL Corporation,
visit our location on the Internet at
http://www.pplweb.com
Admission
Ticket
April 30, 2007
PPL Electric
Utilities Corporation
Annual Meeting of Shareowners
9 a.m., May 24, 2007
PPL Electric Utilities Corporation
Two North Ninth Street
Allentown, Pennsylvania
Dear Shareowner of Preferred Stock:
It is a pleasure to invite you to attend the 2007 Annual Meeting
of Shareowners, which will be held at 9 a.m. on Thursday,
May 24, 2007, at the offices of PPL Electric Utilities
Corporation, Two North Ninth Street, Allentown. Detailed
information as to the business to be transacted at the meeting
is contained in the accompanying Notice of Annual Meeting and
Information Statement.
The accompanying Notice of Annual Meeting and Information
Statement is being provided to you for information purposes only.
As detailed in the Information Statement, votes from holders of
Preferred and Series Preferred Stock can have no effect on
the outcome of matters under consideration at the Annual
Meeting. This is because PPL Corporation owns all of the
outstanding shares of common stock of PPL Electric Utilities
Corporation, which represents 99% of the voting shares.
Consequently, in an effort to avoid unnecessary expense, we are
not soliciting proxies from such holders. Preferred and
Series Preferred holders are, of course, welcome to attend
the meeting on May 24.
We hope you will be able to attend in person. If you plan to
attend the meeting, please bring this admission ticket with you
to the meeting.
Sincerely,
James H. Miller
Chairman