form10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2013
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________

Commission File
Number
Registrant; State of Incorporation;
Address and Telephone Number
IRS Employer
Identification No.
     
1-11459
PPL Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA  18101-1179
(610) 774-5151
23-2758192
     
1-32944
PPL Energy Supply, LLC
(Exact name of Registrant as specified in its charter)
(Delaware)
Two North Ninth Street
Allentown, PA  18101-1179
(610) 774-5151
23-3074920
     
1-905
PPL Electric Utilities Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA  18101-1179
(610) 774-5151
23-0959590
     
333-173665
LG&E and KU Energy LLC
(Exact name of Registrant as specified in its charter)
(Kentucky)
220 West Main Street
Louisville, KY  40202-1377
(502) 627-2000
20-0523163
     
1-2893
Louisville Gas and Electric Company
(Exact name of Registrant as specified in its charter)
(Kentucky)
220 West Main Street
Louisville, KY  40202-1377
(502) 627-2000
61-0264150
     
1-3464
Kentucky Utilities Company
(Exact name of Registrant as specified in its charter)
(Kentucky and Virginia)
One Quality Street
Lexington, KY  40507-1462
(502) 627-2000
61-0247570
 
 
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

 
PPL Corporation
Yes  X   
No        
  
 
PPL Energy Supply, LLC
Yes  X   
No        
  
 
PPL Electric Utilities Corporation
Yes  X   
No        
  
 
LG&E and KU Energy LLC
Yes  X   
No        
  
 
Louisville Gas and Electric Company
Yes  X  
No        
  
 
Kentucky Utilities Company
Yes  X   
No        
  

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files).

 
PPL Corporation
Yes  X   
No        
  
 
PPL Energy Supply, LLC
Yes  X   
No        
  
 
PPL Electric Utilities Corporation
Yes  X   
No        
  
 
LG&E and KU Energy LLC
Yes  X   
No        
  
 
Louisville Gas and Electric Company
Yes  X   
No        
  
 
Kentucky Utilities Company
Yes  X   
No        
  

Indicate by check mark whether the registrants are large accelerated filers, accelerated filers, non-accelerated filers, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

   
Large accelerated
filer
Accelerated
filer
Non-accelerated
filer
Smaller reporting
company
 
PPL Corporation
[ X ]
[     ]
[     ]
[     ]
 
PPL Energy Supply, LLC
[     ]
[     ]
[ X ]
[     ]
 
PPL Electric Utilities Corporation
[     ]
[     ]
[ X ]
[     ]
 
LG&E and KU Energy LLC
[     ]
[     ]
[ X ]
[     ]
 
Louisville Gas and Electric Company
[     ]
[     ]
[ X ]
[     ]
 
Kentucky Utilities Company
[     ]
[     ]
[ X ]
[     ]

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

 
PPL Corporation
Yes        
No  X   
  
 
PPL Energy Supply, LLC
Yes        
No  X   
  
 
PPL Electric Utilities Corporation
Yes        
No  X   
  
 
LG&E and KU Energy LLC
Yes        
No  X   
  
 
Louisville Gas and Electric Company
Yes        
No  X   
  
 
Kentucky Utilities Company
Yes        
No  X   
  

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 
PPL Corporation
Common stock, $0.01 par value, 630,249,634 shares outstanding at October 25, 2013.
     
 
PPL Energy Supply, LLC
PPL Corporation indirectly holds all of the membership interests in PPL Energy Supply, LLC.
     
 
PPL Electric Utilities Corporation
Common stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at October 25, 2013.
     
 
LG&E and KU Energy LLC
PPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.
     
 
Louisville Gas and Electric Company
Common stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at October 25, 2013.
     
 
Kentucky Utilities Company
Common stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at October 25, 2013.

This document is available free of charge at the Investor Center on PPL Corporation's website at www.pplweb.com.  However, information on this website does not constitute a part of this Form 10-Q.
 
 

PPL CORPORATION
PPL ENERGY SUPPLY, LLC
PPL ELECTRIC UTILITIES CORPORATION
LG&E AND KU ENERGY LLC
LOUISVILLE GAS AND ELECTRIC COMPANY
KENTUCKY UTILITIES COMPANY

FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2013


Table of Contents

This combined Form 10-Q is separately filed by the following Registrants in their individual capacity:  PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company.  Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant, except that information under "Forward-Looking Information" relating to subsidiaries of PPL Corporation is also attributed to PPL Corporation and information relating to the subsidiaries of LG&E and KU Energy LLC is also attributed to LG&E and KU Energy LLC.

Unless otherwise specified, references in this Report, individually, to PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company are references to such entities directly or to one or more of their subsidiaries, as the case may be, the financial results of which subsidiaries are consolidated into such Registrants' financial statements in accordance with GAAP.  This presentation has been applied where identification of particular subsidiaries is not material to the matter being disclosed, and to conform narrative disclosures to the presentation of financial information on a consolidated basis.
   
Page
     
i 
  
1
  
PART I.  FINANCIAL INFORMATION
    
 
Item 1.  Financial Statements
    
   
PPL Corporation and Subsidiaries
    
     
3
  
     
4
  
     
5
  
     
6
  
     
8
  
   
PPL Energy Supply, LLC and Subsidiaries
    
     
9
  
     
10
  
     
11
  
     
12
  
     
14
  
   
PPL Electric Utilities Corporation and Subsidiaries
    
     
16
  
     
17
  
     
18
  
     
20
  
   
LG&E and KU Energy LLC and Subsidiaries
    
     
22
  
     
23
  
     
24
  
     
26
  

 
 
 


   
Louisville Gas and Electric Company
  
     
28
     
29
     
30
     
32
   
Kentucky Utilities Company
  
     
34
     
35
     
36
     
38
 
Combined Notes to Condensed Financial Statements (Unaudited)
  
   
39
   
39
   
40
   
41
   
42
   
46
   
50
   
53
   
56
   
57
   
71
   
73
   
74
   
82
   
94
   
94
   
95
   
96
   
98
 
Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations
  
   
99
     
99
     
101
     
102
       
102
       
103
       
104
   
Results of Operations
107
     
108
     
120
     
122
     
124
     
126
     
128
   
130
     
130
     
135
     
139
     
139
     
139
     
139
   
142
   
142

 
 
 


 
143
 
143
PART II.  OTHER INFORMATION
  
 
144
 
144
 
144
 
144
 
144
 
145
147
148
 
154
 
166


 
 
 





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GLOSSARY OF TERMS AND ABBREVIATIONS
PPL Corporation and its subsidiaries


Central Networks - collectively, Central Networks East plc, Central Networks Limited and certain other related assets and liabilities.  On April 1, 2011, PPL WEM Holdings plc (formerly WPD Investment Holdings Limited) purchased all of the outstanding ordinary share capital of these companies from E.ON AG subsidiaries.  Central Networks West plc (subsequently renamed Western Power Distribution (West Midlands) plc), wholly owned by Central Networks Limited (subsequently renamed WPD Midlands Holdings Limited), and Central Networks East plc (subsequently renamed Western Power Distribution (East Midlands) plc) are British regional electricity distribution utility companies.

Kentucky Registrants - LKE, LG&E and KU, collectively, SEC Registrants that directly or through subsidiaries own or control operations primarily in Kentucky.

KU - Kentucky Utilities Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky.

LG&E - Louisville Gas and Electric Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas in Kentucky.

LKE - LG&E and KU Energy LLC, a subsidiary of PPL and the parent of LG&E, KU and other subsidiaries.

LKS - LG&E and KU Services Company, a subsidiary of LKE that provides services to LKE and its subsidiaries.

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

PPL Brunner Island - PPL Brunner Island, LLC, a subsidiary of PPL Generation that owns generating operations in Pennsylvania.

PPL Capital Funding - PPL Capital Funding, Inc., a financing subsidiary of PPL that provides financing for the operations of PPL and certain subsidiaries.

PPL Electric - PPL Electric Utilities Corporation, a public utility subsidiary of PPL engaged in the regulated transmission and distribution of electricity in its Pennsylvania service area and that provides electric supply to its retail customers as a PLR.

PPL Energy Funding - PPL Energy Funding Corporation, a subsidiary of PPL and the parent holding company of PPL Energy Supply, PPL Global and other subsidiaries.

PPL EnergyPlus - PPL EnergyPlus, LLC, a subsidiary of PPL Energy Supply that markets and trades wholesale and retail electricity and gas, and supplies energy and energy services in competitive markets.

PPL Energy Supply - PPL Energy Supply, LLC, a subsidiary of PPL Energy Funding and the parent company of PPL Generation, PPL EnergyPlus and other subsidiaries.

PPL Generation - PPL Generation, LLC, a subsidiary of PPL Energy Supply that owns and operates U.S. generating facilities through various subsidiaries.

PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Funding that primarily, through its subsidiaries, owns and operates WPD, PPL's regulated electricity distribution businesses in the U.K.

PPL Ironwood - PPL Ironwood, LLC, an indirect subsidiary of PPL Generation that owns generating operations in Pennsylvania.

PPL Montana - PPL Montana, LLC, an indirect subsidiary of PPL Generation that generates electricity for wholesale sales in Montana and the Pacific Northwest.

PPL Montour - PPL Montour, LLC, a subsidiary of PPL Generation that owns generating operations in Pennsylvania.

 
i
 


PPL Services - PPL Services Corporation, a subsidiary of PPL that provides services to PPL and its subsidiaries.

PPL Susquehanna - PPL Susquehanna, LLC, a subsidiary of PPL Generation that owns a nuclear-powered generating station.

PPL WEM - PPL WEM Holdings plc (formerly WPD Investment Holdings Limited), an indirect, U.K. subsidiary of PPL Global.  PPL WEM indirectly owns both WPD (East Midlands) and WPD (West Midlands).

PPL WW - PPL WW Holdings Limited (formerly Western Power Distribution Holdings Limited), an indirect, U.K. subsidiary of PPL Global.  PPL WW Holdings indirectly owns WPD (South Wales) and WPD (South West).

Registrant(s) - refers to the Registrants named on the cover of this Report (each a "Registrant" and collectively, the "Registrants").

Subsidiary Registrant(s) - the Registrants that are subsidiaries of PPL.  PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

WPD - refers to PPL WW and PPL WEM and their subsidiaries.

WPD (East Midlands) - Western Power Distribution (East Midlands) plc, a British regional electricity distribution utility company.  The company (formerly Central Networks East plc) was acquired and renamed in April 2011.

WPD Midlands - refers to WPD (East Midlands) and WPD (West Midlands), collectively.

WPD (South Wales) - Western Power Distribution (South Wales) plc, a British regional electricity distribution utility company.

WPD (South West) - Western Power Distribution (South West) plc, a British regional electricity distribution utility company.

WPD (West Midlands) - Western Power Distribution (West Midlands) plc, a British regional electricity distribution utility company.  The company (formerly Central Networks West plc) was acquired and renamed in April 2011.

WKE - Western Kentucky Energy Corp., a subsidiary of LKE that leased certain non-utility generating plants in western Kentucky until July 2009.


Other terms and abbreviations

£ - British pound sterling.

2010 Equity Unit(s) - a PPL equity unit, issued in June 2010, consisting of a 2010 Purchase Contract and, initially, a 5.0% undivided beneficial ownership interest in $1,000 principal amount of PPL Capital Funding 4.625% Junior Subordinated Notes due 2018.

2010 Purchase Contract(s) - a contract that is a component of a 2010 Equity Unit requiring holders to purchase shares of PPL common stock on or prior to July 1, 2013.

2011 Equity Unit(s) - a PPL equity unit, issued in April 2011, consisting of a 2011 Purchase Contract and, initially, a 5.0% undivided beneficial ownership interest in $1,000 principal amount of PPL Capital Funding 4.32% Junior Subordinated Notes due 2019.

2011 Purchase Contract(s) - a contract that is a component of a 2011 Equity Unit requiring holders to purchase shares of PPL common stock on or prior to May 1, 2014.

2012 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2012.

 
ii
 


Act 11 - Act 11 of 2012 that became effective on April 16, 2012.  The Pennsylvania legislation authorizes the PUC to approve two specific ratemaking mechanisms:  the use of a fully projected future test year in base rate proceedings and, subject to certain conditions, a DSIC.

Act 129 - Act 129 of 2008 that became effective in October 2008.  The law amends the Pennsylvania Public Utility Code and creates an energy efficiency and conservation program and smart metering technology requirements, adopts new PLR electricity supply procurement rules, provides remedies for market misconduct and changes the existing Alternative Energy Portfolio Standard.

AEPS - Alternative Energy Portfolio Standard.

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 costs.

AOCI - accumulated other comprehensive income or loss.

ARO - asset retirement obligation.

Baseload generation - includes the output provided by PPL's nuclear, coal, hydroelectric and qualifying facilities.

Basis - when used in the context of derivatives and commodity trading, the commodity price differential between two locations, products or time periods.

CAIR - Clean Air Interstate Rule.

Cane Run Unit 7 - a combined-cycle natural gas unit under construction in Kentucky, jointly owned by LG&E and KU, which is expected to provide additional electric generating capacity of 141 MW and 499 MW to LG&E and KU by 2015.

CCR - Coal Combustion Residuals.  CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.

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

COLA - license application for a combined construction permit and operating license from the NRC for a nuclear plant.

CSAPR - Cross-State Air Pollution Rule.

Customer Choice Act - the Pennsylvania Electricity Generation Customer Choice and Competition Act, legislation enacted to restructure the state's electric utility industry to create retail access to a competitive market for generation of electricity.

Depreciation not normalized - the flow-through income tax impact related to the state regulatory treatment of depreciation-related timing differences.

DPCR4 - Distribution Price Control Review 4, the U.K. 5-year rate review period applicable to WPD that commenced April 1, 2005.

DRIP - Dividend Reinvestment and Direct Stock Purchase Plan.

DSIC - Distribution System Improvement Charge authorized under Act 11, which is an alternative ratemaking mechanism providing more-timely cost recovery of qualifying distribution system capital expenditures.

DSM - Demand Side Management.  Pursuant to Kentucky Revised Statute 278.285, the KPSC may determine the reasonableness of DSM plans proposed by any utility under its jurisdiction.  Proposed DSM mechanisms may seek full recovery of DSM programs and revenues lost by implementing those programs and/or incentives designed to provide financial rewards to the utility for implementing cost-effective DSM programs.  The cost of such programs shall be assigned only to the class or classes of customers which benefit from the programs.

 
iii
 


ECR - Environmental Cost Recovery.  Pursuant to Kentucky Revised Statute 278.183, Kentucky electric utilities are entitled to the current recovery of costs of complying with the Clean Air Act, as amended, and those federal, state or local environmental requirements which apply to coal combustion and by-products from the production of energy from coal.

EEI - Electric Energy, Inc., owns and operates a coal-fired plant and a natural gas facility in southern Illinois.  KU's 20% ownership interest in EEI is accounted for as an equity method investment.

EPA - Environmental Protection Agency, a U.S. government agency.

EPS - earnings per share.

Equity Units - refers collectively to the 2011 and 2010 Equity Units.

ESOP - Employee Stock Ownership Plan.

FERC - Federal Energy Regulatory Commission, the federal agency that regulates, among other things, interstate transmission and wholesale sales of electricity, hydroelectric power projects and related matters.

Fitch - Fitch, Inc., a credit rating agency.

FTRs - financial transmission rights, which are financial instruments established to manage price risk related to electricity transmission congestion that entitle the holder to receive compensation or require the holder to remit payment for certain congestion-related transmission charges based on the level of congestion between two pricing locations (source and sink).

GAAP - Generally Accepted Accounting Principles in the U.S.

GBP - British pound sterling.

GHG - greenhouse gas(es).

GLT - Gas Line Tracker.  The KPSC approved LG&E's recovery of costs associated with gas service lines, gas risers, leak mitigation, and gas main replacements.  Rate recovery became effective on January 1, 2013.

If-Converted Method - A method applicable for calculating diluted EPS for a company with convertible debt outstanding.  The method is applied as follows: Interest charges (after-tax) applicable to the convertible debt are added back to net income and the convertible debt is assumed to have been converted to equity at the beginning of the period and the resulting common shares are treated as outstanding shares.  Both adjustments are made only for purposes of calculating diluted EPS.  This method was applied to PPL's Equity Units prior to settlement beginning in the first quarter of 2013.

Intermediate and peaking generation - includes the output provided by PPL's competitive oil- and natural gas-fired units.

Ironwood Acquisition - In April 2012, PPL Ironwood Holdings, LLC, an indirect, wholly owned subsidiary of PPL Energy Supply, completed the acquisition from a subsidiary of The AES Corporation of all of the equity interests of AES Ironwood, L.L.C. (subsequently renamed PPL Ironwood, LLC) and AES Prescott, L.L.C. (subsequently renamed PPL Prescott, LLC), which together own and operate, a natural gas-fired power plant in Lebanon, Pennsylvania.

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

ISO - Independent System Operator.

KPSC - Kentucky Public Service Commission, the state agency that has jurisdiction over the regulation of rates and service of utilities in Kentucky.

kV - Kilovolt

LIBOR - London Interbank Offered Rate.

LTIIP - Long Term Infrastructure Improvement Plan.
 
iv
 
MATS - Mercury and Air Toxics Standards.

MDEQ - Montana Department of Environmental Quality.

MEIC - Montana Environmental Information Center.

MMBtu - One million British Thermal Units.

Montana Power - The Montana Power Company, a Montana-based company that sold its generating assets to PPL Montana in December 1999.  Through a series of transactions consummated during the first quarter of 2002, Montana Power sold its electricity delivery business to NorthWestern.

Moody's - Moody's Investors Service, Inc., a credit rating agency.

MW - megawatt, one thousand kilowatts.

MWh - megawatt-hour, one thousand kilowatt-hours.

NDT - PPL Susquehanna's nuclear plant decommissioning trust.

NERC - North American Electric Reliability Corporation.

NorthWestern - NorthWestern Corporation, a Delaware corporation, and successor in interest to Montana Power's electricity delivery business, including Montana Power's rights and obligations under contracts with PPL Montana.

NPNS - the normal purchases and normal sales exception as permitted by derivative accounting rules.  Derivatives that qualify for this exception receive accrual accounting treatment.

NRC - Nuclear Regulatory Commission, the U.S. federal agency that regulates nuclear power facilities.

OCI - other comprehensive income or loss.

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

Opacity - the degree to which emissions reduce the transmission of light and obscure the view of an object in the background.  There are emission regulations that limit the opacity of power plant stack gas emissions.

OVEC - Ohio Valley Electric Corporation, located in Piketon, Ohio, an entity in which LKE indirectly owns an 8.13% interest (consists of LG&E's 5.63% and KU's 2.50% interests), which is accounted for as a cost-method investment.  OVEC owns and operates two coal-fired power plants, the Kyger Creek plant in Ohio and the Clifty Creek plant in Indiana, with combined nameplate capacities of 2,390 MW.

PADEP - the Pennsylvania Department of Environmental Protection, a state government agency.

PJM - PJM Interconnection, L.L.C., operator of the electric transmission network and electric energy market in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

PLR - Provider of Last Resort, the role of PPL Electric in providing default electricity supply within its delivery area to retail customers who have not chosen to select an alternative electricity supplier under the Customer Choice Act.

PP&E - property, plant and equipment.

PUC - Pennsylvania Public Utility Commission, the state agency that regulates certain ratemaking, services, accounting and operations of Pennsylvania utilities.

Purchase Contract(s) - refers collectively to the 2010 and 2011 Purchase Contracts (which are components of the 2010 and 2011 Equity Units.)
 
v
 
RAV - regulatory asset value.  This term, used within the U.K. regulatory environment, is also commonly known as RAB or regulatory asset base.

RECs - renewable energy credits.

Regional Transmission Line Expansion Plan - PJM conducts a long-range Regional Transmission Expansion Planning process that identifies what changes and additions to the grid are needed to ensure future needs are met for both the reliability and the economic performance of the grid.  Under PJM agreements, transmission owners are obligated to build transmission projects assigned to them by the PJM Board that are needed to maintain reliability standards.

Regulation S-X - SEC regulation governing the form and content of and requirements for financial statements required to be filed pursuant to the federal securities laws.

RFC - Reliability First Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the reliability of the bulk power systems throughout North America.

RMC - Risk Management Committee.

S&P - Standard & Poor's Ratings Services, a credit rating agency.

Sarbanes-Oxley - Sarbanes-Oxley Act of 2002, which sets requirements for management's assessment of internal controls for financial reporting and requires an independent auditor to make its own assessment.

SCR - selective catalytic reduction, a pollution control process for the removal of nitrogen oxide from exhaust gases.

Scrubber - an air pollution control device that can remove particulates and/or gases (primarily sulfur dioxide) from exhaust gases.

SEC - the U.S. Securities and Exchange Commission, a U.S. government agency primarily responsible to protect investors and maintain the integrity of the securities markets.

SERC - SERC Reliability Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the reliability of the bulk power systems throughout North America.

SIFMA Index - the Securities Industry and Financial Markets Association Municipal Swap Index.

Smart meter - an electric meter that utilizes smart metering technology.

Smart metering technology - technology that can measure, among other things, time of electricity consumption to permit offering rate incentives for usage during lower cost or demand intervals.  The use of this technology also has the potential to strengthen network reliability.

SMGT - Southern Montana Electric Generation & Transmission Cooperative, Inc., a Montana cooperative and purchaser of electricity under a long-term supply contract with PPL EnergyPlus that was terminated effective April 1, 2012.

SNCR - selective non-catalytic reduction, a pollution control process for the removal of nitrogen oxide from exhaust gases using ammonia.

Spark Spread - a measure of gross margin representing the price of power on a per MWh basis less the equivalent measure of the natural gas cost to produce that power.  This measure is used to describe the gross margin of PPL and its subsidiaries' competitive natural gas-fired generating fleet.  This term is also used to describe a derivative contract in which PPL and its subsidiaries sell power and buy natural gas on a forward basis in the same contract.

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

TC2 - Trimble County Unit 2, a coal-fired plant located in Kentucky with a net summer capacity of 732 MW.  LKE indirectly owns a 75% interest (consists of LG&E's 14.25% and KU's 60.75% interests) in TC2 or 549 MW of the capacity.

 
vi
 


Tolling agreement - agreement whereby the owner of an electric generating facility agrees to use that facility to convert fuel provided by a third party into electricity for delivery back to the third party.

VaR - value-at-risk, a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.

VIE - variable interest entity.

Volumetric risk - the risk that the actual load volumes provided under full-requirement sales contracts could vary significantly from forecasted volumes.

VSCC - Virginia State Corporation Commission, the state agency that has jurisdiction over the regulation of Virginia corporations, including utilities.

 
vii
 




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viii
 

FORWARD-LOOKING INFORMATION

Statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical fact are "forward-looking statements" within the meaning of the federal securities laws.  Although the Registrants believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct.  Forward-looking statements are subject to many risks and uncertainties, and actual results may differ materially from the results discussed in forward-looking statements.  In addition to the specific factors discussed in each Registrant's 2012 Form 10-K and in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q, the following are among the important factors that could cause actual results to differ materially from the forward-looking statements.

·
fuel supply cost and availability;
·
continuing ability to recover fuel costs and environmental expenditures in a timely manner at LG&E and KU, and natural gas supply costs at LG&E;
·
weather conditions affecting generation, customer energy use and operating costs;
·
operation, availability and operating costs of existing generation facilities;
·
the duration of and cost, including lost revenue, associated with scheduled and unscheduled outages at our generating facilities;
·
transmission and distribution system conditions and operating costs;
·
expansion of alternative sources of electricity generation;
·
laws or regulations to reduce emissions of "greenhouse" gases or the physical effects of climate change;
·
collective labor bargaining negotiations;
·
the outcome of litigation against the Registrants and their subsidiaries;
·
potential effects of threatened or actual terrorism, war or other hostilities, cyber-based intrusions or natural disasters;
·
the commitments and liabilities of the Registrants and their subsidiaries;
·
volatility in market demand and prices for energy, capacity, transmission services, emission allowances and RECs;
·
competition in retail and wholesale power and natural gas markets;
·
liquidity of wholesale power markets;
·
defaults by counterparties under energy, fuel or other power product contracts;
·
market prices of commodity inputs for ongoing capital expenditures;
·
capital market conditions, including the availability of capital or credit, changes in interest rates and certain economic indices, and decisions regarding capital structure;
·
stock price performance of PPL;
·
volatility in the fair value of debt and equity securities and its impact on the value of assets in the NDT funds and in defined benefit plans, and the potential cash funding requirements if fair value declines;
·
interest rates and their effect on pension, retiree medical, nuclear decommissioning liabilities and interest payable on certain debt securities;
·
volatility in or the impact of other changes in financial or commodity markets and economic conditions;
·
new accounting requirements or new interpretations or applications of existing requirements;
·
changes in securities and credit ratings;
·
changes in foreign currency exchange rates for British pound sterling;
·
current and future environmental conditions, regulations and other requirements and the related costs of compliance, including environmental capital expenditures, emission allowance costs and other expenses;
·
legal, regulatory, political, market or other reactions to the 2011 incident at the nuclear generating facility at Fukushima, Japan, including additional NRC requirements;
·
changes in political, regulatory or economic conditions in states, regions or countries where the Registrants or their subsidiaries conduct business;
·
receipt of necessary governmental permits, approvals and rate relief;
·
new state, federal or foreign legislation or regulatory developments;
·
the outcome of any rate cases or other cost recovery filings by PPL Electric, LG&E, KU or WPD;
·
the impact of any state, federal or foreign investigations applicable to the Registrants and their subsidiaries and the energy industry;
·
the effect of any business or industry restructuring;
·
development of new projects, markets and technologies;
·
performance of new ventures; and
·
business dispositions or acquisitions and our ability to successfully operate acquired businesses and realize expected benefits from business acquisitions.

 
1
 


Any such forward-looking statements should be considered in light of such important factors and in conjunction with other documents of the Registrants 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 the Registrants to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement.  Any forward-looking statement speaks only as of the date on which such statement is made, and the Registrants undertake no obligation to update the information contained in such statement to reflect subsequent developments or information.
 
2
 
PART I.  FINANCIAL INFORMATION
ITEM 1. Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Corporation and Subsidiaries
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
(Millions of Dollars, except share data)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
Utility
 
$
 1,739 
 
$
 1,693 
 
$
 5,344 
 
$
 5,012 
 
Unregulated retail electric and gas
 
 
 264 
 
 
 218 
 
 
 758 
 
 
 620 
 
Wholesale energy marketing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized
 
 
 980 
 
 
 1,076 
 
 
 2,767 
 
 
 3,367 
 
 
Unrealized economic activity (Note 14)
 
 
 (49)
 
 
 (716)
 
 
 (281)
 
 
 (322)
 
Net energy trading margins
 
 
 12 
 
 
 (11)
 
 
 1 
 
 
 7 
 
Energy-related businesses
 
 
 159 
 
 
 143 
 
 
 423 
 
 
 380 
 
Total Operating Revenues
 
 
 3,105 
 
 
 2,403 
 
 
 9,012 
 
 
 9,064 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 494 
 
 
 570 
 
 
 1,464 
 
 
 1,405 
 
 
Energy purchases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized
 
 
 592 
 
 
 583 
 
 
 1,855 
 
 
 2,253 
 
 
 
Unrealized economic activity (Note 14)
 
 
 (37)
 
 
 (569)
 
 
 (192)
 
 
 (420)
 
 
Other operation and maintenance
 
 
 669 
 
 
 650 
 
 
 2,043 
 
 
 2,095 
 
Depreciation
 
 
 289 
 
 
 278 
 
 
 859 
 
 
 813 
 
Taxes, other than income
 
 
 90 
 
 
 90 
 
 
 272 
 
 
 268 
 
Energy-related businesses
 
 
 151 
 
 
 137 
 
 
 403 
 
 
 363 
 
Total Operating Expenses
 
 
 2,248 
 
 
 1,739 
 
 
 6,704 
 
 
 6,777 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 857 
 
 
 664 
 
 
 2,308 
 
 
 2,287 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense) - net
 
 
 (116)
 
 
 (44)
 
 
 19 
 
 
 (31)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other-Than-Temporary Impairments
 
 
 1 
 
 
   
 
 
 1 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
 
 246 
 
 
 248 
 
 
 755 
 
 
 714 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
 
 
 494 
 
 
 372 
 
 
 1,571 
 
 
 1,541 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes
 
 
 84 
 
 
 17 
 
 
 344 
 
 
 364 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations After Income Taxes
 
 
 410 
 
 
 355 
 
 
 1,227 
 
 
 1,177 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) from Discontinued Operations (net of income taxes)
 
 
 1 
 
 
   
 
 
 2 
 
 
 (6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
 
 411 
 
 
 355 
 
 
 1,229 
 
 
 1,171 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interests
 
 
 1 
 
 
   
 
 
 1 
 
 
 4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to PPL Shareowners
 
$
 410 
 
$
 355 
 
$
 1,228 
 
$
 1,167 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts Attributable to PPL Shareowners:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations After Income Taxes
 
$
 409 
 
$
 355 
 
$
 1,226 
 
$
 1,173 
 
Income (Loss) from Discontinued Operations (net of income taxes)
 
 
 1 
 
 
   
 
 
 2 
 
 
 (6)
 
Net Income
 
$
 410 
 
$
 355 
 
$
 1,228 
 
$
 1,167 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings Per Share of Common Stock:
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations After Income Taxes Available to PPL
 
 
 
 Common Shareowners:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.65 
 
$
0.61 
 
$
 2.03 
 
$
2.01 
 
 
Diluted
 
$
0.62 
 
$
0.61 
 
$
 1.90 
 
$
2.01 
 
Net Income Available to PPL Common Shareowners:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.65 
 
$
0.61 
 
$
2.03 
 
$
2.00 
 
 
Diluted
 
$
0.62 
 
$
0.61 
 
$
1.90 
 
$
2.00 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends Declared Per Share of Common Stock
 
$
0.3675 
 
$
0.36 
 
$
1.1025 
 
$
1.08 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-Average Shares of Common Stock Outstanding (in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 631,046 
 
 
 580,585 
 
 
 601,275 
 
 
579,847 
 
 
Diluted
 
 
 664,343 
 
 
 582,636 
 
 
 662,094 
 
 
580,930 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
3
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
 411 
 
$
 355 
 
$
 1,229 
 
$
 1,171 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Amounts arising during the period - gains (losses), net of tax (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
benefit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax of $8, $1, $1, $1
 
 
 87 
 
 
 152 
 
 
 (165)
 
 
 49 
 
 
Available-for-sale securities, net of tax of ($15), ($14), ($42), ($32)
 
 
 15 
 
 
 13 
 
 
 40 
 
 
 30 
 
 
Qualifying derivatives, net of tax of $2, $14, ($41), ($29)
 
 
 (9)
 
 
 (41)
 
 
 77 
 
 
 39 
 
 
Equity investees' other comprehensive income (loss), net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
tax of $0, $0, $0, $2
 
 
   
 
 
   
 
 
   
 
 
 (3)
 
 
Defined benefit plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net actuarial gain (loss), net of tax of $0, $0, $0, $28
 
 
   
 
 
   
 
 
   
 
 
 (85)
Reclassifications from AOCI - (gains) losses, net of tax expense
 
 
 
 
 
 
 
 
 
 
 
 
 
(benefit):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities, net of tax of $1, $0, $2, $1
 
 
   
 
 
   
 
 
 (2)
 
 
 (6)
 
 
Qualifying derivatives, net of tax of $11, $51, $68, $210
 
 
 (6)
 
 
 (61)
 
 
 (122)
 
 
 (335)
 
 
Equity investees' other comprehensive (income) loss, net of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
tax of $0, $0, $0, $0
 
 (1)
 
 
   
 
 
 (1)
 
 
   
 
 
Defined benefit plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service costs, net of tax of ($1), ($1), ($3), ($4)
 
 
 2 
 
 
 1 
 
 
 5 
 
 
 6 
 
 
 
Net actuarial loss, net of tax of ($12), ($6), ($37), ($17)
 
 
 33 
 
 
 17 
 
 
 101 
 
 
 54 
Total other comprehensive income (loss) attributable to PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareowners
 
 
 121 
 
 
 81 
 
 
 (67)
 
 
 (251)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
 
 532 
 
 
 436 
 
 
 1,162 
 
 
 920 
 
 
Comprehensive income attributable to noncontrolling interests
 
 
 1 
 
 
   
 
 
 1 
 
 
 4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to PPL Shareowners
 
$
 531 
 
$
 436 
 
$
 1,161 
 
$
 916 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
4
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
2013 
 
2012 
Cash Flows from Operating Activities
 
 
 
 
 
 
 
Net income
 
$
 1,229 
 
$
 1,171 
 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
 
 
 
Depreciation
 
 
 859 
 
 
 813 
 
 
Amortization
 
 
 164 
 
 
 144 
 
 
Defined benefit plans - expense
 
 
 135 
 
 
 123 
 
 
Deferred income taxes and investment tax credits
 
 
 301 
 
 
 298 
 
 
Unrealized (gains) losses on derivatives, and other hedging activities
 
 
 126 
 
 
 21 
 
 
Other
 
 
 92 
 
 
 34 
 
Change in current assets and current liabilities
 
 
 
 
 
 
 
 
Accounts receivable
 
 
 (79)
 
 
 19 
 
 
Accounts payable
 
 
 (140)
 
 
 (175)
 
 
Unbilled revenues
 
 
 197 
 
 
 121 
 
 
Counterparty collateral
 
 
 (77)
 
 
 13 
 
 
Taxes payable
 
 
 76 
 
 
 29 
 
 
Uncertain tax positions
 
 
 (104)
 
 
 (4)
 
 
Accrued interest
 
 
 8 
 
 
 43 
 
 
Other
 
 
 (111)
 
 
 8 
 
Other operating activities
 
 
 
 
 
 
 
 
Defined benefit plans - funding
 
 
 (505)
 
 
 (526)
 
 
Other assets
 
 
 (59)
 
 
 1 
 
 
Other liabilities
 
 
 111 
 
 
 (39)
 
 
 
Net cash provided by operating activities
 
 
 2,223 
 
 
 2,094 
Cash Flows from Investing Activities
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
 
 
 (2,768)
 
 
 (2,078)
 
Ironwood Acquisition, net of cash acquired
 
 
   
 
 
 (84)
 
Purchases of nuclear plant decommissioning trust investments
 
 
 (102)
 
 
 (112)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
 
 
 92 
 
 
 102 
 
Net (increase) decrease in restricted cash and cash equivalents
 
 
 13 
 
 
 62 
 
Other investing activities
 
 
 (23)
 
 
 (6)
 
 
 
Net cash provided by (used in) investing activities
 
 
 (2,788)
 
 
 (2,116)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
Issuance of long-term debt
 
 
 862 
 
 
 824 
 
Retirement of long-term debt
 
 
 (309)
 
 
 (105)
 
Repurchase of common stock
 
 
 (74)
 
 
   
 
Issuance of common stock
 
 
 1,409 
 
 
 54 
 
Payment of common stock dividends
 
 
 (645)
 
 
 (623)
 
Redemption of preference stock of a subsidiary
 
 
   
 
 
 (250)
 
Debt issuance and credit facility costs
 
 
 (37)
 
 
 (10)
 
Contract adjustment payments
 
 
 (72)
 
 
 (71)
 
Net increase (decrease) in short-term debt
 
 
 (148)
 
 
 (51)
 
Other financing activities
 
 
 (20)
 
 
 (8)
 
 
 
Net cash provided by (used in) financing activities
 
 
 966 
 
 
 (240)
Effect of Exchange Rates on Cash and Cash Equivalents
 
 
 (11)
 
 
 6 
Net Increase (Decrease) in Cash and Cash Equivalents
 
 
 390 
 
 
 (256)
Cash and Cash Equivalents at Beginning of Period
 
 
 901 
 
 
 1,202 
Cash and Cash Equivalents at End of Period
 
$
 1,291 
 
$ 
 946 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
5
 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 1,291 
 
$
 901 
 
Restricted cash and cash equivalents
 
 
 52 
 
 
 54 
 
Accounts receivable (less reserve:  2013, $65; 2012, $64)
 
 
 
 
 
 
 
 
Customer
 
 
 857 
 
 
 745 
 
 
Other
 
 
 117 
 
 
 79 
 
Unbilled revenues
 
 
 652 
 
 
 857 
 
Fuel, materials and supplies
 
 
 686 
 
 
 673 
 
Prepayments
 
 
 173 
 
 
 166 
 
Price risk management assets
 
 
 1,045 
 
 
 1,525 
 
Regulatory assets
 
 
 31 
 
 
 19 
 
Other current assets
 
 
 67 
 
 
 49 
 
Total Current Assets
 
 
 4,971 
 
 
 5,068 
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Nuclear plant decommissioning trust funds
 
 
 804 
 
 
 712 
 
Other investments
 
 
 47 
 
 
 47 
 
Total Investments
 
 
 851 
 
 
 759 
 
 
 
 
 
 
 
 
 
 
Property, Plant and Equipment
 
 
 
 
 
 
 
Regulated utility plant
 
 
 26,498 
 
 
 25,196 
 
Less:  accumulated depreciation - regulated utility plant
 
 
 4,636 
 
 
 4,164 
 
 
Regulated utility plant, net
 
 
 21,862 
 
 
 21,032 
 
Non-regulated property, plant and equipment
 
 
 
 
 
 
 
 
Generation
 
 
 11,653 
 
 
 11,295 
 
 
Nuclear fuel
 
 
 590 
 
 
 524 
 
 
Other
 
 
 834 
 
 
 726 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
 
 
 6,173 
 
 
 5,942 
 
 
Non-regulated property, plant and equipment, net
 
 
 6,904 
 
 
 6,603 
 
Construction work in progress
 
 
 2,822 
 
 
 2,397 
 
Property, Plant and Equipment, net (a)
 
 
 31,588 
 
 
 30,032 
 
 
 
 
 
 
 
 
 
 
Other Noncurrent Assets
 
 
 
 
 
 
 
Regulatory assets
 
 
 1,423 
 
 
 1,483 
 
Goodwill
 
 
 4,050 
 
 
 4,158 
 
Other intangibles
 
 
 932 
 
 
 925 
 
Price risk management assets
 
 
 550 
 
 
 572 
 
Other noncurrent assets
 
 
 623 
 
 
 637 
 
Total Other Noncurrent Assets
 
 
 7,578 
 
 
 7,775 
 
 
 
 
 
 
 
Total Assets
 
$
 44,988 
 
$
 43,634 

(a)
At September 30, 2013 and December 31, 2012, includes $413 million and $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
6
 


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
Short-term debt
 
$
 499 
 
$
 652 
 
Long-term debt due within one year
 
 
 751 
 
 
 751 
 
Accounts payable
 
 
 1,079 
 
 
 1,252 
 
Taxes
 
 
 170 
 
 
 90 
 
Interest
 
 
 325 
 
 
 325 
 
Dividends
 
 
 232 
 
 
 210 
 
Price risk management liabilities
 
 
 823 
 
 
 1,065 
 
Regulatory liabilities
 
 
 68 
 
 
 61 
 
Other current liabilities
 
 
 1,001 
 
 
 1,219 
 
Total Current Liabilities
 
 
 4,948 
 
 
 5,625 
 
 
 
 
 
 
 
 
 
 
Long-term Debt
 
 
 19,092 
 
 
 18,725 
 
 
 
 
 
 
 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 
 
 
 
 
 
 
Deferred income taxes
 
 
 3,777 
 
 
 3,387 
 
Investment tax credits
 
 
 345 
 
 
 328 
 
Price risk management liabilities
 
 
 538 
 
 
 629 
 
Accrued pension obligations
 
 
 1,529 
 
 
 2,076 
 
Asset retirement obligations
 
 
 678 
 
 
 536 
 
Regulatory liabilities
 
 
 1,054 
 
 
 1,010 
 
Other deferred credits and noncurrent liabilities
 
 
 665 
 
 
 820 
 
Total Deferred Credits and Other Noncurrent Liabilities
 
 
 8,586 
 
 
 8,786 
 
 
 
 
 
 
 
 
 
 
Commitments and Contingent Liabilities (Notes 5, 6 and 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
PPL Shareowners' Common Equity
 
 
 
 
 
 
 
 
Common stock - $0.01 par value (a)
 
 
 6 
 
 
 6 
 
 
Additional paid-in capital
 
 
 8,305 
 
 
 6,936 
 
 
Earnings reinvested
 
 
 6,040 
 
 
 5,478 
 
 
Accumulated other comprehensive loss
 
 
 (2,007)
 
 
 (1,940)
 
 
Total PPL Shareowners' Common Equity
 
 
 12,344 
 
 
 10,480 
 
Noncontrolling Interests
 
 
 18 
 
 
 18 
 
Total Equity
 
 
 12,362 
 
 
 10,498 
 
 
 
 
 
 
 
 
 
 
Total Liabilities and Equity
 
$
 44,988 
 
$
 43,634 

(a)
780,000 shares authorized; 630,239 and 581,944 shares issued and outstanding at September 30, 2013 and December 31, 2012.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
7
 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
PPL Shareowners
 
 
 
 
 
 
 
 
 
 
Common
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 stock
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
shares
 
 
 
 
 
Additional
 
 
 
 
 
other
 
 
Non-
 
 
 
 
 
 
 
outstanding
 
 
Common
 
 
paid-in
 
 
Earnings
 
 
comprehensive
 
 
controlling
 
 
 
 
 
 
 
(a)
 
 
stock
 
 
capital
 
 
reinvested
 
 
loss
 
 
interests
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013 (b)
 
 591,622 
 
$
 6 
 
$
 7,195 
 
$
 5,863 
 
$
 (2,128)
 
$
 18 
 
$
 10,954 
Common stock issued (c)
 
 40,117 
 
 
   
 
 
 1,151 
 
 
   
 
 
   
 
 
   
 
 
 1,151 
Common stock repurchased (d)
 
 (1,500)
 
 
   
 
 
 (46)
 
 
   
 
 
   
 
 
   
 
 
 (46)
Stock-based compensation (e)
 
   
 
 
   
 
 
 5 
 
 
   
 
 
   
 
 
   
 
 
 5 
Net income
 
   
 
 
   
 
 
   
 
 
 410 
 
 
   
 
 
 1 
 
 
 411 
Dividends, dividend equivalents,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
redemptions and distributions (f)
 
   
 
 
   
 
 
   
 
 
 (233)
 
 
   
 
 
 (1)
 
 
 (234)
Other comprehensive
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
income (loss)
 
   
 
 
   
 
 
   
 
 
   
 
 
 121 
 
 
   
 
 
 121 
September 30, 2013 (b)
 
 630,239 
 
$
 6 
 
$
 8,305 
 
$
 6,040 
 
$
 (2,007)
 
$
 18 
 
$
 12,362 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012 (b)
 
 581,944 
 
$
 6 
 
$
 6,936 
 
$
 5,478 
 
$
 (1,940)
 
$
 18 
 
$
 10,498 
Common stock issued (c)
 
 50,725 
 
 
   
 
 
 1,433 
 
 
   
 
 
   
 
 
   
 
 
 1,433 
Common stock repurchased (d)
 
 (2,430)
 
 
   
 
 
 (74)
 
 
   
 
 
   
 
 
   
 
 
 (74)
Cash settlement of equity forward
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
agreements (d)
 
   
 
 
   
 
 
 (13)
 
 
   
 
 
   
 
 
   
 
 
 (13)
Stock-based compensation (e)
 
   
 
 
   
 
 
 23 
 
 
   
 
 
   
 
 
   
 
 
 23 
Net income
 
   
 
 
   
 
 
   
 
 
 1,228 
 
 
   
 
 
 1 
 
 
 1,229 
Dividends, dividend equivalents,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
redemptions and distributions (f)
 
   
 
 
   
 
 
   
 
 
 (666)
 
 
   
 
 
 (1)
 
 
 (667)
Other comprehensive
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income (loss)
 
   
 
 
   
 
 
   
 
 
   
 
 
 (67)
 
 
   
 
 
 (67)
September 30, 2013 (b)
 
 630,239 
 
$
 6 
 
$
 8,305 
 
$
 6,040 
 
$
 (2,007)
 
$
 18 
 
$
 12,362 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 580,213 
 
$
 6 
 
$
 6,886 
 
$
 5,190 
 
$
 (1,120)
 
$
 18 
 
$
 10,980 
Common stock issued (c)
 
 757 
 
 
   
 
 
 21 
 
 
   
 
 
   
 
 
   
 
 
 21 
Stock-based compensation (e)
 
   
 
 
   
 
 
 5 
 
 
   
 
 
   
 
 
   
 
 
 5 
Net income
 
   
 
 
   
 
 
   
 
 
 355 
 
 
   
 
 
   
 
 
 355 
Dividends, dividend equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
redemptions and distributions (f)
 
   
 
 
   
 
 
   
 
 
 (210)
 
 
   
 
 
   
 
 
 (210)
Other comprehensive
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income (loss)
 
   
 
 
   
 
 
   
 
 
   
 
 
 81 
 
 
   
 
 
 81 
September 30, 2012
 
 580,970 
 
$
 6 
 
$
 6,912 
 
$
 5,335 
 
$
 (1,039)
 
$
 18 
 
$
 11,232 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 578,405 
 
$
 6 
 
$
 6,813 
 
$
 4,797 
 
$
 (788)
 
$
 268 
 
$
 11,096 
Common stock issued (c)
 
 2,565 
 
 
   
 
 
 71 
 
 
   
 
 
   
 
 
   
 
 
 71 
Stock-based compensation (e)
 
   
 
 
   
 
 
 28 
 
 
   
 
 
   
 
 
   
 
 
 28 
Net income
 
   
 
 
   
 
 
   
 
 
 1,167 
 
 
   
 
 
 4 
 
 
 1,171 
Dividends, dividend equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
redemptions and distributions (f)
 
   
 
 
   
 
 
   
 
 
 (629)
 
 
   
 
 
 (254)
 
 
 (883)
Other comprehensive
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
income (loss)
 
   
 
 
   
 
 
   
 
 
   
 
 
 (251)
 
 
   
 
 
 (251)
September 30, 2012
 
 580,970 
 
$
 6 
 
$
 6,912 
 
$
 5,335 
 
$
 (1,039)
 
$
 18 
 
$
 11,232 

(a)
Shares in thousands.  Each share entitles the holder to one vote on any question presented at any shareowners' meeting.
(b)
See Note 18 for disclosure of balances of each component of AOCI.
(c)
Each period includes shares of common stock issued through various stock and incentive compensation plans.  The 2013 periods include the April and July issuances of shares of common stock.  See Note 7 for additional information.
(d)
See Note 7 for additional information.
(e)
The three and nine months ended September 30, 2013 include $8 million and $44 million and the three and nine months ended September 30, 2012 include $7 million and $42 million of stock-based compensation expense related to new and existing unvested equity awards.  The three and nine months ended September 30, 2013 include $(3) million and $(21) million and the three and nine months ended September 30, 2012 include $(2) million and $(14) million related primarily to the reclassification from "Stock-based compensation" to "Common stock issued" for the issuance of common stock after applicable equity award vesting periods and tax adjustments related to stock-based compensation.
(f)
"Earnings reinvested" includes dividends and dividend equivalents on PPL common stock and restricted stock units.  "Noncontrolling interests" includes dividends, redemptions and distributions to noncontrolling interests.  In June 2012, PPL Electric redeemed all of its outstanding preference stock at par value, which was classified as noncontrolling interest.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
8
 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
 
 
 
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale energy marketing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized
 
$
 980 
 
$
 1,076 
 
$
 2,767 
 
$
 3,367 
 
 
Unrealized economic activity (Note 14)
 
 
 (49)
 
 
 (716)
 
 
 (281)
 
 
 (322)
 
Wholesale energy marketing to affiliate
 
 
 11 
 
 
 23 
 
 
 37 
 
 
 61 
 
Unregulated retail electric and gas
 
 
 266 
 
 
 219 
 
 
 761 
 
 
 623 
 
Net energy trading margins
 
 
 12 
 
 
 (11)
 
 
 1 
 
 
 7 
 
Energy-related businesses
 
 
 143 
 
 
 128 
 
 
 378 
 
 
 336 
 
Total Operating Revenues
 
 
 1,363 
 
 
 719 
 
 
 3,663 
 
 
 4,072 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
   
 
 
 
 
 
 
 
 
 
 
Operation
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 258 
 
 
 321 
 
 
 780 
 
 
 728 
 
 
Energy purchases
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
Realized
 
 
 425 
 
 
 421 
 
 
 1,277 
 
 
 1,715 
 
 
 
Unrealized economic activity (Note 14)
 
 
 (37)
 
 
 (569)
 
 
 (192)
 
 
 (420)
 
 
Energy purchases from affiliate
 
 
 1 
 
 
 1 
 
 
 3 
 
 
 2 
 
 
Other operation and maintenance
 
 
 243 
 
 
 220 
 
 
 748 
 
 
 769 
 
Depreciation
 
 
 80 
 
 
 73 
 
 
 237 
 
 
 206 
 
Taxes, other than income
 
 
 18 
 
 
 18 
 
 
 51 
 
 
 53 
 
Energy-related businesses
 
 
 138 
 
 
 125 
 
 
 366 
 
 
 326 
 
Total Operating Expenses
 
 
 1,126 
 
 
 610 
 
 
 3,270 
 
 
 3,379 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 237 
 
 
 109 
 
 
 393 
 
 
 693 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense) - net
 
 
 2 
 
 
 5 
 
 
 18 
 
 
 16 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other-Than-Temporary Impairments
 
 
 1 
 
 
   
 
 
 1 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
 
 39 
 
 
 43 
 
 
 131 
 
 
 123 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Before Income Taxes
 
 
 199 
 
 
 71 
 
 
 279 
 
 
 585 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes
 
 
 74 
 
 
 16 
 
 
 106 
 
 
 202 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
 
 125 
 
 
 55 
 
 
 173 
 
 
 383 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to Noncontrolling Interests
 
 
 1 
 
 
 1 
 
 
 1 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to PPL Energy Supply Member
 
$
 124 
 
$
 54 
 
$
 172 
 
$
 382 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
9
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
 125 
 
$
 55 
 
$
 173 
 
$
 383 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Amounts arising during the period - gains (losses), net of tax (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
benefit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities, net of tax of ($15), ($14), ($42), ($32)
 
 
 15 
 
 
 13 
 
 
 40 
 
 
 30 
 
 
Qualifying derivatives, net of tax of $0, ($1), $0, ($41)
 
 
   
 
 
 (1)
 
 
   
 
 
 58 
Reclassifications from AOCI - (gains) losses, net of tax expense
 
 
 
 
 
 
 
 
 
 
 
 
 
(benefit):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities, net of tax of $1, $0, $2, $1
 
 
   
 
 
   
 
 
 (2)
 
 
 (6)
 
 
Qualifying derivatives, net of tax of $19, $62, $63, $218
 
 
 (29)
 
 
 (92)
 
 
 (96)
 
 
 (351)
 
 
Defined benefit plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service costs, net of tax of ($1), ($1), ($2), ($2)
 
 
 1 
 
 
 1 
 
 
 3 
 
 
 4 
 
 
 
Net actuarial loss, net of tax of ($2), ($1), ($7), ($1)
 
 
 3 
 
 
 2 
 
 
 11 
 
 
 8 
Total other comprehensive income (loss) attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply Member
 
 
 (10)
 
 
 (77)
 
 
 (44)
 
 
 (257)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
 
 115 
 
 
 (22)
 
 
 129 
 
 
 126 
 
 
Comprehensive income attributable to noncontrolling interests
 
 
 1 
 
 
 1 
 
 
 1 
 
 
 1 
Comprehensive income (loss) attributable to PPL Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
Supply Member
 
$
 114 
 
$
 (23)
 
$
 128 
 
$
 125 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
10
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
2013 
 
2012 
Cash Flows from Operating Activities
 
 
 
 
 
 
 
Net income
 
$
 173 
 
$
 383 
 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
   
 
 
   
 
 
Depreciation
 
 
 237 
 
 
 206 
 
 
Amortization
 
 
 111 
 
 
 93 
 
 
Defined benefit plans - expense
 
 
 39 
 
 
 33 
 
 
Deferred income taxes and investment tax credits
 
 
 112 
 
 
 132 
 
 
Unrealized (gains) losses on derivatives, and other hedging activities
 
 
 98 
 
 
 (37)
 
 
Other
 
 
 32 
 
 
 33 
 
Change in current assets and current liabilities
 
 
 
 
 
 
 
 
Accounts receivable
 
 
 71 
 
 
 (26)
 
 
Accounts payable
 
 
 (131)
 
 
 (110)
 
 
Unbilled revenues
 
 
 135 
 
 
 78 
 
 
Fuel, materials and supplies
 
 
 (18)
 
 
 (20)
 
 
Counterparty collateral
 
 
 (77)
 
 
 12 
 
 
Other
 
 
 (32)
 
 
 (28)
 
Other operating activities
 
 
 
 
 
 
 
 
Defined benefit plans - funding
 
 
 (107)
 
 
 (70)
 
 
Other assets
 
 
 (32)
 
 
 (16)
 
 
Other liabilities
 
 
 (28)
 
 
 11 
 
 
 
Net cash provided by operating activities
 
 
 583 
 
 
 674 
Cash Flows from Investing Activities
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
 
 
 (341)
 
 
 (460)
 
Ironwood Acquisition, net of cash acquired
 
 
   
 
 
 (84)
 
Expenditures for intangible assets
 
 
 (33)
 
 
 (36)
 
Purchases of nuclear plant decommissioning trust investments
 
 
 (102)
 
 
 (112)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
 
 
 92 
 
 
 102 
 
Net (increase) decrease in notes receivable from affiliates
 
 
   
 
 
 198 
 
Net (increase) decrease in restricted cash and cash equivalents
 
 
 9 
 
 
 70 
 
Other investing activities
 
 
 24 
 
 
 14 
 
 
 
Net cash provided by (used in) investing activities
 
 
 (351)
 
 
 (308)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
Retirement of long-term debt
 
 
 (309)
 
 
 (6)
 
Contributions from member
 
 
 980 
 
 
 472 
 
Distributions to member
 
 
 (408)
 
 
 (733)
 
Net increase (decrease) in short-term debt
 
 
 (356)
 
 
 (45)
 
Other financing activities
 
 
 (1)
 
 
 (1)
 
 
 
Net cash provided by (used in) financing activities
 
 
 (94)
 
 
 (313)
Net Increase (Decrease) in Cash and Cash Equivalents
 
 
 138 
 
 
 53 
 
Cash and Cash Equivalents at Beginning of Period
 
 
 413 
 
 
 379 
 
Cash and Cash Equivalents at End of Period
 
$
 551 
 
$
 432 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
11
 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 551 
 
$
 413 
 
Restricted cash and cash equivalents
 
 
 37 
 
 
 46 
 
Accounts receivable (less reserve:  2013, $20; 2012, $23)
 
 
 
 
 
 
 
 
Customer
 
 
 203 
 
 
 183 
 
 
Other
 
 
 104 
 
 
 31 
 
Accounts receivable from affiliates
 
 
 37 
 
 
 125 
 
Unbilled revenues
 
 
 234 
 
 
 369 
 
Fuel, materials and supplies
 
 
 345 
 
 
 327 
 
Prepayments
 
 
 22 
 
 
 15 
 
Price risk management assets
 
 
 961 
 
 
 1,511 
 
Other current assets
 
 
 22 
 
 
 10 
 
Total Current Assets
 
 
 2,516 
 
 
 3,030 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Nuclear plant decommissioning trust funds
 
 
 804 
 
 
 712 
 
Other investments
 
 
 41 
 
 
 41 
 
Total Investments
 
 
 845 
 
 
 753 
 
 
 
 
 
 
 
 
Property, Plant and Equipment
 
 
 
 
 
 
 
Non-regulated property, plant and equipment
 
 
 
 
 
 
 
 
Generation
 
 
 11,663 
 
 
 11,305 
 
 
Nuclear fuel
 
 
 590 
 
 
 524 
 
 
Other
 
 
 307 
 
 
 294 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
 
 
 6,025 
 
 
 5,817 
 
 
Non-regulated property, plant and equipment, net
 
 
 6,535 
 
 
 6,306 
 
Construction work in progress
 
 
 739 
 
 
 987 
 
Property, Plant and Equipment, net (a)
 
 
 7,274 
 
 
 7,293 
 
 
 
 
 
 
 
 
Other Noncurrent Assets
 
 
 
 
 
 
 
Goodwill
 
 
 86 
 
 
 86 
 
Other intangibles
 
 
 262 
 
 
 252 
 
Price risk management assets
 
 
 519 
 
 
 557 
 
Other noncurrent assets
 
 
 362 
 
 
 404 
 
Total Other Noncurrent Assets
 
 
 1,229 
 
 
 1,299 
 
 
 
 
 
 
 
 
Total Assets
 
$
 11,864 
 
$
 12,375 

(a)
At September 30, 2013 and December 31, 2012, includes $413 million and $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
12
 


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
Short-term debt
 
 
   
 
$
 356 
 
Long-term debt due within one year
 
$
 741 
 
 
 751 
 
Accounts payable
 
 
 328 
 
 
 438 
 
Accounts payable to affiliates
 
 
 3 
 
 
 31 
 
Taxes
 
 
 19 
 
 
 62 
 
Interest
 
 
 53 
 
 
 31 
 
Price risk management liabilities
 
 
 773 
 
 
 1,010 
 
Deferred income taxes
 
 
 45 
 
 
 158 
 
Other current liabilities
 
 
 264 
 
 
 319 
 
Total Current Liabilities
 
 
 2,226 
 
 
 3,156 
 
 
 
 
 
 
 
 
 
 
Long-term Debt
 
 
 2,221 
 
 
 2,521 
 
 
 
 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 
 
 
 
 
 
 
Deferred income taxes
 
 
 1,429 
 
 
 1,232 
 
Investment tax credits
 
 
 207 
 
 
 186 
 
Price risk management liabilities
 
 
 462 
 
 
 556 
 
Accrued pension obligations
 
 
 203 
 
 
 293 
 
Asset retirement obligations
 
 
 388 
 
 
 365 
 
Other deferred credits and noncurrent liabilities
 
 
 180 
 
 
 218 
 
Total Deferred Credits and Other Noncurrent Liabilities
 
 
 2,869 
 
 
 2,850 
 
 
 
 
 
 
 
 
 
 
Commitments and Contingent Liabilities (Note 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
Member's equity
 
 
 4,530 
 
 
 3,830 
 
Noncontrolling interests
 
 
 18 
 
 
 18 
 
Total Equity
 
 
 4,548 
 
 
 3,848 
 
 
 
 
 
 
 
 
 
 
Total Liabilities and Equity
 
$
 11,864 
 
$
 12,375 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
13
 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-
 
 
 
 
 
Member's
 
controlling
 
 
 
 
 
equity
 
interests
 
Total
 
 
 
 
 
 
 
 
 
 
June 30, 2013 (a)
 
$
 3,541 
 
$
 18 
 
$
 3,559 
Net income
 
 
 124 
 
 
 1 
 
 
 125 
Other comprehensive income (loss)
 
 
 (10)
 
 
   
 
 
 (10)
Contributions from member
 
 
 875 
 
 
   
 
 
 875 
Distributions
 
 
   
 
 
 (1)
 
 
 (1)
September 30, 2013 (a)
 
$
 4,530 
 
$
 18 
 
$
 4,548 
 
 
 
 
 
 
 
 
 
 
December 31, 2012 (a)
 
$
 3,830 
 
$
 18 
 
$
 3,848 
Net income
 
 
 172 
 
 
 1 
 
 
 173 
Other comprehensive income (loss)
 
 
 (44)
 
 
   
 
 
 (44)
Contributions from member
 
 
 980 
 
 
   
 
 
 980 
Distributions
 
 
 (408)
 
 
 (1)
 
 
 (409)
September 30, 2013 (a)
 
$
 4,530 
 
$
 18 
 
$
 4,548 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
$
 3,982 
 
$
 18 
 
$
 4,000 
Net income
 
 
 54 
 
 
 1 
 
 
 55 
Other comprehensive income (loss)
 
 
 (77)
 
 
   
 
 
 (77)
Distributions
 
 
 (76)
 
 
 (1)
 
 
 (77)
September 30, 2012
 
$
 3,883 
 
$
 18 
 
$
 3,901 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
$
 4,019 
 
$
 18 
 
$
 4,037 
Net income
 
 
 382 
 
 
 1 
 
 
 383 
Other comprehensive income (loss)
 
 
 (257)
 
 
   
 
 
 (257)
Contributions from member
 
 
 472 
 
 
   
 
 
 472 
Distributions
 
 
 (733)
 
 
 (1)
 
 
 (734)
September 30, 2012
 
$
 3,883 
 
$
 18 
 
$
 3,901 

(a)
See Note 18 for disclosure of balances of each component of AOCI.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
14
 





(THIS PAGE LEFT BLANK INTENTIONALLY.)

 
15
 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
September 30,
 
September 30,
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail electric
 
$
 463 
 
$
 443 
 
$
 1,388 
 
$
 1,303 
 
Electric revenue from affiliate
 
 
 1 
 
 
 1 
 
 
 3 
 
 
 3 
 
Total Operating Revenues
 
 
 464 
 
 
 444 
 
 
 1,391 
 
 
 1,306 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
   
 
 
 
 
 
 
 
 
 
 
Operation
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
 
 
 144 
 
 
 137 
 
 
 436 
 
 
 410 
 
 
Energy purchases from affiliate
 
 
 11 
 
 
 23 
 
 
 37 
 
 
 61 
 
 
Other operation and maintenance
 
 
 134 
 
 
 148 
 
 
 391 
 
 
 431 
 
Depreciation
 
 
 45 
 
 
 41 
 
 
 132 
 
 
 119 
 
Taxes, other than income
 
 
 25 
 
 
 24 
 
 
 77 
 
 
 72 
 
Total Operating Expenses
 
 
 359 
 
 
 373 
 
 
 1,073 
 
 
 1,093 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 105 
 
 
 71 
 
 
 318 
 
 
 213 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense) - net
 
 
 2 
 
 
 3 
 
 
 5 
 
 
 6 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
 
 30 
 
 
 25 
 
 
 80 
 
 
 73 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Before Income Taxes
 
 
 77 
 
 
 49 
 
 
 243 
 
 
 146 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes
 
 
 26 
 
 
 16 
 
 
 83 
 
 
 47 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (a)
 
 
 51 
 
 
 33 
 
 
 160 
 
 
 99 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions on Preference Stock
 
 
   
 
 
   
 
 
   
 
 
 4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Available to PPL
 
$
 51 
 
$
 33 
 
$
 160 
 
$
 95 

(a)
Net income approximates comprehensive income.

 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
16
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
 
 
 
 
2013 
 
2012 
Cash Flows from Operating Activities
 
 
 
 
 
 
 
Net income
 
$
 160 
 
$
 99 
 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
   
 
 
   
 
 
Depreciation
 
 
 132 
 
 
 119 
 
 
Amortization
 
 
 13 
 
 
 13 
 
 
Defined benefit plans - expense
 
 
 16 
 
 
 17 
 
 
Deferred income taxes and investment tax credits
 
 
 103 
 
 
 72 
 
 
Other
 
 
 2 
 
 
 3 
 
Change in current assets and current liabilities
 
 
 
 
 
 
 
 
Accounts receivable
 
 
 (14)
 
 
 48 
 
 
Accounts payable
 
 
 (51)
 
 
 (43)
 
 
Unbilled revenues
 
 
 34 
 
 
 18 
 
 
Taxes payable
 
 
 24 
 
 
   
 
 
Other
 
 
 (19)
 
 
 (4)
 
Other operating activities
 
 
 
 
 
 
 
 
Defined benefit plans - funding
 
 
 (88)
 
 
 (54)
 
 
Other assets
 
 
 6 
 
 
   
 
 
Other liabilities
 
 
 9 
 
 
 (27)
 
 
 
Net cash provided by operating activities
 
 
 327 
 
 
 261 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
 
 
 (688)
 
 
 (407)
 
Net (increase) decrease in notes receivable from affiliates
 
 
   
 
 
 (210)
 
Other investing activities
 
 
 (9)
 
 
 3 
 
 
 
Net cash provided by (used in) investing activities
 
 
 (697)
 
 
 (614)
 
 
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities
 
 
 
 
 
 
 
Issuance of long-term debt
 
 
 348 
 
 
 249 
 
Contributions from parent
 
 
 205 
 
 
 150 
 
Redemption of preference stock
 
 
   
 
 
 (250)
 
Payment of common stock dividends to parent
 
 
 (94)
 
 
 (75)
 
Other financing activities
 
 
 (4)
 
 
 (10)
 
 
 
Net cash provided by (used in) financing activities
 
 
 455 
 
 
 64 
 
 
 
 
 
 
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents
 
 
 85 
 
 
 (289)
Cash and Cash Equivalents at Beginning of Period
 
 
 140 
 
 
 320 
Cash and Cash Equivalents at End of Period
 
$
 225 
 
$
 31 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
17
 

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 225 
 
$
 140 
 
Accounts receivable (less reserve: 2013, $20; 2012, $18)
 
 
 
 
 
 
 
 
Customer
 
 
 273 
 
 
 249 
 
 
Other
 
 
 14 
 
 
 5 
 
Accounts receivable from affiliates
 
 
 4 
 
 
 29 
 
Unbilled revenues
 
 
 76 
 
 
 110 
 
Materials and supplies
 
 
 35 
 
 
 39 
 
Prepayments
 
 
 67 
 
 
 76 
 
Deferred income taxes
 
 
 46 
 
 
 45 
 
Other current assets
 
 
 18 
 
 
 4 
 
Total Current Assets
 
 
 758 
 
 
 697 
 
 
 
 
 
 
 
 
 
 
Property, Plant and Equipment
 
 
 
 
 
 
 
Regulated utility plant
 
 
 6,771 
 
 
 6,286 
 
Less: accumulated depreciation - regulated utility plant
 
 
 2,421 
 
 
 2,316 
 
 
Regulated utility plant, net
 
 
 4,350 
 
 
 3,970 
 
Other, net
 
 
 2 
 
 
 2 
 
Construction work in progress
 
 
 519 
 
 
 370 
 
Property, Plant and Equipment, net
 
 
 4,871 
 
 
 4,342 
 
 
 
 
 
 
 
 
 
 
Other Noncurrent Assets
 
 
 
 
 
 
 
Regulatory assets
 
 
 857 
 
 
 853 
 
Intangibles
 
 
 208 
 
 
 171 
 
Other noncurrent assets
 
 
 35 
 
 
 55 
 
Total Other Noncurrent Assets
 
 
 1,100 
 
 
 1,079 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
 6,729 
 
$
 6,118 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
18
 


CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars, shares in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
Long term debt due within one year
 
$
 10 
 
 
   
 
Accounts payable
 
 
 244 
 
$
 259 
 
Accounts payable to affiliates
 
 
 46 
 
 
 63 
 
Taxes
 
 
 36 
 
 
 12 
 
Interest
 
 
 23 
 
 
 26 
 
Regulatory liabilities
 
 
 51 
 
 
 52 
 
Other current liabilities
 
 
 94 
 
 
 93 
 
Total Current Liabilities
 
 
 504 
 
 
 505 
 
 
 
 
 
 
 
 
 
 
Long-term Debt
 
 
 2,305 
 
 
 1,967 
 
 
 
 
 
 
 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 
 
 
 
 
 
 
Deferred income taxes
 
 
 1,334 
 
 
 1,233 
 
Investment tax credits
 
 
 3 
 
 
 3 
 
Accrued pension obligations
 
 
 157 
 
 
 237 
 
Regulatory liabilities
 
 
 14 
 
 
 8 
 
Other deferred credits and noncurrent liabilities
 
 
 79 
 
 
 103 
 
Total Deferred Credits and Other Noncurrent Liabilities
 
 
 1,587 
 
 
 1,584 
 
 
 
 
 
 
 
 
 
 
Commitments and Contingent Liabilities (Notes 6 and 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholder's Equity
 
 
 
 
 
 
 
Common stock - no par value (a)
 
 
 364 
 
 
 364 
 
Additional paid-in capital
 
 
 1,340 
 
 
 1,135 
 
Earnings reinvested
 
 
 629 
 
 
 563 
 
Total Equity
 
 
 2,333 
 
 
 2,062 
 
 
 
 
 
 
 
 
 
 
Total Liabilities and Equity
 
$
 6,729 
 
$
 6,118 

(a)
170,000 shares authorized; 66,368 shares issued and outstanding at September 30, 2013 and December 31, 2012.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
19
 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
 
 
 
 
 
 
 
 
 
 
 
 
 
 
stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
shares
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
outstanding
  
Preference
 
Common
 
 paid-in
 
Earnings
 
 
 
 
 
 
 (a)
  
stock
  
 stock
  
 capital
  
 reinvested
  
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 66,368 
 
 
   
 
$
 364 
 
$
 1,340 
 
$
 606 
 
$
 2,310 
Net income
 
   
 
 
   
 
 
   
 
 
   
 
 
 51 
 
 
 51 
Cash dividends declared on common stock
 
   
 
 
   
 
 
   
 
 
   
 
 
 (28)
 
 
 (28)
September 30, 2013
 
 66,368 
 
 
   
 
$
 364 
 
$
 1,340 
 
$
 629 
 
$
 2,333 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 66,368 
 
 
   
 
$
 364 
 
$
 1,135 
 
$
 563 
 
$
 2,062 
Net income
 
   
 
 
   
 
 
   
 
 
   
 
 
 160 
 
 
 160 
Capital contributions from PPL
 
   
 
 
   
 
 
   
 
 
 205 
 
 
   
 
 
 205 
Cash dividends declared on common stock
 
   
 
 
   
 
 
   
 
 
   
 
 
 (94)
 
 
 (94)
September 30, 2013
 
 66,368 
 
 
   
 
$
 364 
 
$
 1,340 
 
$
 629 
 
$
 2,333 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
 66,368 
 
 
   
 
$
 364 
 
$
 979 
 
$
 538 
 
$
 1,881 
Net income
 
   
 
 
   
 
 
   
 
 
   
 
 
 33 
 
 
 33 
Capital contributions from PPL
 
   
 
 
   
 
 
   
 
 
 150 
 
 
   
 
 
 150 
Cash dividends declared on common stock
 
   
 
 
   
 
 
   
 
 
   
 
 
 (19)
 
 
 (19)
September 30, 2012
 
 66,368 
 
 
   
 
$
 364 
 
$
 1,129 
 
$
 552 
 
$
 2,045 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 66,368 
 
$
 250 
 
$
 364 
 
$
 979 
 
$
 532 
 
$
 2,125 
Net income
 
   
 
 
   
 
 
   
 
 
   
 
 
 99 
 
 
 99 
Redemption of preference stock (b)
 
   
 
 
 (250)
 
 
   
 
 
   
 
 
   
 
 
 (250)
Capital contributions from PPL
 
   
 
 
   
 
 
   
 
 
 150 
 
 
   
 
 
 150 
Cash dividends declared on preference stock
 
   
 
 
   
 
 
   
 
 
   
 
 
 (4)
 
 
 (4)
Cash dividends declared on common stock
 
   
 
 
   
 
 
   
 
 
   
 
 
 (75)
 
 
 (75)
September 30, 2012
 
 66,368 
 
$
   
 
$
 364 
 
$
 1,129 
 
$
 552 
 
$
 2,045 

(a)
Shares in thousands.  All common shares of PPL Electric stock are owned by PPL.
(b)
In June 2012, PPL Electric redeemed all of its outstanding preference stock.

 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
20
 





(THIS PAGE LEFT BLANK INTENTIONALLY.)

 
21
 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
2013 
 
2012 
 
 
2013 
 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
 
$
 744 
 
$
 732 
 
$
 2,226 
 
$
 2,095 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 237 
 
 
 249 
 
 
 684 
 
 
 677 
 
 
Energy purchases
 
 
 23 
 
 
 27 
 
 
 146 
 
 
 135 
 
 
Other operation and maintenance
 
 
 188 
 
 
 186 
 
 
 582 
 
 
 589 
 
Depreciation
 
 
 84 
 
 
 87 
 
 
 249 
 
 
 259 
 
Taxes, other than income
 
 
 12 
 
 
 11 
 
 
 36 
 
 
 34 
 
Total Operating Expenses
 
 
 544 
 
 
 560 
 
 
 1,697 
 
 
 1,694 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 200 
 
 
 172 
 
 
 529 
 
 
 401 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense) - net
 
 
 (4)
 
 
 (4)
 
 
 (6)
 
 
 (14)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
 
 37 
 
 
 37 
 
 
 110 
 
 
 112 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense with Affiliate
 
 
   
 
 
   
 
 
 1 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
 
 
 159 
 
 
 131 
 
 
 412 
 
 
 275 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes
 
 
 59 
 
 
 48 
 
 
 153 
 
 
 89 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations After Income Taxes
 
 
 100 
 
 
 83 
 
 
 259 
 
 
 186 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (Loss) from Discontinued Operations (net of income taxes)
 
 
   
 
 
   
 
 
 1 
 
 
 (6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (a)
 
$
 100 
 
$
 83 
 
$
 260 
 
$
 180 

(a)
Net income approximates comprehensive income.

 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
22
 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
2013 
 
 
2012 
Cash Flows from Operating Activities
 
 
 
 
 
 
 
 
Net income
 
$
 260 
 
 
$
 180 
 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
 
 
 
 
Depreciation
 
 
 249 
 
 
 
 259 
 
 
Amortization
 
 
 19 
 
 
 
 20 
 
 
Defined benefit plans - expense
 
 
 38 
 
 
 
 30 
 
 
Deferred income taxes and investment tax credits
 
 
 99 
 
 
 
 92 
 
 
Other
 
 
 6 
 
 
 
 (5)
 
Change in current assets and current liabilities
 
 
 
 
 
 
 
 
 
Accounts receivable
 
 
 (78)
 
 
 
 (25)
 
 
Accounts payable
 
 
 34 
 
 
 
 4 
 
 
Accounts payable to affiliates
 
 
 1 
 
 
 
   
 
 
Unbilled revenues
 
 
 19 
 
 
 
 26 
 
 
Fuel, materials and supplies
 
 
 1 
 
 
 
 4 
 
 
Income tax receivable
 
 
   
 
 
 
 3 
 
 
Taxes payable
 
 
 83 
 
 
 
 51 
 
 
Accrued interest
 
 
 30 
 
 
 
 29 
 
 
Other
 
 
   
 
 
 
 19 
 
Other operating activities
 
 
 
 
 
 
 
 
 
Defined benefit plans - funding
 
 
 (159)
 
 
 
 (66)
 
 
Settlement of interest rate swaps
 
 
 98 
 
 
 
   
 
 
Other assets
 
 
 (1)
 
 
 
 (3)
 
 
Other liabilities
 
 
 14 
 
 
 
 28 
 
 
 
Net cash provided by operating activities
 
 
 713 
 
 
 
 646 
Cash Flows from Investing Activities
 
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
 
 
 (891)
 
 
 
 (525)
 
Net (increase) decrease in notes receivable from affiliates
 
 
   
 
 
 
 9 
 
Net (increase) decrease in restricted cash and cash equivalents
 
 
 10 
 
 
 
 (3)
 
Other investing activities
 
 
 2 
 
 
 
   
 
 
 
Net cash provided by (used in) investing activities
 
 
 (879)
 
 
 
 (519)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
 
Net increase (decrease) in notes payable with affiliates
 
 
 27 
 
 
 
   
 
Net increase (decrease) in short-term debt
 
 
 87 
 
 
 
   
 
Debt issuance and credit facility costs
 
 
   
 
 
 
 (1)
 
Distributions to member
 
 
 (116)
 
 
 
 (95)
 
Contributions from member
 
 
 146 
 
 
 
   
 
 
 
Net cash provided by (used in) financing activities
 
 
 144 
 
 
 
 (96)
Net Increase (Decrease) in Cash and Cash Equivalents
 
 
 (22)
 
 
 
 31 
Cash and Cash Equivalents at Beginning of Period
 
 
 43 
 
 
 
 59 
Cash and Cash Equivalents at End of Period
 
$
 21 
 
 
$
 90 
 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
23
 

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 21 
 
$ 
 43 
 
Accounts receivable (less reserve: 2013, $22; 2012, $19)
 
 
 
 
 
 
 
 
Customer
 
 
 216 
 
 
 133 
 
 
Other
 
 
 18 
 
 
 20 
 
Unbilled revenues
 
 
 137 
 
 
 156 
 
Accounts receivable from affiliates
 
 
   
 
 
 1 
 
Fuel, materials and supplies
 
 
 275 
 
 
 276 
 
Prepayments
 
 
 24 
 
 
 28 
 
Price risk management assets from affiliates
 
 
   
 
 
 14 
 
Deferred income taxes
 
 
 20 
 
 
 13 
 
Regulatory assets
 
 
 29 
 
 
 19 
 
Other current assets
 
 
 6 
 
 
 4 
 
Total Current Assets
 
 
 746 
 
 
 707 
 
 
 
 
 
 
 
 
 
 
Property, Plant and Equipment
 
 
 
 
 
 
 
Regulated utility plant
 
 
 8,434 
 
 
 8,073 
 
Less: accumulated depreciation - regulated utility plant
 
 
 713 
 
 
 519 
 
 
Regulated utility plant, net
 
 
 7,721 
 
 
 7,554 
 
Other, net
 
 
 3 
 
 
 3 
 
Construction work in progress
 
 
 1,341 
 
 
 750 
 
Property, Plant and Equipment, net
 
 
 9,065 
 
 
 8,307 
 
 
 
 
 
 
 
 
 
 
Other Noncurrent Assets
 
 
 
 
 
 
 
Regulatory assets
 
 
 566 
 
 
 630 
 
Goodwill
 
 
 996 
 
 
 996 
 
Other intangibles
 
 
 232 
 
 
 271 
 
Other noncurrent assets
 
 
 97 
 
 
 108 
 
Total Other Noncurrent Assets
 
 
 1,891 
 
 
 2,005 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
 11,702 
 
$
 11,019 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
24
 


CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
Short-term debt
 
$
 212 
 
$
 125 
 
Notes payable with affiliates
 
 
 52 
 
 
 25 
 
Accounts payable
 
 
 312 
 
 
 283 
 
Accounts payable to affiliates
 
 
 2 
 
 
 1 
 
Customer deposits
 
 
 49 
 
 
 48 
 
Taxes
 
 
 109 
 
 
 26 
 
Price risk management liabilities
 
 
 4 
 
 
 5 
 
Price risk management liabilities with affiliates
 
 
 14 
 
 
 
 
Regulatory liabilities
 
 
 17 
 
 
 9 
 
Interest
 
 
 51 
 
 
 21 
 
Other current liabilities
 
 
 104 
 
 
 100 
 
Total Current Liabilities
 
 
 926 
 
 
 643 
 
 
 
 
 
 
 
 
 
 
Long-term Debt
 
 
 4,076 
 
 
 4,075 
 
 
 
 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 
 
 
 
 
 
 
Deferred income taxes
 
 
 651 
 
 
 541 
 
Investment tax credits
 
 
 136 
 
 
 138 
 
Accrued pension obligations
 
 
 267 
 
 
 414 
 
Asset retirement obligations
 
 
 245 
 
 
 125 
 
Regulatory liabilities
 
 
 1,040 
 
 
 1,002 
 
Price risk management liabilities
 
 
 37 
 
 
 53 
 
Other deferred credits and noncurrent liabilities
 
 
 249 
 
 
 242 
 
Total Deferred Credits and Other Noncurrent Liabilities
 
 
 2,625 
 
 
 2,515 
 
 
 
 
 
 
 
 
 
 
Commitments and Contingent Liabilities (Notes 6 and 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Member's equity
 
 
 4,075 
 
 
 3,786 
 
 
 
 
 
 
 
 
 
 
Total Liabilities and Equity
 
$
 11,702 
 
$
 11,019 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
25
 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
Member's
 
 
 
Equity
 
 
 
 
June 30, 2013
 
$
 4,022 
Net income
 
 
 100 
Distributions to member
 
 
 (47)
September 30, 2013
 
$
 4,075 
 
 
 
 
December 31, 2012
 
$
 3,786 
Net income
 
 
 260 
Contributions from member
 
 
 146 
Distributions to member
 
 
 (116)
Other comprehensive income (loss)
 
 
 (1)
September 30, 2013
 
$
 4,075 
 
 
 
 
June 30, 2012
 
$
3,774 
Net income
 
 
 83 
Distributions to member
 
 
 (35)
September 30, 2012
 
$
 3,822 
 
 
 
 
December 31, 2011
 
$
3,741 
Net income
 
 
 180 
Distributions to member
 
 
 (95)
Other comprehensive income (loss)
 
 
 (4)
September 30, 2012
 
$
 3,822 

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
26
 






(THIS PAGE LEFT BLANK INTENTIONALLY.)

 
27
 

CONDENSED STATEMENTS OF INCOME
Louisville Gas and Electric Company
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail and wholesale
 
$
 332 
 
$
 324 
 
$
 1,003 
 
$
 939 
 
Electric revenue from affiliate
 
 
 11 
 
 
 9 
 
 
 46 
 
 
 51 
 
Total Operating Revenues
 
 
 343 
 
 
 333 
 
 
 1,049 
 
 
 990 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 100 
 
 
 100 
 
 
 284 
 
 
 281 
 
 
Energy purchases
 
 
 18 
 
 
 18 
 
 
 129 
 
 
 110 
 
 
Energy purchases from affiliate
 
 
 2 
 
 
 3 
 
 
 6 
 
 
 9 
 
 
Other operation and maintenance
 
 
 93 
 
 
 87 
 
 
 278 
 
 
 277 
 
Depreciation
 
 
 37 
 
 
 38 
 
 
 110 
 
 
 114 
 
Taxes, other than income
 
 
 6 
 
 
 6 
 
 
 18 
 
 
 17 
 
Total Operating Expenses
 
 
 256 
 
 
 252 
 
 
 825 
 
 
 808 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 87 
 
 
 81 
 
 
 224 
 
 
 182 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense) - net
 
 
 (1)
 
 
 (3)
 
 
 (3)
 
 
 (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
 
 10 
 
 
 10 
 
 
 30 
 
 
 31 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Before Income Taxes
 
 
 76 
 
 
 68 
 
 
 191 
 
 
 148 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes
 
 
 27 
 
 
 25 
 
 
 69 
 
 
 54 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (a)
 
$
 49 
 
$
 43 
 
$
 122 
 
$
 94 

(a)
Net income equals comprehensive income.

 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
28
 

CONDENSED STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
2013 
 
 
2012 
Cash Flows from Operating Activities
 
 
 
 
 
 
 
 
Net income
 
$
 122 
 
 
$
 94 
 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
 
 
 
 
Depreciation
 
 
 110 
 
 
 
 114 
 
 
Amortization
 
 
 9 
 
 
 
 8 
 
 
Defined benefit plans - expense
 
 
 13 
 
 
 
 14 
 
 
Deferred income taxes and investment tax credits
 
 
 22 
 
 
 
 40 
 
 
Other
 
 
 10 
 
 
 
 (11)
 
Change in current assets and current liabilities
 
 
 
 
 
 
 
 
 
Accounts receivable
 
 
 (20)
 
 
 
 (5)
 
 
Accounts payable
 
 
 18 
 
 
 
 2 
 
 
Accounts payable to affiliates
 
 
 7 
 
 
 
   
 
 
Unbilled revenues
 
 
 10 
 
 
 
 16 
 
 
Fuel, materials and supplies
 
 
 2 
 
 
 
 (10)
 
 
Taxes payable
 
 
 32 
 
 
 
 21 
 
 
Other
 
 
 12 
 
 
 
 13 
 
Other operating activities
 
 
 
 
 
 
 
 
 
Defined benefit plans - funding
 
 
 (45)
 
 
 
 (26)
 
 
Settlement of interest rate swaps
 
 
 49 
 
 
 
   
 
 
Other assets
 
 
 (1)
 
 
 
 (2)
 
 
Other liabilities
 
 
 2 
 
 
 
 (1)
 
 
 
Net cash provided by operating activities
 
 
 352 
 
 
 
 267 
Cash Flows from Investing Activities
 
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
 
 
 (376)
 
 
 
 (193)
 
Net (increase) decrease in restricted cash and cash equivalents
 
 
 10 
 
 
 
 (3)
 
 
 
Net cash provided by (used in) investing activities
 
 
 (366)
 
 
 
 (196)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
 
Net increase (decrease) in short-term debt
 
 
 17 
 
 
 
   
 
Debt issuance and credit facility costs
 
 
   
 
 
 
 (1)
 
Payment of common stock dividends to parent
 
 
 (67)
 
 
 
 (47)
 
Contributions from parent
 
 
 54 
 
 
 
   
 
 
 
Net cash provided by (used in) financing activities
 
 
 4 
 
 
 
 (48)
Net Increase (Decrease) in Cash and Cash Equivalents
 
 
 (10)
 
 
 
 23 
Cash and Cash Equivalents at Beginning of Period
 
 
 22 
 
 
 
 25 
Cash and Cash Equivalents at End of Period
 
$
 12 
 
 
$ 
 48 
 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
29
 

CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 12 
 
$
 22 
 
Accounts receivable (less reserve: 2013, $2; 2012, $1)
 
 
 
 
 
 
 
 
Customer
 
 
 93 
 
 
 59 
 
 
Other
 
 
 9 
 
 
 16 
 
Unbilled revenues
 
 
 62 
 
 
 72 
 
Accounts receivable from affiliates
 
 
 8 
 
 
 14 
 
Fuel, materials and supplies
 
 
 140 
 
 
 142 
 
Prepayments
 
 
 4 
 
 
 7 
 
Price risk management from affiliates
 
 
   
 
 
 7 
 
Deferred income taxes
 
 
 3 
 
 
   
 
Regulatory assets
 
 
 19 
 
 
 19 
 
Other current assets
 
 
 1 
 
 
 1 
 
Total Current Assets
 
 
 351 
 
 
 359 
 
 
 
 
 
 
 
 
 
 
Property, Plant and Equipment
 
 
 
 
 
 
 
Regulated utility plant
 
 
 3,340 
 
 
 3,187 
 
Less: accumulated depreciation - regulated utility plant
 
 
 309 
 
 
 220 
 
 
Regulated utility plant, net
 
 
 3,031 
 
 
 2,967 
 
Other, net
 
 
 1 
 
 
   
 
Construction work in progress
 
 
 490 
 
 
 259 
 
Property, Plant and Equipment, net
 
 
 3,522 
 
 
 3,226 
 
 
 
 
 
 
 
 
 
 
Other Noncurrent Assets
 
 
 
 
 
 
 
Regulatory assets
 
 
 359 
 
 
 400 
 
Goodwill
 
 
 389 
 
 
 389 
 
Other intangibles
 
 
 126 
 
 
 144 
 
Other noncurrent assets
 
 
 33 
 
 
 44 
 
Total Other Noncurrent Assets
 
 
 907 
 
 
 977 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
 4,780 
 
$
 4,562 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
30
 


CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company
(Unaudited)
(Millions of Dollars, shares in thousands)
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
Short-term debt
 
$
 72 
 
$
 55 
 
Accounts payable
 
 
 147 
 
 
 117 
 
Accounts payable to affiliates
 
 
 30 
 
 
 23 
 
Customer deposits
 
 
 24 
 
 
 23 
 
Taxes
 
 
 34 
 
 
 2 
 
Price risk management liabilities
 
 
 4 
 
 
 5 
 
Price risk management liabilities with affiliates
 
 
 7 
 
 
 
 
Regulatory liabilities
 
 
 11 
 
 
 4 
 
Interest
 
 
 10 
 
 
 5 
 
Other current liabilities
 
 
 34 
 
 
 34 
 
Total Current Liabilities
 
 
 373 
 
 
 268 
 
 
 
 
 
 
 
 
 
 
Long-term Debt
 
 
 1,112 
 
 
 1,112 
 
 
 
 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 
 
 
 
 
 
 
Deferred income taxes
 
 
 577 
 
 
 544 
 
Investment tax credits
 
 
 39 
 
 
 40 
 
Accrued pension obligations
 
 
 56 
 
 
 102 
 
Asset retirement obligations
 
 
 69 
 
 
 56 
 
Regulatory liabilities
 
 
 489 
 
 
 471 
 
Price risk management liabilities
 
 
 37 
 
 
 53 
 
Other deferred credits and noncurrent liabilities
 
 
 109 
 
 
 106 
 
Total Deferred Credits and Other Noncurrent Liabilities
 
 
 1,376 
 
 
 1,372 
 
 
 
 
 
 
 
 
 
 
Commitments and Contingent Liabilities (Notes 6 and 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholder's Equity
 
 
 
 
 
 
 
Common stock - no par value (a)
 
 
 424 
 
 
 424 
 
Additional paid-in capital
 
 
 1,332 
 
 
 1,278 
 
Earnings reinvested
 
 
 163 
 
 
 108 
 
Total Equity
 
 
 1,919 
 
 
 1,810 
 
 
 
 
 
 
 
 
 
 
Total Liabilities and Equity
 
$
 4,780 
 
$
 4,562 

(a)
75,000 shares authorized; 21,294 shares issued and outstanding at September 30, 2013 and December 31, 2012.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
31
 

CONDENSED STATEMENTS OF EQUITY
Louisville Gas and Electric Company
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
shares
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
 
outstanding
 
 
Common
 
 
paid-in
 
 
Earnings
 
 
 
 
 
 
 
(a)
 
 
stock
 
 
capital
 
 
reinvested
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 21,294 
 
$
424 
 
$
1,332 
 
$
133 
 
$
1,889 
Net income
 
 
 
 
 
 
 
 
 
 
 49 
 
 
 49 
Cash dividends declared on common stock
 
 
 
 
 
 
 
 
 
 
 (19)
 
 
 (19)
September 30, 2013
 
21,294 
 
$
 424 
 
$
 1,332 
 
$
 163 
 
$
 1,919 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
21,294 
 
$
424 
 
$
1,278 
 
$
108 
 
$
 1,810 
Net income
 
 
 
 
 
 
 
 
 
 
 122 
 
 
 122 
Capital contributions from LKE
 
 
 
 
 
 
 
 54 
 
 
 
 
 
 54 
Cash dividends declared on common stock
 
 
 
 
 
 
 
 
 
 
 (67)
 
 
 (67)
September 30, 2013
 
21,294 
 
$
 424 
 
$
 1,332 
 
$
 163 
 
$
 1,919 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
21,294 
 
$
424 
 
$
1,278 
 
$
80 
 
$
1,782 
Net income
 
 
 
 
 
 
 
 
 
 
 43 
 
 
 43 
Cash dividends declared on common stock
 
 
 
 
 
 
 
 
 
 
 (16)
 
 
 (16)
September 30, 2012
 
 21,294 
 
$
 424 
 
$
 1,278 
 
$
 107 
 
$
 1,809 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
21,294 
 
$
424 
 
$
1,278 
 
$
60 
 
$
1,762 
Net income
 
 
 
 
 
 
 
 
 
 
 94 
 
 
 94 
Cash dividends declared on common stock
 
 
 
 
 
 
 
 
 
 
 (47)
 
 
 (47)
September 30, 2012
 
 21,294 
 
$
 424 
 
$
 1,278 
 
$
 107 
 
$
 1,809 

(a)
Shares in thousands.  All common shares of LG&E stock are owned by LKE.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
32
 




(THIS PAGE LEFT BLANK INTENTIONALLY.)

 
33
 

CONDENSED STATEMENTS OF INCOME
Kentucky Utilities Company
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
September 30,
 
September 30,
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail and wholesale
 
$
 412 
 
$
 408 
 
$
 1,223 
 
$
 1,156 
 
Electric revenue from affiliate
 
 
 2 
 
 
 3 
 
 
 6 
 
 
 9 
 
Total Operating Revenues
 
 
 414 
 
 
 411 
 
 
 1,229 
 
 
 1,165 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Operation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 137 
 
 
 149 
 
 
 400 
 
 
 396 
 
 
Energy purchases
 
 
 5 
 
 
 9 
 
 
 17 
 
 
 25 
 
 
Energy purchases from affiliate
 
 
 11 
 
 
 9 
 
 
 46 
 
 
 51 
 
 
Other operation and maintenance
 
 
 91 
 
 
 93 
 
 
 286 
 
 
 286 
 
Depreciation
 
 
 46 
 
 
 49 
 
 
 138 
 
 
 145 
 
Taxes, other than income
 
 
 6 
 
 
 5 
 
 
 18 
 
 
 17 
 
Total Operating Expenses
 
 
 296 
 
 
 314 
 
 
 905 
 
 
 920 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Income
 
 
 118 
 
 
 97 
 
 
 324 
 
 
 245 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Expense) - net
 
 
 (2)
 
 
 1 
 
 
 (1)
 
 
 (5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
 
 
 17 
 
 
 18 
 
 
 51 
 
 
 52 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Before Income Taxes
 
 
 99 
 
 
 80 
 
 
 272 
 
 
 188 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes
 
 
 36 
 
 
 30 
 
 
 101 
 
 
 70 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (a)
 
$
 63 
 
$
 50 
 
$
 171 
 
$
 118 

(a)
Net income equals comprehensive income.

 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
34
 

CONDENSED STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
2013 
 
 
2012 
Cash Flows from Operating Activities
 
 
 
 
 
 
 
 
Net income
 
$
 171 
 
 
$
 118 
 
Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
 
 
 
 
 
Depreciation
 
 
 138 
 
 
 
 145 
 
 
Amortization
 
 
 9 
 
 
 
 9 
 
 
Defined benefit plans - expense
 
 
 16 
 
 
 
 9 
 
 
Deferred income taxes and investment tax credits
 
 
 73 
 
 
 
 78 
 
 
Other
 
 
 (3)
 
 
 
 1 
 
Change in current assets and current liabilities
 
 
 
 
 
 
 
 
 
Accounts receivable
 
 
 (46)
 
 
 
 (34)
 
 
Accounts payable
 
 
 25 
 
 
 
 9 
 
 
Accounts payable to affiliates
 
 
 (9)
 
 
 
 (4)
 
 
Unbilled revenues
 
 
 9 
 
 
 
 10 
 
 
Fuel, materials and supplies
 
 
 (1)
 
 
 
 16 
 
 
Taxes payable
 
 
 39 
 
 
 
 26 
 
 
Accrued interest
 
 
 15 
 
 
 
 14 
 
 
Other
 
 
 (3)
 
 
 
 18 
 
Other operating activities
 
 
 
 
 
 
 
 
 
Defined benefit plans - funding
 
 
 (62)
 
 
 
 (20)
 
 
Settlement of interest rate swaps
 
 
 49 
 
 
 
   
 
 
Other assets
 
 
 (2)
 
 
 
 (1)
 
 
Other liabilities
 
 
 1 
 
 
 
 16 
 
 
 
Net cash provided by operating activities
 
 
 419 
 
 
 
 410 
Cash Flows from Investing Activities
 
 
 
 
 
 
 
 
Expenditures for property, plant and equipment
 
 
 (512)
 
 
 
 (331)
 
Other investing activities
 
 
 2 
 
 
 
   
 
 
 
Net cash provided by (used in) investing activities
 
 
 (510)
 
 
 
 (331)
Cash Flows from Financing Activities
 
 
 
 
 
 
 
 
Net increase (decrease) in short-term debt
 
 
 70 
 
 
 
   
 
Payment of common stock dividends to parent
 
 
 (83)
 
 
 
 (68)
 
Contributions from parent
 
 
 92 
 
 
 
   
 
 
 
Net cash provided by (used in) financing activities
 
 
 79 
 
 
 
 (68)
Net Increase (Decrease) in Cash and Cash Equivalents
 
 
 (12)
 
 
 
 11 
Cash and Cash Equivalents at Beginning of Period
 
 
 21 
 
 
 
 31 
Cash and Cash Equivalents at End of Period
 
$
 9 
 
 
$
 42 
 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
35
 

CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 9 
 
$ 
 21 
 
Accounts receivable (less reserve: 2013, $4; 2012, $2)
 
 
 
 
 
 
 
 
Customer
 
 
 123 
 
 
 74 
 
 
Other
 
 
 8 
 
 
 13 
 
Unbilled revenues
 
 
 75 
 
 
 84 
 
Accounts receivable from affiliates
 
 
 10 
 
 
 7 
 
Fuel, materials and supplies
 
 
 135 
 
 
 134 
 
Prepayments
 
 
 11 
 
 
 10 
 
Price risk management assets from affiliates
 
 
   
 
 
 7 
 
Deferred income taxes
 
 
 3 
 
 
 3 
 
Regulatory assets
 
 
 10 
 
 
   
 
Other current assets
 
 
 5 
 
 
 3 
 
Total Current Assets
 
 
 389 
 
 
 356 
 
 
 
 
 
 
 
 
 
 
Property, Plant and Equipment
 
 
 
 
 
 
 
Regulated utility plant
 
 
 5,094 
 
 
 4,886 
 
Less: accumulated depreciation - regulated utility plant
 
 
 404 
 
 
 299 
 
 
Regulated utility plant, net
 
 
 4,690 
 
 
 4,587 
 
Other, net
 
 
 1 
 
 
 1 
 
Construction work in progress
 
 
 849 
 
 
 490 
 
Property, Plant and Equipment, net
 
 
 5,540 
 
 
 5,078 
 
 
 
 
 
 
 
 
 
 
Other Noncurrent Assets
 
 
 
 
 
 
 
Regulatory assets
 
 
 207 
 
 
 230 
 
Goodwill
 
 
 607 
 
 
 607 
 
Other intangibles
 
 
 106 
 
 
 127 
 
Other noncurrent assets
 
 
 57 
 
 
 57 
 
Total Other Noncurrent Assets
 
 
 977 
 
 
 1,021 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
 6,906 
 
$
 6,455 
 
 
 
 
 
 
 
 
 
 
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
36
 


CONDENSED BALANCE SHEETS
Kentucky Utilities Company
(Unaudited)
(Millions of Dollars, shares in thousands)
 
 
 
 
 
September 30,
 
December 31,
 
 
 
 
 
2013 
 
2012 
Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
Short-term debt
 
$
 140 
 
$
 70 
 
Accounts payable
 
 
 155 
 
 
 147 
 
Accounts payable to affiliates
 
 
 24 
 
 
 33 
 
Customer deposits
 
 
 25 
 
 
 25 
 
Taxes
 
 
 65 
 
 
 26 
 
Price risk management liabilities with affiliates
 
 
 7 
 
 
 
 
Regulatory liabilities
 
 
 6 
 
 
 5 
 
Interest
 
 
 25 
 
 
 10 
 
Other current liabilities
 
 
 31 
 
 
 33 
 
Total Current Liabilities
 
 
 478 
 
 
 349 
 
 
 
 
 
 
 
 
 
 
Long-term Debt
 
 
 1,843 
 
 
 1,842 
 
 
 
 
 
 
 
Deferred Credits and Other Noncurrent Liabilities
 
 
 
 
 
 
 
Deferred income taxes
 
 
 660 
 
 
 587 
 
Investment tax credits
 
 
 97 
 
 
 98 
 
Accrued pension obligations
 
 
 45 
 
 
 104 
 
Asset retirement obligations
 
 
 176 
 
 
 69 
 
Regulatory liabilities
 
 
 551 
 
 
 531 
 
Other deferred credits and noncurrent liabilities
 
 
 93 
 
 
 92 
 
Total Deferred Credits and Other Noncurrent Liabilities
 
 
 1,622 
 
 
 1,481 
 
 
 
 
 
 
 
 
 
 
Commitments and Contingent Liabilities (Notes 6 and 10)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholder's Equity
 
 
 
 
 
 
 
Common stock - no par value (a)
 
 
 308 
 
 
 308 
 
Additional paid-in capital
 
 
 2,440 
 
 
 2,348 
 
Accumulated other comprehensive income (loss)
 
 
 1 
 
 
 1 
 
Earnings reinvested
 
 
 214 
 
 
 126 
 
Total Equity
 
 
 2,963 
 
 
 2,783 
 
 
 
 
 
 
 
 
 
 
Total Liabilities and Equity
 
$
 6,906 
 
$
 6,455 

(a)
80,000 shares authorized; 37,818 shares issued and outstanding at September 30, 2013 and December 31, 2012.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
37
 

CONDENSED STATEMENTS OF EQUITY
Kentucky Utilities Company
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
(Millions of Dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
stock
 
 
 
 
 
 
 
 
 
 
other
 
 
 
 
 
shares
 
 
 
 
Additional
 
 
 
 
comprehensive
 
 
 
 
 
outstanding
 
Common
 
paid-in
 
Earnings
 
income
 
 
 
 
 
(a)
 
stock
 
capital
 
reinvested
 
(loss)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
 37,818 
 
$
308 
 
$
2,440 
 
$
179 
 
$
 1 
 
$
 2,928 
Net income
 
 
 
 
 
 
 
 
 
 
 63 
 
 
 
 
 
 63 
Cash dividends declared on common stock
 
 
 
 
 
 
 
 
 
 
 (28)
 
 
 
 
 
 (28)
September 30, 2013
 
37,818 
 
$
 308 
 
$
 2,440 
 
$
 214 
 
$
 1 
 
$
 2,963 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
37,818 
 
$
308 
 
$
2,348 
 
$
126 
 
$
 1 
 
$
2,783 
Net income
 
 
 
 
 
 
 
 
 
 
 171 
 
 
 
 
 
 171 
Capital contributions from LKE
 
 
 
 
 
 
 
 92 
 
 
 
 
 
 
 
 
 92 
Cash dividends declared on common stock
 
 
 
 
 
 
 
 
 
 
 (83)
 
 
 
 
 
 (83)
September 30, 2013
 
37,818 
 
$
 308 
 
$
 2,440 
 
$
 214 
 
$
 1 
 
$
 2,963 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2012
 
37,818 
 
$
308 
 
$
2,348 
 
$
109 
 
$
 (4)
 
$
2,761 
Net income
 
 
 
 
 
 
 
 
 
 
 50 
 
 
 
 
 
 50 
Cash dividends declared on common stock
 
 
 
 
 
 
 
 
 
 
 (20)
 
 
 
 
 
 (20)
September 30, 2012
 
37,818 
 
$
 308 
 
$
 2,348 
 
$
 139 
 
$
 (4)
 
$
 2,791 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
37,818 
 
$
308 
 
$
2,348 
 
$
89 
 
 
 
 
$
2,745 
Net income
 
 
 
 
 
 
 
 
 
 
 118 
 
 
 
 
 
 118 
Cash dividends declared on common stock
 
 
 
 
 
 
 
 
 
 
 (68)
 
 
 
 
 
 (68)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
$
 (4)
 
 
 (4)
September 30, 2012
 
37,818 
 
$
 308 
 
$
 2,348 
 
$
 139 
 
$
 (4)
 
$
 2,791 

(a)
Shares in thousands.  All common shares of KU stock are owned by LKE.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
38
 

Combined Notes to Condensed Financial Statements (Unaudited)


1.  Interim Financial Statements

(All Registrants)

Capitalized terms and abbreviations appearing in the unaudited combined notes to condensed financial statements are defined in the glossary.  Dollars are in millions, except per share data, unless otherwise noted.  The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for their related activities and disclosures.  Within combined disclosures, amounts are disclosed for any Registrant when significant.

The accompanying unaudited condensed financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation in accordance with GAAP are reflected in the condensed financial statements.  All adjustments are of a normal recurring nature, except as otherwise disclosed.  Each Registrant's Balance Sheet at December 31, 2012 is derived from that Registrant's 2012 audited Balance Sheet.  The financial statements and notes thereto should be read in conjunction with the financial statements and notes contained in each Registrant's 2012 Form 10-K.  The results of operations for the three and nine months ended September 30, 2013, are not necessarily indicative of the results to be expected for the full year ending December 31, 2013, or other future periods, because results for interim periods can be disproportionately influenced by various factors, developments and seasonal variations.

The classification of certain prior period amounts has been changed to conform to the presentation in the September 30, 2013 financial statements.

2.  Summary of Significant Accounting Policies

(All Registrants)

The following accounting policy disclosures represent updates to Note 1 in each Registrant's 2012 Form 10-K and should be read in conjunction with those disclosures.

Accounts Receivable (PPL, PPL Energy Supply and PPL Electric)

In accordance with a PUC-approved purchase of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative suppliers (including PPL EnergyPlus) at a discount, which reflects a provision for uncollectible accounts.  The alternative suppliers have no continuing involvement or interest in the purchased accounts receivable.  The purchased accounts receivable are initially recorded at fair value using a market approach based on the purchase price paid and are classified as Level 2 in the fair value hierarchy.  During the three and nine months ended September 30, 2013, PPL Electric purchased $259 million and $738 million of accounts receivable from unaffiliated third parties and $75 million and $222 million from PPL EnergyPlus.  During the three and nine months ended September 30, 2012, PPL Electric purchased $225 million and $647 million of accounts receivable from unaffiliated third parties and $81 million and $237 million from PPL EnergyPlus.

Depreciation (PPL and Kentucky Registrants)

The KPSC approved new lower depreciation rates for LG&E and KU as part of the rate-case settlement agreement reached in
2012.  The new rates became effective January 1, 2013 and will result in lower depreciation of approximately $19 million ($9 million for LG&E and $10 million for KU) in 2013, exclusive of net additions to PP&E since the rate case.
 
 
New Accounting Guidance Adopted (All Registrants)

Improving Disclosures about Offsetting Balance Sheet Items

Effective January 1, 2013, the Registrants retrospectively adopted accounting guidance issued to enhance disclosures about derivative instruments that either (1) offset on the balance sheet or (2) are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet.

 
39
 


The adoption of this guidance resulted in enhanced disclosures but did not have a significant impact on the Registrants.  See Note 14 for the new disclosures.

Testing Indefinite-Lived Intangible Assets for Impairment

Effective January 1, 2013, the Registrants prospectively adopted accounting guidance that allows an entity to elect the option to first make a qualitative evaluation about the likelihood of an impairment of an indefinite-lived intangible asset.  If, based on this assessment, the entity determines that it is more likely than not that the fair value of the indefinite-lived intangible asset exceeds the carrying amount, a quantitative impairment test does not need to be performed.  If the entity concludes otherwise, a quantitative impairment test must be performed by determining the fair value of the asset and comparing it with the carrying value.  The entity would record an impairment charge, if necessary.

The adoption of this guidance did not have a significant impact on the Registrants.

Reporting Amounts Reclassified Out of AOCI

Effective January 1, 2013, the Registrants prospectively adopted accounting guidance issued to improve the reporting of reclassifications out of AOCI.  The Registrants are required to provide information about the effects on net income of significant amounts reclassified out of AOCI by their respective statement of income line item, if the item is required to be reclassified to net income in its entirety.  For items not reclassified to net income in their entirety, the Registrants are required to reference other disclosures that provide greater detail about these reclassifications.

The adoption of this guidance resulted in enhanced disclosures but did not have a significant impact on the Registrants.  See Note 18 for the new disclosures.

3.  Segment and Related Information

(PPL)

See Note 2 in PPL's 2012 Form 10-K for a discussion of reportable segments.  "Corporate and Other" primarily includes financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, as well as certain unallocated assets, which is presented to reconcile segment information to PPL's consolidated results.  For 2012, there were no significant costs or assets in this category.

In 2013, costs included in the Corporate and Other category increased, as anticipated, primarily due to an increase in financing at PPL Capital Funding not directly attributable to a particular segment.  PPL's growth in rate-regulated businesses provides the organization an enhanced corporate-level financing alternative, through PPL Capital Funding, that further enables PPL to cost-effectively support targeted credit profiles across all of PPL's rated companies.  As a result, PPL plans to further utilize PPL Capital Funding in addition to continued direct financing by the operating companies.  The financing costs associated primarily with PPL Capital Funding's new securities issuances, with certain exceptions including the remarketing of the debt component of the Equity Units, have not been directly assigned or allocated to any segment and generally have been reflected in Corporate and Other in 2013.

For the periods ended September 30, financial data for the segments are:

 
 
 
 
 
 
Three Months
 
Nine Months
 
 
2013 
 
2012 
 
2013 
 
2012 
Income Statement Data
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
 
 
 
 
 
 
 
 
 
 
 
 
 
U.K. Regulated
 
$
 543 
 
$
 528 
 
$
 1,763 
 
$
 1,647 
 
Kentucky Regulated
 
 
 744 
 
 
 732 
 
 
 2,226 
 
 
 2,095 
 
Pennsylvania Regulated
 
 
 463 
 
 
 443 
 
 
 1,388 
 
 
 1,303 
 
Supply (a)
 
 
 1,352 
 
 
 700 
 
 
 3,626 
 
 
 4,019 
 
Corporate and Other
 
 
 3 
 
 
 
 
 
 9 
 
 
 
Total
 
$
 3,105 
 
$
 2,403 
 
$
 9,012 
 
$
 9,064 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intersegment electric revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Pennsylvania Regulated
 
$
 1 
 
$
 1 
 
$
 3 
 
$
 3 
 
Supply
 
 
 11 
 
 
 23 
 
 
 37 
 
 
 61 

 
40
 


 
 
 
 
 
 
Three Months
 
Nine Months
 
 
2013 
 
2012 
 
2013 
 
2012 
Net Income Attributable to PPL Shareowners
 
 
 
 
 
 
 
 
 
 
 
 
 
U.K. Regulated (a)
 
$
 183 
 
$
 202 
 
$
 741 
 
$
 563 
 
Kentucky Regulated
 
 
 93 
 
 
 72 
 
 
 227 
 
 
 148 
 
Pennsylvania Regulated
 
 
 51 
 
 
 33 
 
 
 160 
 
 
 95 
 
Supply (a)
 
 
 91 
 
 
 48 
 
 
 122 
 
 
 361 
 
Corporate and Other
 
 
 (8)
 
 
   
 
 
 (22)
 
 
   
Total
 
$
 410 
 
$
 355 
 
$
 1,228 
 
$
 1,167 

 
 
 
September 30,
 
December 31,
 
 
 
2013 
 
2012 
Balance Sheet Data
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
U.K. Regulated
 
$
 14,329 
 
$
 14,073 
 
Kentucky Regulated
 
 
 11,368 
 
 
 10,670 
 
Pennsylvania Regulated
 
 
 6,729 
 
 
 6,023 
 
Supply
 
 
 12,198 
 
 
 12,868 
 
Corporate and Other (b)
 
 
 364 
 
 
 
Total assets
 
$
 44,988 
 
$
 43,634 

(a)
Includes unrealized gains and losses from economic activity.  See Note 14 for additional information.
(b)
Primarily consists of unallocated assets, including cash, PP&E and the elimination of inter-segment transactions.

4.  Earnings Per Share

(PPL)

Basic EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding during the applicable period.  Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding, increased by incremental shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares as calculated using the treasury stock method or If-Converted Method, as applicable.  The If-Converted Method was applied to the Equity Units prior to settlement beginning in the first quarter of 2013.  Incremental non-participating securities that have a dilutive impact are detailed in the table below.

See Note 7 for information on the April and May 2013 settlements of forward sale agreements and the July 2013 issuance of PPL common stock to settle the 2010 Purchase Contracts.

Reconciliations of the amounts of income and shares of PPL common stock (in thousands) for the periods ended September 30 used in the EPS calculation are:

 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Income (Numerator)
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations after income taxes attributable to PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
shareowners
 
$
 409 
 
$
 355 
 
$
 1,226 
 
$
 1,173 
Less amounts allocated to participating securities
 
 
 2 
 
 
 2 
 
 
 6 
 
 
 7 
Income from continuing operations after income taxes available to PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
common shareowners - Basic
 
 
 407 
 
 
 353 
 
 
 1,220 
 
 
 1,166 
Plus interest charges (net of tax) related to Equity Units
 
 
 7 
 
 
 
 
 
 37 
 
 
 
Income from continuing operations after income taxes available to PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
common shareowners - Diluted
 
$
 414 
 
$
 353 
 
$
 1,257 
 
$
 1,166 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations (net of income taxes) available
 
 
 
 
 
 
 
 
 
 
 
 
 
to PPL common shareowners - Basic and Diluted
 
$
 1 
 
$
   
 
$
 2 
 
$
 (6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to PPL shareowners
 
$
 410 
 
$
 355 
 
$
 1,228 
 
$
 1,167 
Less amounts allocated to participating securities
 
 
 2 
 
 
 2 
 
 
 6 
 
 
 7 
Net income available to PPL common shareowners - Basic
 
 
 408 
 
 
 353 
 
 
 1,222 
 
 
 1,160 
Plus interest charges (net of tax) related to Equity Units
 
 
 7 
 
 
   
 
 
 37 
 
 
   
Net income available to PPL common shareowners - Diluted
 
$
 415 
 
$
 353 
 
$
 1,259 
 
$
 1,160 

 
41
 

 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Shares of Common Stock (Denominator)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average shares - Basic EPS
 
 
 631,046 
 
 
 580,585 
 
 
 601,275 
 
 
 579,847 
Add incremental non-participating securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based payment awards
 
 
 1,163 
 
 
 635 
 
 
 1,035 
 
 
 522 
 
 
Equity Units
 
 
 32,134 
 
 
 439 
 
 
 59,171 
 
 
 146 
 
 
Forward sale agreements
 
 
   
 
 
 977 
 
 
 613 
 
 
 415 
Weighted-average shares - Diluted EPS
 
 
 664,343 
 
 
 582,636 
 
 
 662,094 
 
 
 580,930 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
 
Available to PPL common shareowners:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations after income taxes
 
$
 0.65 
 
$
 0.61 
 
$
 2.03 
 
$
 2.01 
 
 
Income (loss) from discontinued operations (net of income taxes)
 
 
   
 
 
   
 
 
   
 
 
(0.01)
 
 
Net Income
 
$
 0.65 
 
$
 0.61 
 
$
 2.03 
 
$
 2.00 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
 
 
 
 
Available to PPL common shareowners:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations after income taxes
 
$
 0.62 
 
$
 0.61 
 
$
 1.90 
 
$
 2.01 
 
 
Income (loss) from discontinued operations (net of income taxes)
 
 
   
 
 
   
 
 
   
 
 
(0.01)
 
 
Net Income
 
$
 0.62 
 
$
 0.61 
 
$
 1.90 
 
$
 2.00 

For the periods ended September 30, PPL issued common stock related to stock-based compensation plans, ESOP and DRIP as follows:

(Shares in thousands)
 
Three Months
 
Nine Months
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation plans (a)
 
 
 85 
 
 
 159 
 
 
 1,469 
 
 
 512 
ESOP
 
 
   
 
 
   
 
 
 275 
 
 
 280 
DRIP
 
 
   
 
 
 598 
 
 
 549 
 
 
 1,773 

(a)
Includes stock options exercised, vesting of restricted stock and restricted stock units and conversion of stock units granted to directors.

See Note 7 for information on the repurchase of shares of PPL common stock that offset the 2013 issuances of common stock under stock-based compensation plans, ESOP and DRIP.

For the periods ended September 30, the following were excluded from the computations of diluted EPS because the effect would have been antidilutive.

 
 
Three Months
 
Nine Months
(Shares in thousands)
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options
 
 
 1,136 
 
 
 4,935 
 
 
 4,793 
 
 
 5,622 
Performance units
 
 
 1 
 
 
   
 
 
 73 
 
 
 76 
Restricted stock units
 
 
   
 
 
   
 
 
 39 
 
 
   

5.  Income Taxes

Reconciliations of income taxes for the periods ended September 30 are:

(PPL)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal income tax on Income from Continuing Operations Before
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes at statutory tax rate - 35%
 
$
 173 
 
$
 130 
 
$
 550 
 
$
 539 

 
42
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Increase (decrease) due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
 
 12 
 
 
 6 
 
 
 29 
 
 
 38 
 
 
State valuation allowance adjustments (a)
 
 
 38 
 
 
 2 
 
 
 38 
 
 
 2 
 
 
Impact of lower U.K. income tax rates (b)
 
 
 (38)
 
 
 (30)
 
 
 (101)
 
 
 (75)
 
 
U.S. income tax on foreign earnings - net of foreign tax credit (c)
 
 
 10 
 
 
 1 
 
 
 5 
 
 
 2 
 
 
Federal and state tax reserve adjustments (d)
 
 
 (1)
 
 
 (2)
 
 
 (41)
 
 
 (7)
 
 
Foreign tax reserve adjustments
 
 
 (2)
 
 
   
 
 
 (2)
 
 
 (5)
 
 
Federal and state income tax return adjustments
 
 
 (4)
 
 
    
 
 
 (4)
 
 
   
 
 
Enactment of the U.K.'s Finance Acts 2013 and 2012 (b)
 
 
 (93)
 
 
 (74)
 
 
 (93)
 
 
 (74)
 
 
Federal income tax credits
 
 
 (4)
 
 
 (5)
 
 
 (9)
 
 
 (12)
 
 
Amortization of investment tax credit
 
 
 (1)
 
 
 (2)
 
 
 (6)
 
 
 (7)
 
 
Depreciation not normalized
 
 
 (2)
 
 
 (2)
 
 
 (6)
 
 
 (6)
 
 
State deferred tax rate change (e)
 
 
   
 
 
 (6)
 
 
   
 
 
 (17)
 
 
Net operating loss carryforward adjustments (f)
 
 
   
 
 
   
 
 
   
 
 
 (9)
 
 
Intercompany interest on U.K. financing entities (g)
 
 
 (2)
 
 
 (3)
 
 
 (7)
 
 
 (8)
 
 
Other
 
 
 (2)
 
 
 2 
 
 
 (9)
 
 
 3 
 
 
 
Total increase (decrease)
 
 
 (89)
 
 
 (113)
 
 
 (206)
 
 
 (175)
Total income taxes from continuing operations
 
$
 84 
 
$
 17 
 
$
 344 
 
$
 364 
 
(a)
During the three and nine months ended September 30, 2013, PPL recorded an increase in state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.
(b)
The U.K. Finance Act 2013, enacted in July 2013, reduced the U.K. statutory income tax rate from 23% to 21% effective April 1, 2014 and from 21% to 20% effective April 1, 2015.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit in the third quarter of 2013 related to both rate decreases.

The U.K. Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit in the third quarter of 2012 related to both rate decreases.
(c)
During the three and nine months ended September 30, 2013, PPL recorded a $10 million and $24 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013.

During the nine months ended September 30, 2013, PPL recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that was reflected on an amended 2010 U.S. tax return.
(d)
In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD.  PPL filed its tax returns for years subsequent to its 1997 and 1998 claims for refund on the basis that the U.K. WPT was creditable.  In September 2010, the U.S. Tax Court (Tax Court) ruled in PPL's favor in a dispute with the IRS, concluding that the U.K. WPT is a creditable tax for U.S. tax purposes.  In January 2011, the IRS appealed the Tax Court's decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit).  In December 2011, the Third Circuit issued its opinion reversing the Tax Court's decision, holding that the U.K. WPT is not a creditable tax.  As a result of the Third Circuit's adverse determination, PPL recorded a $39 million expense in the fourth quarter of 2011.  In June 2012, the U.S. Court of Appeals for the Fifth Circuit issued a contrary opinion in an identical case involving another company.  In July 2012, PPL filed a petition for a writ of certiorari seeking U.S. Supreme Court review of the Third Circuit's opinion.  The Supreme Court granted PPL's petition and oral argument was held in February 2013.  On May 20, 2013, the Supreme Court reversed the Third Circuit's opinion and ruled that the WPT is a creditable tax.  As a result of the Supreme Court ruling, PPL recorded a tax benefit of $44 million during the nine months ended September 30, 2013, of which $19 million relates to interest.
(e)
During the three and nine months ended September 30, 2012, PPL recorded adjustments related to state deferred tax liabilities.
(f)
During the nine months ended September 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(g)
PPL recorded foreign income tax benefits related to interest expense on intercompany loans for which there was no domestic income tax expense.            
 
(PPL Energy Supply)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Federal income tax on Income Before Income Taxes at statutory
 
 
 
 
 
 
 
 
 
 
 
 
 
tax rate - 35%
 
$
 70 
 
$
 25 
 
$
 98 
 
$
 205 
Increase (decrease) due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
 
 7 
 
 
 1 
 
 
 10 
 
 
 25 
 
 
State valuation allowance adjustments
 
 
 4 
 
 
 2 
 
 
 4 
 
 
 2 
 
 
Federal and state tax reserve adjustments (a)
 
 
   
 
 
   
 
 
 6 
 
 
   
 
 
Federal income tax credits
 
 
 (4)
 
 
 (4)
 
 
 (7)
 
 
 (10)
 
 
State deferred tax rate change (b)
 
 
   
 
 
 (6)
 
 
   
 
 
 (17)
 
 
Other
 
 
 (3)
 
 
 (2)
 
 
 (5)
 
 
 (3)
 
 
 
Total increase (decrease)
 
 
 4 
 
 
 (9)
 
 
 8 
 
 
 (3)
Total income taxes
 
$
 74 
 
$
 16 
 
$
 106 
 
$
 202 

(a)
During the nine months ended September 30, 2013, PPL Energy Supply reversed $3 million in tax benefits related to a 2008 change in method of accounting for certain expenditures for tax purposes and recorded $4 million in federal tax reserves related to differences in over (under) payment interest rates applied to audit claims as a result of the U.S. Supreme Court decision related to Windfall Profits Tax.
(b)
During the three and nine months ended September 30, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities.
 
43
 
(PPL Electric)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal income tax on Income Before Income Taxes at statutory
 
 
 
 
 
 
 
 
 
 
 
 
 
tax rate - 35%
 
$
 27 
 
$
 17 
 
$
 85 
 
$
 51 
Increase (decrease) due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
 
 5 
 
 
 2 
 
 
 13 
 
 
 7 
 
 
Federal and state tax reserve adjustments
 
 
 (2)
 
 
 (2)
 
 
 (6)
 
 
 (5)
 
 
Depreciation not normalized
 
 
 (2)
 
 
 (1)
 
 
 (6)
 
 
 (5)
 
 
Other
 
 
 (2)
 
 
   
 
 
 (3)
 
 
 (1)
 
 
 
Total increase (decrease)
 
 
 (1)
 
 
 (1)
 
 
 (2)
 
 
 (4)
Total income taxes
 
$
 26 
 
$
 16 
 
$
 83 
 
$
 47 

(LKE)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal income tax on Income from Continuing Operations Before
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes at statutory tax rate - 35%
 
$
 56 
 
$
 46 
 
$
 144 
 
$
 96 
Increase (decrease) due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
 
 6 
 
 
 5 
 
 
 14 
 
 
 7 
 
 
Amortization of investment tax credit
 
 
 (1)
 
 
 (1)
 
 
 (3)
 
 
 (4)
 
 
Net operating loss carryforward adjustments (a)
 
 
   
 
 
   
 
 
   
 
 
 (9)
 
 
Other
 
 
 (2)
 
 
 (2)
 
 
 (2)
 
 
 (1)
 
 
 
Total increase (decrease)
 
 
 3 
 
 
 2 
 
 
 9 
 
 
 (7)
Total income taxes from continuing operations
 
$
 59 
 
$
 48 
 
$
 153 
 
$
 89 

(a)
During the nine months ended September 30, 2012, LKE recorded adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.

(LG&E)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal income tax on Income Before Income Taxes at statutory
 
 
 
 
 
 
 
 
 
 
 
 
 
 tax rate - 35%
 
$
 27 
 
$
 24 
 
$
 67 
 
$
 52 
Increase (decrease) due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
 
 3 
 
 
 2 
 
 
 7 
 
 
 5 
 
 
Other
 
 
 (3)
 
 
 (1)
 
 
 (5)
 
 
 (3)
 
 
 
Total increase (decrease)
 
 
   
 
 
 1 
 
 
 2 
 
 
 2 
Total income taxes
 
$
 27 
 
$
 25 
 
$
 69 
 
$
 54 

(KU)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal income tax on Income Before Income Taxes at statutory
 
 
 
 
 
 
 
 
 
 
 
 
 
tax rate - 35%
 
$
 35 
 
$
 28 
 
$
 95 
 
$
 66 
Increase (decrease) due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
 
 4 
 
 
 3 
 
 
 10 
 
 
 6 
 
 
Other
 
 
 (3)
 
 
 (1)
 
 
 (4)
 
 
 (2)
 
 
 
Total increase (decrease)
 
 
 1 
 
 
 2 
 
 
 6 
 
 
 4 
Total income taxes
 
$
 36 
 
$
 30 
 
$
 101 
 
$
 70 

Unrecognized Tax Benefits (All Registrants)

Changes to unrecognized tax benefits for the periods ended September 30 were as follows.
 
44
 
 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
2013 
 
2012 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
 
$
36 
 
$
113 
 
$
92 
 
$
145 
 
Additions based on tax positions of prior years
 
 
   
 
 
2 
 
 
   
 
 
6 
 
Reductions based on tax positions of prior years
 
 
   
 
 
   
 
 
(26)
 
 
(31)
 
Additions based on tax positions related to the current year
 
 
   
 
 
   
 
 
4 
 
 
   
 
Reductions based on tax positions related to the current year
 
 
   
 
 
(1)
 
 
   
 
 
(2)
 
Settlements
 
 
   
 
 
   
 
 
(30)
 
 
   
 
Lapse of applicable statutes of limitations
 
 
(5)
 
 
(2)
 
 
(9)
 
 
(6)
 
End of period
 
$
31 
 
$
112 
 
$
31 
 
$
112 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
 
$
15 
 
$
31 
 
$
30 
 
$
28 
 
Additions based on tax positions of prior years
 
 
   
 
 
   
 
 
   
 
 
4 
 
Reductions based on tax positions of prior years
 
 
   
 
 
   
 
 
(15)
 
 
(1)
 
End of period
 
$
15 
 
$
31 
 
$
15 
 
$
31 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Electric
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
 
$
12 
 
$
43 
 
$
26 
 
$
73 
 
Reductions based on tax positions of prior years
 
 
   
 
 
(1)
 
 
(10)
 
 
(28)
 
Additions based on tax positions related to the current year
 
 
   
 
 
   
 
 
   
 
 
1 
 
Lapse of applicable statutes of limitations
 
 
(3)
 
 
(2)
 
 
(7)
 
 
(6)
 
End of period
 
$
9 
 
$
40 
 
$
9 
 
$
40 

LKE's, LG&E's and KU's unrecognized tax benefits and changes in those unrecognized tax benefits were insignificant for the three and nine months ended September 30, 2013 and 2012.

At September 30, 2013, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase or decrease by the following amounts.

 
 
 
 
Increase
 
Decrease
 
 
 
 
 
 
 
 
 
PPL
 
$
 16 
 
$ 
 30 
PPL Energy Supply
 
 
   
 
 
 15 
PPL Electric
 
 
 16 
 
 
 8 

These potential changes could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positions related to the creditability of foreign taxes, the timing and utilization of foreign tax credits and the related impact on alternative minimum tax and other credits, the timing and/or valuation of certain deductions, intercompany transactions and unitary filing groups.  The events that could cause these changes are direct settlements with taxing authorities, litigation, legal or administrative guidance by relevant taxing authorities and the lapse of an applicable statute of limitation.

For LKE, LG&E and KU, no significant changes in unrecognized tax benefits are projected over the next 12 months.

At September 30, the total unrecognized tax benefits and related indirect effects that, if recognized, would decrease the effective income tax rate were as follows.

 
 
 
 
 
 
 
 
 
2013 
 
2012 
 
 
 
 
 
 
 
PPL
 
$
21 
 
$
34 
PPL Energy Supply
 
 
14 
 
 
14 

The amounts for PPL Electric, LKE, LG&E and KU were insignificant.

Other (PPL, PPL Energy Supply and PPL Electric)

PPL changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year for Pennsylvania operations.  PPL made the same change for its Montana operations for the 2009 tax year.  In 2011, the IRS issued guidance on repair expenditures related to network assets providing a safe harbor method of determining whether the repair expenditures can be currently deducted for tax purposes.  On April 30, 2013, the IRS issued Revenue Procedure 2013-24 providing guidance to taxpayers to determine whether expenditures to maintain, replace or improve steam or electric generation property must be capitalized for tax purposes.  The IRS may assert, and ultimately conclude, that PPL's deduction

 
45
 

for generation-related expenditures should be less than the amount determined by PPL.  PPL believes that it has established adequate reserves for this contingency.

6.  Utility Rate Regulation

(All Registrants except PPL Energy Supply)

The following table provides information about the regulatory assets and liabilities of cost-based rate-regulated utility operations.

 
 
 
PPL
 
PPL Electric
 
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Regulatory Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
ECR
 
$
 7 
 
 
   
 
 
   
 
 
   
 
Gas supply clause
 
 
 13 
 
$
 11 
 
 
   
 
 
   
 
Fuel adjustment clause
 
 
   
 
 
 6 
 
 
   
 
 
   
 
Other
 
 
 11 
 
 
 2 
 
$
 2 
 
 
   
Total current regulatory assets
 
$
 31 
 
$
 19 
 
$
 2 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent Regulatory Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Defined benefit plans
 
$
 683 
 
$
 730 
 
$
 345 
 
$
 362 
 
Taxes recoverable through future rates
 
 
 302 
 
 
 293 
 
 
 302 
 
 
 293 
 
Storm costs
 
 
 152 
 
 
 168 
 
 
 55 
 
 
 59 
 
Unamortized loss on debt
 
 
 88 
 
 
 96 
 
 
 58 
 
 
 65 
 
Interest rate swaps
 
 
 49 
 
 
 67 
 
 
   
 
 
   
 
Accumulated cost of removal of utility plant
 
 
 95 
 
 
 71 
 
 
 95 
 
 
 71 
 
AROs
 
 
 37 
 
 
 26 
 
 
   
 
 
   
 
Other
 
 
 17 
 
 
 32 
 
 
 2 
 
 
 3 
Total noncurrent regulatory assets
 
$
 1,423 
 
$
 1,483 
 
$
 857 
 
$
 853 

Current Regulatory Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Generation supply charge
 
$
 21 
 
$
 27 
 
$
 21 
 
$
 27 
 
ECR
 
 
   
 
 
 4 
 
 
   
 
 
   
 
Gas supply clause
 
 
 2 
 
 
 4 
 
 
   
 
 
   
 
Transmission service charge
 
 
 9 
 
 
 6 
 
 
 9 
 
 
 6 
 
Transmission formula rate
 
 
 9 
 
 
   
 
 
 9 
 
 
   
 
Universal service rider
 
 
 11 
 
 
 17 
 
 
 11 
 
 
 17 
 
Gas line tracker
 
 
 6 
 
 
   
 
 
   
 
 
   
 
Other
 
 
 10 
 
 
 3 
 
 
 1 
 
 
 2 
Total current regulatory liabilities
 
$
 68 
 
$
 61 
 
$
 51 
 
$
 52 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent Regulatory Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated cost of removal of utility plant
 
$
 690 
 
$
 679 
 
 
   
 
 
   
 
Coal contracts (a)
 
 
 108 
 
 
 141 
 
 
   
 
 
   
 
Power purchase agreement - OVEC (a)
 
 
 102 
 
 
 108 
 
 
   
 
 
   
 
Net deferred tax assets
 
 
 32 
 
 
 34 
 
 
   
 
 
   
 
Act 129 compliance rider
 
 
 14 
 
 
 8 
 
$
 14 
 
$
 8 
 
Defined benefit plans
 
 
 18 
 
 
 17 
 
 
   
 
 
   
 
Interest rate swaps
 
 
 84 
 
 
 14 
 
 
   
 
 
   
 
Other
 
 
 6 
 
 
 9 
 
 
   
 
 
   
Total noncurrent regulatory liabilities
 
$
 1,054 
 
$
 1,010 
 
$
 14 
 
$
 8 

 
 
 
LKE
 
LG&E
 
KU
 
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Regulatory Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ECR
 
$
 7 
 
 
   
 
$
 2 
 
 
   
 
$
 5 
 
 
   
 
Gas supply clause
 
 
 13 
 
$
 11 
 
 
 13 
 
$
 11 
 
 
   
 
 
   
 
Fuel adjustment clause
 
 
   
 
 
 6 
 
 
   
 
 
 6 
 
 
   
 
 
   
 
Other
 
 
 9 
 
 
 2 
 
 
 4 
 
 
 2 
 
 
 5 
 
 
   
Total current regulatory assets
 
$
 29 
 
$
 19 
 
$
 19 
 
$
 19 
 
$
 10 
 
 
   

 
46
 

 
 
 
LKE
 
LG&E
 
KU
 
 
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
September 30,
 
December 31,
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
                                     
Noncurrent Regulatory Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Defined benefit plans
 
$
 338 
 
$
 368 
 
$
 212 
 
$
 232 
 
$
 126 
 
$
 136 
 
Storm costs
 
 
 97 
 
 
 109 
 
 
 53 
 
 
 59 
 
 
 44 
 
 
 50 
 
Unamortized loss on debt
 
 
 30 
 
 
 31 
 
 
 19 
 
 
 20 
 
 
 11 
 
 
 11 
 
Interest rate swaps
 
 
 49 
 
 
 67 
 
 
 49 
 
 
 67 
 
 
   
 
 
   
 
AROs
 
 
 37 
 
 
 26 
 
 
 20 
 
 
 15 
 
 
 17 
 
 
 11 
 
Other
 
 
 15 
 
 
 29 
 
 
 6 
 
 
 7 
 
 
 9 
 
 
 22 
Total noncurrent regulatory assets
 
$
 566 
 
$
 630 
 
$
 359 
 
$
 400 
 
$
 207 
 
$
 230 

Current Regulatory Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ECR
 
 
   
 
$
 4 
 
 
   
 
 
   
 
 
   
 
$
 4 
 
 
Gas supply clause
 
$
 2 
 
 
 4 
 
$
 2 
 
$
 4 
 
 
   
 
 
   
 
 
Gas line tracker
 
 
 6 
 
 
   
 
 
 6 
 
 
   
 
 
   
 
 
   
 
 
Other
 
 
 9 
 
 
 1 
 
 
 3 
 
 
   
 
$
 6 
 
 
 1 
Total current regulatory liabilities
 
$
 17 
 
$
 9 
 
$
 11 
 
$
 4 
 
$
 6 
 
$
 5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent Regulatory Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated cost of removal
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
of utility plant
 
$
 690 
 
$
 679 
 
$
 300 
 
$
 297 
 
$
 390 
 
$
 382 
 
Coal contracts (a)
 
 
 108 
 
 
 141 
 
 
 47 
 
 
 61 
 
 
 61 
 
 
 80 
 
Power purchase agreement - OVEC (a)
 
 
 102 
 
 
 108 
 
 
 71 
 
 
 75 
 
 
 31 
 
 
 33 
 
Net deferred tax assets
 
 
 32 
 
 
 34 
 
 
 26 
 
 
 28 
 
 
 6 
 
 
 6 
 
Defined benefit plans
 
 
 18 
 
 
 17 
 
 
   
 
 
   
 
 
 18 
 
 
 17 
 
Interest rate swaps
 
 
 84 
 
 
 14 
 
 
 42 
 
 
 7 
 
 
 42 
 
 
 7 
 
Other
 
 
 6 
 
 
 9 
 
 
 3 
 
 
 3 
 
 
 3 
 
 
 6 
Total noncurrent regulatory liabilities
 
$
 1,040 
 
$
 1,002 
 
$
 489 
 
$
 471 
 
$
 551 
 
$
 531 

(a)
These liabilities were recorded as offsets to certain intangible assets that were recorded at fair value upon the acquisition of LKE by PPL.

Regulatory Matters

Kentucky Activities (PPL and Kentucky Registrants)

Rate Case Proceedings

In December 2012, the KPSC approved a rate case settlement agreement providing for increases in annual base electricity rates of $34 million for LG&E and $51 million for KU and an increase in annual base gas rates of $15 million for LG&E using a 10.25% return on equity.  The approved rates became effective January 1, 2013.  

Pennsylvania Activities (PPL and PPL Electric)

Rate Case Proceeding

In December 2012, the PUC approved a total distribution revenue increase of about $71 million for PPL Electric, using a 10.40% return on equity.  The approved rates became effective January 1, 2013.

Storm Damage Expense Rider

In its December 28, 2012 final rate case order, the PUC directed PPL Electric to file a proposed Storm Damage Expense Rider (SDER).  PPL Electric filed its proposed SDER on March 28, 2013, including requested recovery of the 2012 qualifying storm costs related to Hurricane Sandy, which the PUC previously approved for deferral.  PPL Electric proposed that the SDER become effective January 1, 2013 for storm costs incurred in 2013, with those costs and the 2012 Hurricane Sandy costs included in rates effective January 1, 2014.  Several parties filed comments opposing the SDER.  PPL Electric and several other parties filed reply comments in May 2013.  In October 2013, the PUC adopted an Order requesting submission of additional comments and reply comments on PPL Electric's proposal.  This matter remains pending before the PUC.


 
47
 

Act 129

Act 129 requires Pennsylvania Electric Distribution Companies (EDCs) to meet specified goals for reduction in customer electricity usage and peak demand by specified dates.  EDCs not meeting the requirements of Act 129 are subject to significant penalties.

Under Act 129, EDCs must file an energy efficiency and conservation plan (EE&C Plan) with the PUC and contract with conservation service providers to implement all or a portion of the EE&C Plan.  EDCs are able to recover the costs (capped at 2.0% of the EDC's 2006 revenue) of implementing their EE&C Plans.  In October 2009, the PUC approved PPL Electric's Phase 1 EE&C Plan ending May 31, 2013.

Act 129 requires EDCs to reduce overall electricity consumption by 1.0% by May 2011 and by 3.0% by May 2013, and reduce peak demand by 4.5%.  The overall consumption reduction is measured against PUC-forecasted consumption for the twelve months ended May 31, 2010.  The peak demand reduction must occur for the 100 hours of highest demand, which is determined by actual demand reduction during the June 2012 through September 2012 period.  PPL Electric believes it has met the May 2011 requirement and will determine if it met the May 2013 peak demand reduction and energy reduction targets after it completes the final program evaluation in the fourth quarter of 2013.  PPL Electric does not expect the PUC to formally determine compliance for either the 2011 or 2013 requirements before the first quarter of 2014.
 
 
Act 129 requires the PUC to evaluate the costs and benefits of the EE&C program by November 30, 2013 and adopt additional reductions if the benefits of the program exceed the costs.  In August 2012, after receiving input from stakeholders, the PUC issued a Final Implementation Order establishing a three-year Phase II program, ending May 31, 2016, with individual consumption reduction targets for each EDC.  PPL Electric's Phase II reduction target is 2.1% of the total energy consumption forecasted by the PUC for the twelve months ended May 31, 2010.  The PUC did not establish demand reduction targets for the Phase II program.  PPL Electric filed its Phase II EE&C Plan with the PUC on November 15, 2012 and, in March 2013, the PUC approved PPL Electric's Phase II EE&C Plan with minor modifications.  PPL Electric filed a Revised Phase II EE&C Plan on May 13, 2013 pursuant to the PUC's March Order.  On July 11, 2013, the PUC issued an Order approving PPL Electric's Revised Phase II EE&C Plan.  PPL Electric began its Phase II Plan implementation on June 1, 2013.

Act 129 also requires Default Service Providers (DSP) to provide electric generation supply service to customers pursuant to a PUC-approved default service procurement plan through auctions, requests for proposal and bilateral contracts at the sole discretion of the DSP.  Act 129 requires a mix of spot market purchases, short-term contracts and long-term contracts (4 to 20 years), with long-term contracts limited to 25% of load unless otherwise approved by the PUC.  A DSP is able to recover the costs associated with its default service procurement plan.

The PUC has approved PPL Electric's DSP procurement plan for the period January 1, 2011 through May 31, 2013, and PPL Electric has concluded all competitive solicitations to procure power for its PLR obligations under that plan.

The PUC has directed all EDCs to file default service procurement plans for the period June 1, 2013 through May 31, 2015.  PPL Electric filed its plan in May 2012.  In that plan, PPL Electric proposed a process to obtain supply for its default service customers and a number of initiatives designed to encourage more customers to purchase electricity from the competitive retail market.  In January 2013, the PUC approved PPL Electric's plan with modifications and directed PPL Electric to establish collaborative processes to address several retail competition issues.  In February 2013, PPL Electric filed a revised Default Service Supply Master Agreement and a revised Request for Proposals Process and Rules which the PUC approved.  PPL Electric filed revised retail competition initiatives and a revised plan consistent with the PUC's January order, and in May 2013, the PUC approved PPL Electric's most recent filing with minor changes.  PPL Electric began implementing its revised plan on June 1, 2013.  See Note 10 for additional information.

Smart Meter Rider

Act 129 also requires installation of smart meters for new construction, upon the request of consumers and at their cost, or on a depreciation schedule not exceeding 15 years.  Under Act 129, EDCs are able to recover the costs of providing smart metering technology.  All of PPL Electric's metered customers currently have advanced meters installed at their service locations capable of many of the functions required under Act 129. PPL Electric continues to conduct pilot projects to evaluate additional applications of its current advanced metering technology pursuant to the requirements of Act 129.  PPL Electric recovers the cost of its pilot projects through a cost recovery mechanism, the Smart Meter Rider (SMR).  In August 2013, PPL Electric filed with the PUC an annual report describing the actions it was taking under its Smart Meter Plan during 2013 and its planned actions for 2014.  PPL Electric also submitted revised SMR charges that will become effective January 1, 2014.  PPL Electric will submit its final Smart Meter Plan by June 30, 2014.

 
48
 
PUC Investigation of Retail Electricity Market

In April 2011, the PUC opened an investigation of Pennsylvania's retail electricity market to be conducted in two phases.  Phase one addressed the status of the existing retail market and explored potential changes.  Questions issued by the PUC for phase one of the investigation focused primarily on default service issues.  Phase two was initiated in July 2011 to develop specific proposals for changes to the retail market and default service model.  From December 2011 through the end of 2012, the PUC issued several orders and other pronouncements related to the investigation.  A final implementation order was issued in February 2013, and the PUC created several working groups to address continuing competitive issues.  Although the final implementation order contains provisions that will require numerous modifications to PPL Electric's current default service model for retail customers, those modifications are not expected to have a material adverse effect on PPL Electric's results of operations.

Distribution System Improvement Charge

Act 11 authorizes the PUC to approve two specific ratemaking mechanisms:  the use of a fully projected future test year in base rate proceedings and, subject to certain conditions, the use of a DSIC.  Such alternative ratemaking procedures and mechanisms provide opportunity for accelerated cost-recovery and, therefore, are important to PPL Electric as it begins a period of significant capital investment to maintain and enhance the reliability of its delivery system, including the replacement of aging distribution assets.  In August 2012, the PUC issued a Final Implementation Order adopting procedures, guidelines and a model tariff for the implementation of Act 11.  Act 11 requires utilities to file an LTIIP as a prerequisite to filing for recovery through the DSIC.  The LTIIP is mandated to be a five- to ten-year plan describing projects eligible for inclusion in the DSIC.

In September 2012, PPL Electric filed its LTIIP describing projects eligible for inclusion in the DSIC.  The PUC approved the LTIIP on January 10, 2013 and, on January 15, 2013, PPL Electric filed a petition requesting permission to establish a DSIC.  Several parties filed responses to PPL Electric's petition.  In an order entered on May 23, 2013, the PUC approved PPL Electric's proposed DSIC with an initial rate effective July 1, 2013, subject to refund after hearings.  The PUC also assigned four specific issues to the Office of Administrative Law Judge for hearing and preparation of a recommended decision.  The Judge's recommended decision is expected in early 2014.  The case remains pending before the PUC.

Federal Matters

FERC Audit Proceedings (All Registrants except PPL Energy Supply)

In November 2011, the FERC commenced an audit of PPL and its subsidiaries, including an audit of the FERC transmission formula rate mechanisms at PPL Electric, LG&E and KU beginning in April 2012.  The audit identified several matters related to separate aspects of formula rate mechanics at PPL Electric, LG&E and KU.  As previously reported, among the audit matters related to PPL Electric was the determination that PPL Electric had not obtained a waiver of the equity method accounting requirement with respect to its wholly owned subsidiary, PPL Receivables Corporation, which was formed in 2004 to purchase eligible accounts receivable and unbilled revenue from PPL Electric to collateralize commercial paper issuances and reduce borrowing costs.  PPL, PPL Electric, LKE, LG&E and KU currently believe that the total amount of refunds, if any, that may be required with respect to the formula rate and all other issues identified during the course of the audit will not be material to any of these Registrants.  PPL, PPL Electric, LKE, LG&E and KU, however, cannot predict the ultimate outcome of these matters.

Transmission rates are regulated by the FERC.  PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism.  The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed under the FERC's Uniform System of Accounts.  PPL Electric has initiated separate formula rate Annual Updates for each of the years 2010-2013.  The 2010, 2011, and 2012 updates were subsequently challenged by a group of municipal customers, which challenges PPL Electric has opposed.  In August 2011, the FERC issued an order substantially rejecting the 2010 formal challenge and the municipal customers filed a request for rehearing of that order.  In September 2012, the FERC issued an order setting for evidentiary hearings and settlement judge procedures a number of issues raised in the 2010 and 2011 formal challenges.  Settlement conferences were held in late 2012 and early 2013.  In February 2013, the FERC set for evidentiary hearings and settlement judge procedures a number of issues in the 2012 formal challenge and consolidated that challenge with the 2010 and 2011 challenges.  PPL Electric filed a request for rehearing of the February Order which remains pending before the FERC.  PPL Electric and the group of municipal customers have exchanged confidential settlement proposals and PPL Electric anticipates that there will be additional settlement conferences held in 2013.  PPL and PPL Electric cannot predict the outcome of the foregoing proceedings, which remain pending before the FERC.

 
49
 
U. K. Activities (PPL)

Ofgem Review of Line Loss Calculation

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4.  On July 12, 2013, Ofgem issued a decision paper on the process to follow for closing out the line loss incentive/penalty.  Subsequent to the July 2013 decision paper, WPD received additional information from Ofgem and as a result revised the estimated potential loss exposure to be in the range of $93 million to $226 million as of September 30, 2013.  On October 21, 2013, Ofgem issued a further consultation paper requesting additional information.  During the three and nine months ended September 30, 2013, WPD recorded $21 million and $45 million increases to the liability with reductions to "Utility" revenue on the Statement of Income.  At September 30, 2013, the liability was $93 million compared with $94 million at December 31, 2012.  Other changes to this line loss liability included reductions of $41 million resulting from refunds being included in tariffs and foreign exchange movements during the nine months ended September 30, 2013.  PPL cannot predict the outcome of this matter.

7.  Financing Activities

Credit Arrangements and Short-term Debt

(All Registrants)

The Registrants maintain credit facilities to enhance liquidity, provide credit support, and provide a backstop to commercial paper programs.  For reporting purposes, on a consolidated basis, the credit facilities and commercial paper programs of PPL Energy Supply, PPL Electric, LG&E and KU also apply to PPL and the credit facilities and commercial paper programs of LG&E and KU also apply to LKE.  The amounts borrowed below are recorded as "Short-term debt" on the Balance Sheets.  The following credit facilities were in place at:

 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Letters of
 
 
 
 
 
 
Letters of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit Issued
 
 
 
 
 
 
 
Credit Issued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
and
 
 
 
 
 
 
 
and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
Expiration
 
 
 
 
 
 
Paper
 
Unused
 
 
 
Paper
 
 
 
 
 
 
 
 Date
 
Capacity
 
Borrowed
 
Backup
 
Capacity
 
Borrowed
 
Backup
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
WPD Credit Facilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL WW Syndicated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit Facility (a) (b)
 
Dec. 2016
 
£
 210 
 
£
 106 
 
 
n/a
 
£
 104 
 
£
 106 
 
 
n/a
 
 
WPD (South West)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Syndicated Credit Facility
 
Jan. 2017
 
 
 245 
 
 
 
 
 
n/a
 
 
 245 
 
 
 
 
 
n/a
 
 
WPD (East Midlands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Syndicated Credit Facility (b)
 
Apr. 2016
 
 
 300 
 
 
 44 
 
 
 
 
 
 256 
 
 
 
 
 
 
 
 
WPD (West Midlands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Syndicated Credit Facility (b)
 
Apr. 2016
 
 
 300 
 
 
 34 
 
 
 
 
 
 266 
 
 
 
 
 
 
 
 
Uncommitted Credit Facilities
 
 
 
 
 84 
 
 
 
 
£
 5 
 
 
 79 
 
 
 
 
£
 4 
 
 
 
Total WPD Credit Facilities (c)
 
 
 
£
 1,139 
 
£
 184 
 
£
 5 
 
£
 950 
 
£
 106 
 
£
 4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Syndicated Credit Facility
 
Nov. 2017
 
$
 3,000 
 
 
 
 
$
 61 
 
$
 2,939 
 
 
 
 
$
 499 
 
Letter of Credit Facility (d)
 
Mar. 2014
 
 
 150 
 
 
n/a
 
 
 109 
 
 
 41 
 
 
n/a
 
 
 132 
 
Uncommitted Credit Facilities (e)
 
 
 
 
 175 
 
 
n/a
 
 
 51 
 
 
 124 
 
 
n/a
 
 
 40 
 
 
 
Total PPL Energy Supply Credit Facilities
 
$
 3,325 
 
 
 
 
$
 221 
 
$
 3,104 
 
 
 
 
$
 671 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Electric
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Syndicated Credit Facility
 
Oct. 2017
 
$
 300 
 
 
 
 
$
 1 
 
$
 299 
 
 
 
 
$
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Syndicated Credit Facility
 
Nov. 2017
 
$
 500 
 
 
 
 
$
 72 
 
$
 428 
 
 
 
 
$
 55 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Syndicated Credit Facility
 
Nov. 2017
 
$
 400 
 
 
 
 
$
 140 
 
$
 260 
 
 
 
 
$
 70 
 
Letter of Credit Facility (f)
 
May 2016
 
 
 198 
 
 
 
 
 
 198 
 
 
 
 
 
 
 
 
 198 
 
 
 
Total KU Credit Facilities
 
 
 
$
 598 
 
 
 
 
$
 338 
 
$
 260 
 
 
 
 
$
 268 

(a)
In December 2012, the PPL WW syndicated credit facility that was set to expire in January 2013 was replaced and the capacity was increased from £150 million.

 
50
 

(b)
PPL WW's amounts borrowed at September 30, 2013 and December 31, 2012 were USD-denominated borrowings of $166 million and $171 million, which equated to £106 million at the time of borrowings and bore interest at 1.89% and 0.85%.  WPD (East Midlands) amount borrowed at September 30, 2013 was a GBP-denominated borrowing of £44 million, which equated to $68 million and bore interest at 1.30%.  WPD (West Midlands) amount borrowed at September 30, 2013 was a GBP-denominated borrowing of £34 million, which equated to $53 million and bore interest at 1.30%.
(c)
At September 30, 2013, the USD equivalent of unused capacity under WPD's credit facilities was $1.5 billion.
(d)
In February 2013, PPL Energy Supply extended the expiration date from March 2013 and, effective April 2013, the capacity was reduced from $200 million.
(e)
In August 2013, the capacity was reduced from $200 million.
(f)
In May 2013, KU extended the letter of credit facility from April 2014.

In September 2013, PPL Electric terminated its asset-backed commercial paper program sponsored by a financial institution.  See Note 7 in PPL's and PPL Electric's 2012 Form 10-K for more information regarding the asset-backed commercial paper program.

In October 2013, LKE entered into a $75 million syndicated credit facility that expires in October 2018.

PPL Energy Supply, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund their short-term liquidity needs, if and when necessary.  Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's Syndicated Credit Facility.  The following commercial paper programs were in place at:

 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
Weighted -
 
 
 
 
Commercial
 
 
 
Weighted -
 
Commercial
 
 
 
 
 
 
 
Average
 
 
 
 
Paper
 
Unused
 
Average
 
Paper
 
 
 
 
 
 
 
Interest Rate
 
Capacity
 
Issuances
 
Capacity
 
Interest Rate
 
Issuances
                                     
 
PPL Energy Supply
 
 
 
$
 750 
 
 
 
 
$
 750 
 
 
0.50%
 
$
 356 
 
PPL Electric
 
 
 
 
 300 
 
 
 
 
 
 300 
 
 
 
 
 
 
 
LG&E (a)
 
0.28%
 
 
 350 
 
$
 72 
 
 
 278 
 
 
0.42%
 
 
 55 
 
KU (a)
 
0.28%
 
 
 350 
 
 
 140 
 
 
 210 
 
 
0.42%
 
 
 70 
 
 
 
Total
 
 
 
$
 1,750 
 
$
 212 
 
$
 1,538 
 
 
 
 
$
 481 

(a)
In April 2013, the capacity was increased from $250 million.

(PPL and PPL Energy Supply)

PPL Energy Supply maintains a $500 million Facility Agreement expiring June 2017, whereby PPL Energy Supply has the ability to request up to $500 million of committed letter of credit capacity at fees to be agreed upon at the time of each request, based on certain market conditions.  At September 30, 2013, PPL Energy Supply had not requested any capacity for the issuance of letters of credit under this arrangement.

PPL Energy Supply, PPL EnergyPlus, PPL Montour and PPL Brunner Island maintain an $800 million secured energy marketing and trading facility, whereby PPL EnergyPlus will receive credit to be applied to satisfy collateral posting obligations related to its energy marketing and trading activities with counterparties participating in the facility.  The credit amount is guaranteed by PPL Energy Supply, PPL Montour and PPL Brunner Island.  PPL Montour and PPL Brunner Island have granted liens on their respective generating facilities to secure any amount they may owe under their guarantees.  The facility expires in November 2017, but is subject to automatic one-year renewals under certain conditions.  There were no secured obligations outstanding under this facility at September 30, 2013.

(LKE)

See Note 11 for discussion of intercompany borrowings.

Long-term Debt and Equity Securities

(PPL)

In connection with an April 2012 registered public offering of 9.9 million shares of PPL common stock, PPL entered into forward sale agreements with two counterparties.  In conjunction with that offering, the underwriters exercised an overallotment option and PPL entered into additional forward sale agreements covering 591 thousand shares of PPL common stock.

 
51
 

In April 2013, PPL settled the initial forward sale agreements by issuing 8.4 million shares of PPL common stock and cash settling the remaining 1.5 million shares.  PPL received net cash proceeds of $205 million, which was calculated based on an initial forward price of $27.02 per share, reduced during the period the contracts were outstanding as specified in the forward sale agreements.  PPL used the net proceeds to repay short-term debt obligations and for other general corporate purposes.  In May 2013, PPL cash settled the forward sale agreements covering the 591 thousand remaining shares for $4 million.

The forward sale agreements were classified as equity transactions.  As a result, no amounts were recorded in the consolidated financial statements until the April 2013 settlement of the initial forward sale agreements.  However, prior to settlement, incremental shares were included within the calculation of diluted EPS using the treasury stock method.  See Note 4 for the impact on the calculation of diluted EPS.

In March 2013, PPL Capital Funding issued $450 million of 5.90% Junior Subordinated Notes due 2073.  PPL Capital Funding received proceeds of $436 million, net of underwriting fees, which was loaned to or invested in affiliates of PPL Capital Funding and used to fund their capital expenditures and for other general corporate purposes.

In May 2013, PPL Capital Funding remarketed $1.150 billion of 4.625% Junior Subordinated Notes due 2018 that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.  In connection with the remarketing, PPL Capital Funding issued $300 million of 2.04% Junior Subordinated Notes due 2016 and $850 million of 2.77% Junior Subordinated Notes due 2018, which were simultaneously exchanged into three tranches of Senior Notes.  As a result of the exchange, the new Senior Notes include $250 million of 1.90% Senior Notes due 2018, $600 million of 3.40% Senior Notes due 2023 and $300 million of 4.70% Senior Notes due 2043.  The transaction was accounted for as a debt extinguishment, resulting in a $10 million loss on extinguishment of the Junior Subordinated Notes, which was recorded to "Interest Expense" on the Statement of Income.  The transaction was considered non-cash activity that was excluded from the 2013 Statement of Cash Flows.

In July 2013, PPL issued 40 million shares of common stock at $28.73 per share to settle the 2010 Purchase Contracts.  PPL received net cash proceeds of $1.150 billion, which will be used to repay short-term and long-term debt obligations and for other general corporate purposes.

During the nine months ended September 30, 2013, PPL repurchased 2.4 million shares of its common stock for $74 million to offset the 2013 issuances of common stock under stock-based compensation plans, ESOP and DRIP.  These repurchases were recorded as a reduction to "Additional paid-in capital" on the Balance Sheet.

In September 2013, WPD (East Midlands) issued £40 million aggregate principal amount of 1.676% Index-linked Senior Notes due 2052.  WPD (East Midlands) received proceeds of £40 million, which equated to $64 million at the time of issuance.  The proceeds will be used for general corporate purposes.  Although WPD's results are generally recorded on a one-month lag, this transaction was recognized in the current period financial statements.

In October 2013, WPD (East Midlands) issued £25 million aggregate principal amount of 1.676% Index-linked Senior Notes due 2052.  WPD (East Midlands) received proceeds of £25 million, which equated to $40 million at the time of issuance.  The proceeds will be used for general corporate purposes.

In October 2013, WPD (West Midlands) issued £400 million aggregate principal amount of 3.875% Senior Notes due 2024.  WPD (West Midlands) received proceeds of £394 million, which equated to $637 million at the time of issuance, net of a discount and underwriting fees.  The net proceeds will be used for general corporate purposes.

See Note 7 in PPL's 2012 Form 10-K for information on the 2011 Equity Units (with respect to which the related $978 million of Notes are expected to be remarketed as early as the first quarter of 2014).

(PPL and PPL Energy Supply)

In February 2013, PPL Energy Supply completed an offer to exchange up to all, but not less than a majority, of PPL Ironwood's 8.857% Senior Secured Bonds due 2025, (Ironwood Bonds), for newly issued PPL Energy Supply Senior Notes, Series 4.60% due 2021.  A total of $167 million aggregate principal amount of outstanding Ironwood Bonds was exchanged for $212 million aggregate principal amount of Senior Notes, Series 4.60% due 2021.  This transaction was accounted for as a modification of the existing debt; therefore, the amount of debt on the Balance Sheet remained at $167 million and will be accreted to $212 million over the life of the new Senior Notes.  No gain or loss was recorded and the exchange was considered non-cash activity that was excluded from the 2013 Statement of Cash Flows.

In July 2013, PPL Energy Supply repaid the entire $300 million principal amount of its 6.30% Senior Notes upon maturity.

 
52
 

(PPL and PPL Electric)

In July 2013, PPL Electric issued $350 million of 4.75% First Mortgage Bonds due 2043.  PPL Electric received proceeds of $345 million, net of a discount and underwriting fees, which will be used for capital expenditures, to fund pension obligations and for other general corporate purposes.

Legal Separateness

(All Registrants)

The subsidiaries of PPL are separate legal entities.  PPL's subsidiaries are not liable for the debts of PPL.  Accordingly, creditors of PPL may not satisfy their debts from the assets of PPL's subsidiaries absent a specific contractual undertaking by a subsidiary to pay PPL's creditors or as required by applicable law or regulation.  Similarly, absent a specific contractual undertaking or as required by applicable law or regulation, PPL is not liable for the debts of its subsidiaries, nor are its subsidiaries liable for the debts of one another.  Accordingly, creditors of PPL's subsidiaries may not satisfy their debts from the assets of PPL or its other subsidiaries absent a specific contractual undertaking by PPL or its other subsidiaries to pay such creditors or as required by applicable law or regulation.

Similarly, the subsidiaries of PPL Energy Supply, PPL Electric and LKE are each separate legal entities.  These subsidiaries are not liable for the debts of PPL Energy Supply, PPL Electric and LKE.  Accordingly, creditors of PPL Energy Supply, PPL Electric and LKE may not satisfy their debts from the assets of their subsidiaries absent a specific contractual undertaking by a subsidiary to pay the creditors or as required by applicable law or regulation.  Similarly, absent a specific contractual undertaking or as required by applicable law or regulation, PPL Energy Supply, PPL Electric and LKE are not liable for the debts of their subsidiaries, nor are their subsidiaries liable for the debts of one another.  Accordingly, creditors of these subsidiaries may not satisfy their debts from the assets of PPL Energy Supply, PPL Electric and LKE (or their other subsidiaries) absent a specific contractual undertaking by that parent or other subsidiary to pay such creditors or as required by applicable law or regulation.

Distributions and Capital Contributions

(PPL)

In August 2013, PPL declared its quarterly common stock dividend, payable October 1, 2013, at 36.75 cents per share (equivalent to $1.47 per annum).  Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, cash flows, financial and legal requirements and other factors.

(All Registrants except PPL)

During the nine months ended September 30, 2013, the following distributions and capital contributions occurred:

 
 
 
 
PPL Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supply
 
 
PPL Electric
 
LKE
 
LG&E
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends/distributions paid to parent/member
 
$ 
 408 
 
 
$ 
 94 
 
$ 
 116 
 
$ 
 67 
 
$ 
 83 
Capital contributions received from parent/member
 
 
 980 
 
 
 
 205 
 
 
 146 
 
 
 54 
 
 
 92 

8.  Acquisitions, Development and Divestitures

(All Registrants)

The Registrants from time to time evaluate opportunities for potential acquisitions, divestitures and development projects.  Development projects are reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options.  Any resulting transactions may impact future financial results.

Acquisitions

Ironwood Acquisition (PPL and PPL Energy Supply)

See Note 10 in PPL's and PPL Energy Supply's 2012 Form 10-K for information on the April 13, 2012 Ironwood Acquisition.  See Note 7 for information on the February 2013 exchange of a portion of long-term debt assumed through consolidation as a result of the acquisition.

 
53
 
Development

Future Capacity Needs (PPL and Kentucky Registrants)

Construction activity continues on the previously announced natural gas combined-cycle generating unit at the Cane Run station, scheduled to be operational in May 2015.  In October 2013, LG&E and KU announced plans to build a second natural gas combined-cycle generating unit at KU's Green River generating site.  Subject to finalizing details, regulatory applications, permitting and construction schedules, the facility is expected to have approximately 700 MW of capacity at an estimated cost of $700 million and is planned to be operational in 2018.  At the same time, LG&E and KU also announced plans for a potential 10 MW solar generation facility to be operational in 2016 at an estimated cost of $25 million.

(PPL and PPL Energy Supply)

Bell Bend COLA

The NRC continues to review the COLA submitted by a PPL Energy Supply subsidiary, PPL Bell Bend, LLC (PPL Bell Bend) for the proposed construction of the Bell Bend nuclear generating unit (Bell Bend) adjacent to PPL's Susquehanna nuclear generating plant.  PPL Bell Bend does not expect to complete the COLA review process with the NRC prior to 2016.  PPL Bell Bend has made no decision to proceed with construction of Bell Bend and expects that such decision will not be made for several years given the anticipated lengthy NRC license approval process.  Additionally, PPL Bell Bend does not expect to proceed with construction absent favorable economics, a joint arrangement with other interested parties and a federal loan guarantee or other acceptable financing.  PPL Bell Bend is currently authorized to spend up to $205 million on the COLA and other permitting costs necessary for construction, which is expected to be sufficient to fund the project through receipt of the license.  At September 30, 2013 and December 31, 2012, $169 million and $154 million of costs, which includes capitalized interest, associated with the licensing application were capitalized and are included on the Balance Sheets in noncurrent "Other intangibles."  PPL Bell Bend believes that the estimated fair value of the COLA currently exceeds the costs expected to be capitalized associated with the licensing application.  See Note 8 in PPL's and PPL Energy Supply's 2012 Form 10-K for additional information.

Hydroelectric Expansion Project

In the first quarter of 2013, the 63 MW Rainbow hydroelectric redevelopment project in Great Falls, Montana was placed in service.

Regional Transmission Line Expansion Plan (PPL and PPL Electric)

Susquehanna-Roseland

On October 1, 2012, the National Park Service (NPS) issued its Record of Decision (ROD) on the proposed Susquehanna-Roseland transmission line affirming the route chosen by PPL Electric and Public Service Electric & Gas Company (PSE&G) as the preferred alternative under the NPS's National Environmental Policy Act review.  In October 2012, a complaint was filed in the U.S. District Court for the District of Columbia by various environmental groups, including the Sierra Club, challenging the ROD and seeking to prohibit its implementation.  PPL Electric and PSE&G intervened in the lawsuit.  In December 2012, PPL Electric received federal construction and right of way permits to build on National Park Service lands.

On August 19, 2013, the environmental groups filed a petition for injunctive relief seeking to prohibit all construction activities until the court issued a final decision on the complaint.  On August 30, 2013, the District Court ruled in favor of PPL Electric, PSE&G and the U.S. Government and dismissed the lawsuit filed by the environmental groups.  The environmental groups have publicly stated that they do not intend to appeal the District Court decision.  PPL Electric began construction on the National Park Service lands in Pennsylvania on October 1, 2013.

 
54
 
Construction activities have been underway on other portions of the 101-mile route in Pennsylvania since 2012.  The line is expected to be completed before the peak summer demand period of 2015.  At September 30, 2013, PPL Electric's estimated share of the project cost was $630 million.

PPL and PPL Electric cannot predict any future legal challenges to the project or what additional actions, if any, PJM might take in the event of a further delay to the scheduled in-service date for the new line.

Northeast/Pocono

In October 2012, the FERC issued an order in response to PPL Electric's December 2011 request for ratemaking incentives for the Northeast/Pocono Reliability project (a new 58-mile 230 kV transmission line that includes three new substations and upgrades to adjacent facilities).  The FERC granted the incentive for inclusion in rate base of all prudently incurred construction work in progress (CWIP) costs but denied the incentive for a 100 basis point adder to the return on equity.  The order required a follow-up compliance filing from PPL Electric to ensure proper accounting treatment of AFUDC and CWIP for the project, which PPL Electric submitted to the FERC in March 2013 and the FERC subsequently approved in April 2013.

In December 2012, PPL Electric submitted an application to the PUC requesting permission to site and construct the project.  A number of parties have protested the application, which has been assigned to an Administrative Law Judge (ALJ).  Evidentiary hearings were held in July 2013.  In October 2013, the ALJ concluded that PPL met its burden on all issues, and recommended that the PUC approve the siting application, two zoning petitions, and the remaining eminent domain applications.  A final PUC order is expected in the first quarter of 2014.  PPL Electric expects the project to be completed in 2017.  At September 30, 2013, PPL Electric's estimated cost of the project was $335 million, an increase from its original estimate of $200 million at December 31, 2012.  The increased cost is primarily related to higher material and labor costs and additional scope due to revised construction standards.  Of the total estimated cost, $308 million qualifies for the CWIP treatment.   

See Note 8 in PPL's and PPL Electric's 2012 Form 10-K for additional information.

Other (PPL and PPL Energy Supply)

Montana Transactions

In September 2013, PPL Montana executed a definitive agreement to sell 633 MW of hydroelectric facilities to NorthWestern for $900 million in cash, subject to certain adjustments.  The sale, which is not expected to close before the second half of 2014, includes 11 hydroelectric power facilities and related assets.  The sale is subject to closing conditions, including receipt of regulatory approvals by the FERC and Montana Public Service Commission and certain third-party consents.  Due to the uncertainties related to certain of these conditions as of September 30, 2013, the sale did not meet the applicable accounting criteria for the assets and liabilities included in the transaction to be classified as held for sale on the Balance Sheet.

In a related transaction, in September 2013, PPL Montana negotiated and entered into an agreement to pay $271 million to terminate a sale-leaseback arrangement and reacquire its interests in the Colstrip coal-fired facilities.  See Note 11 in PPL's and PPL Energy Supply's 2012 Form 10-K for additional information on the sale-leaseback.  This transaction is anticipated to occur by the end of the first quarter of 2014, subject to approval by the FERC.  At lease termination, in addition to recording a charge for the cash payment, a non-cash charge is expected to be recorded related to the existing lease-related assets on PPL's and PPL Energy Supply's Balance Sheets.  The book value of these assets was approximately $450 million at September 30, 2013.  These lease-related assets will be written-off and the reacquired Colstrip assets will be recorded at fair value as of the acquisition date.  The total loss is currently estimated at between $310 million and $430 million, after-tax, which is dependent on the fair value assigned to the reacquired Colstrip assets.

Lower Mt. Bethel Plant Transaction

In December 2001, a subsidiary of PPL Energy Supply entered into an operating lease arrangement, as lessee, for the development, construction and operation of the Lower Mt. Bethel plant.  The owner/lessor of the Lower Mt. Bethel plant was determined to be a VIE and has been consolidated in PPL's and PPL Energy Supply's financial statements since December 31, 2003.  See Note 22 in PPL's and PPL Energy Supply's 2012 Form 10-K for additional information on the VIE.  A subsidiary of PPL Energy Supply now intends to purchase the Lower Mt. Bethel plant for $455 million at the lease termination date in December 2013, subject to approval by the FERC.  The proceeds are expected to be used by the VIE to repay outstanding debt and make a distribution to its equity investors (currently presented as noncontrolling interests in PPL's and PPL Energy Supply's financial statements).  The transaction will not result in any gain or loss as it will be treated as a

 
55
 
transfer of assets between entities under common control and will not result in any change to the presentation of the Lower Mt. Bethel plant assets as they are currently included in PPL's and PPL Energy Supply's consolidated financial statements.

9.  Defined Benefits

(All Registrants except PPL Electric and KU)

Certain net periodic defined benefit costs are applied to accounts that are further distributed between capital and expense, including certain costs allocated to applicable subsidiaries for plans sponsored by PPL Services and LKE.  Following are the net periodic defined benefit costs (credits) of the plans sponsored by PPL, PPL Energy Supply, LKE and LG&E for the periods ended September 30:

 
 
 
 
Pension Benefits
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
U.S.
 
U.K.
 
U.S.
 
U.K.
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
 31 
 
$
 25 
 
$
 18 
 
$
 13 
 
$
 94 
 
$
 77 
 
$
 52 
 
$
 40 
Interest cost
 
 
 53 
 
 
 55 
 
 
 79 
 
 
 85 
 
 
 160 
 
 
 165 
 
 
 238 
 
 
 254 
Expected return on plan assets
 
 
 (73)
 
 
 (65)
 
 
 (115)
 
 
 (115)
 
 
 (220)
 
 
 (195)
 
 
 (346)
 
 
 (340)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
 
 
 6 
 
 
 6 
 
 
   
 
 
 1 
 
 
 17 
 
 
 18 
 
 
   
 
 
 3 
 
 
Actuarial (gain) loss
 
 
 20 
 
 
 11 
 
 
 37 
 
 
 19 
 
 
 60 
 
 
 32 
 
 
 112 
 
 
 59 
Net periodic defined benefit
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
costs (credits)
 
$
 37 
 
$
 32 
 
$
 19 
 
$
 3 
 
$
 111 
 
$
 97 
 
$
 56 
 
$
 16 

 
 
 
 
Pension Benefits
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
 1 
 
$
 1 
 
$
 5 
 
$
 4 
Interest cost
 
 
 2 
 
 
 2 
 
 
 6 
 
 
 6 
Expected return on plan assets
 
 
 (2)
 
 
 (2)
 
 
 (7)
 
 
 (7)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Actuarial (gain) loss
 
 
 1 
 
 
 1 
 
 
 2 
 
 
 2 
Net periodic defined benefit costs (credits)
 
$
 2 
 
$
 2 
 
$
 6 
 
$
 5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LKE
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
 6 
 
$
 5 
 
$
 19 
 
$
 16 
Interest cost
 
 
 16 
 
 
 16 
 
 
 47 
 
 
 48 
Expected return on plan assets
 
 
 (20)
 
 
 (17)
 
 
 (61)
 
 
 (52)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
 
 
 1 
 
 
 2 
 
 
 3 
 
 
 4 
 
 
Actuarial (gain) loss
 
 
 8 
 
 
 5 
 
 
 25 
 
 
 16 
Net periodic defined benefit costs (credits)
 
$
 11 
 
$
 11 
 
$
 33 
 
$
 32 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
 1 
 
 
   
 
$
 2 
 
$
 1 
Interest cost
 
 
 3 
 
$
 4 
 
 
 10 
 
 
 11 
Expected return on plan assets
 
 
 (5)
 
 
 (5)
 
 
 (15)
 
 
 (14)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
 
 
 1 
 
 
 1 
 
 
 2 
 
 
 2 
 
 
Actuarial (gain) loss
 
 
 3 
 
 
 3 
 
 
 10 
 
 
 8 
Net periodic defined benefit costs (credits)
 
$
 3 
 
$
 3 
 
$
 9 
 
$
 8 

 
 
 
Other Postretirement Benefits
 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
2013 
 
2012 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
 4 
 
$
 3 
 
$
 11 
 
$
 9 
Interest cost
 
 
 7 
 
 
 7 
 
 
 21 
 
 
 23 
Expected return on plan assets
 
 
 (6)
 
 
 (6)
 
 
 (18)
 
 
 (17)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
Transition obligation
 
 
   
 
 
   
 
 
   
 
 
 1 
 
Prior service cost
 
 
   
 
 
 1 
 
 
   
 
 
 1 
 
Actuarial (gain) loss
 
 
 1 
 
 
 1 
 
 
 4 
 
 
 3 
Net periodic defined benefit costs (credits)
 
$
 6 
 
$
 6 
 
$
 18 
 
$
 20 
 
56
 
 
 
 
 
Other Postretirement Benefits
 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
2013 
 
2012 
LKE
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
 2 
 
$
 1 
 
$
 4 
 
$
 3 
Interest cost
 
 
 2 
 
 
 3 
 
 
 6 
 
 
 7 
Expected return on plan assets
 
 
 (2)
 
 
 (1)
 
 
 (4)
 
 
 (3)
Amortization of:
 
 
 
 
 
 
 
 
 
 
 
 
 
Transition obligation
 
 
  
 
 
  
 
 
  
 
 
 1 
 
Prior service cost
 
 
 1 
 
 
 
 
 
 2 
 
 
 2 
 
Actuarial (gain) loss
 
 
  
 
 
  
 
 
  
 
 
 (1)
Net periodic defined benefit costs (credits)
 
$
 3 
 
$
 3 
 
$
 8 
 
$
 9 

(All Registrants except PPL)

In addition to the specific defined benefit plans they sponsor, PPL Energy Supply subsidiaries are also allocated costs of defined benefit plans sponsored by PPL Services and LG&E is allocated costs of defined benefit plans sponsored by LKE based on their participation in those plans, which management believes are reasonable.  PPL Electric and KU do not independently sponsor any defined benefit plans.  PPL Electric is allocated costs of defined benefit plans sponsored by PPL Services and KU is allocated costs of defined benefit plans sponsored by LKE based on their participation in those plans, which management believes are reasonable.  For the periods ended September 30, PPL Services allocated the following net periodic defined benefit costs to PPL Energy Supply subsidiaries and PPL Electric, and LKE allocated the following net periodic defined benefit costs to LG&E and KU.

 
 
Three Months
 
Nine Months
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
$
 11 
 
$
 10 
 
$
 34 
 
$
 29 
PPL Electric
 
 
 9 
 
 
 8 
 
 
 27 
 
 
 23 
LG&E
 
 
 3 
 
 
 3 
 
 
 9 
 
 
 9 
KU
 
 
 4 
 
 
 4 
 
 
 13 
 
 
 13 

10.  Commitments and Contingencies

Energy Purchase Commitments

(PPL and PPL Energy Supply)

PPL Energy Supply enters into long-term purchase contracts to supply the coal requirements for its coal-fired generating facilities.  These contracts include commitments to purchase coal through 2019.  In 2012, as a result of lower electricity and natural gas prices, coal unit utilization began to decrease.  To mitigate the risk of exceeding available coal storage, PPL Energy Supply incurred pre-tax charges of $17 million and $29 million during the three and nine months ended September 30, 2012 to reduce its 2012 and 2013 contracted coal deliveries.  These charges were recorded to "Fuel" on the Statement of Income.

(PPL and PPL Electric)

In May 2012, PPL Electric filed a plan with the PUC to purchase its electricity supply for default customers for the period June 2013 through May 2015.  The PUC approved the plan in January 2013.  The approved plan provides that PPL Electric procure this electricity through competitive solicitations twice each plan year beginning in April 2013.  The solicitations will include layered short-term full-requirement products ranging from three months to 12 months for residential and small commercial and industrial PLR customers as well as a recurring 12 month spot market product for large commercial and industrial PLR customers.  Through October 2013, two of four solicitations have been completed.

(PPL Electric)

See Note 11 for information on the power supply agreements between PPL EnergyPlus and PPL Electric.
 
 
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Legal Matters

(All Registrants)

PPL and its subsidiaries are involved in legal proceedings, claims and litigation in the ordinary course of business.  PPL and its subsidiaries cannot predict the outcome of such matters, or whether such matters may result in material liabilities, unless otherwise noted.

WKE Indemnification (PPL and LKE)

See footnote (l) to the table in "Guarantees and Other Assurances" below for information on an LKE indemnity relating to its former WKE lease, including related legal proceedings.

(PPL and PPL Energy Supply)

Sierra Club Litigation

In July 2012, PPL Montana received a Notice of Intent to Sue (Notice) for violations of the Clean Air Act at Colstrip Steam Electric Station (Colstrip) from counsel on behalf of the Sierra Club and the Montana Environmental Information Center (MEIC).  An Amended Notice was received on September 4, 2012, and a Second Amended Notice was received in October 2012.  A Supplemental Notice was received in December 2012.  The Notice, Amended Notice, Second Amended Notice and Supplemental Notice (the Notices) were all addressed to the Owner or Managing Agent of Colstrip, and to the other Colstrip co-owners: Avista Corporation, Puget Sound Energy, Portland General Electric Company, Northwestern Energy and PacificCorp.  The Notices allege certain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements.

On March 6, 2013, the Sierra Club and MEIC filed a complaint against PPL Montana and the other Colstrip co-owners in the U.S. District Court, District of Montana, Billings Division.  PPL Montana operates Colstrip on behalf of the co-owners.  The complaint is generally consistent with the prior Notices and lists 39 separate claims for relief.  All but three of the claims allege Prevention of Significant Deterioration (PSD) related violations under the federal Clean Air Act for various plant maintenance projects completed since 1992.  For each such project or set of projects, there are separate claims for failure to obtain a PSD permit, for failure to obtain a Montana Air Quality Permit to operate after the project(s) were completed and for operating after completion of such project(s) without "Best Available Control Technology".  The remaining three claims relate to the alleged failure to update the Title V operating permit for Colstrip to reflect the alleged major modifications described in the other claims, allege that the previous Title V compliance certifications were incomplete because they did not address the major plant modifications, and that numerous opacity violations have occurred at the plant since 2007.  The complaint requests injunctive relief and civil penalties on average of $36,000 per day per violation, including a request that the owners remediate environmental damage and that $100,000 of the civil penalties be used for beneficial mitigation projects.  Trial in this matter as to liability has been scheduled for October 2014.  Trial as to remedies, if there is a finding of liability, is scheduled for August 2015.

On July 27, 2013, the Sierra Club and MEIC filed an additional Notice, identifying additional plant projects that are alleged not to be in compliance with the Clean Air Act.  On September 27, 2013, the plaintiffs filed an amended complaint.  This amended complaint drops all claims regarding pre-2001 plant projects, as well as the plaintiffs' Title V and opacity claims.  It does, however, add claims with respect to a number of post-2000 plant projects, which effectively increased the number of projects subject to the litigation by about 40.  PPL Montana and the other Colstrip Owners filed a motion to dismiss the amended complaint on October 11, 2013.  Although PPL Montana believes it and the other co-owners have numerous defenses to the allegations set forth in this complaint and will vigorously assert the same, PPL Montana cannot predict the ultimate outcome of this matter at this time.

Regulatory Issues

(All Registrants)

See Note 6 for information on regulatory matters related to utility rate regulation.  See Note 15 to the Registrants' 2012 Form 10-K for a discussion of Enactment of Financial Reform Legislation.


 
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(PPL, PPL Energy Supply and PPL Electric)

New Jersey Capacity Legislation

In January 2011, New Jersey enacted a law that intervenes in the wholesale capacity market exclusively regulated by the FERC:  S. No. 2381, 214th Leg. (N.J. 2011) (the Act).  To create incentives for the development of new, in-state electric generation facilities, the Act implements a "long-term capacity agreement pilot program (LCAPP)."  The Act requires New Jersey utilities to pay a guaranteed fixed price for wholesale capacity, imposed by the New Jersey Board of Public Utilities (BPU), to certain new generators participating in PJM, with the ultimate costs of that guarantee to be borne by New Jersey ratepayers.  PPL believes the intent and effect of the LCAPP is to encourage the construction of new generation in New Jersey even when, under the FERC-approved PJM economic model, such new generation would not be economic.  The Act could depress capacity prices in PJM in the short term, impacting PPL Energy Supply's revenues, and harm the long-term ability of the PJM capacity market to incent necessary generation investment throughout PJM.  In February 2011, the PJM Power Providers Group (P3), an organization in which PPL is a member, filed a complaint before the FERC seeking changes in PJM's capacity market rules designed to ensure that subsidized generation, such as the generation that may result from the implementation of the LCAPP, will not be able to set capacity prices artificially low as a result of their exercise of buyer market power.  In April 2011, the FERC issued an order granting in part and denying in part P3's complaint and ordering changes in PJM's capacity rules consistent with a significant portion of P3's requested changes.  Several parties have filed appeals of the FERC's order.  PPL, PPL Energy Supply and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

In addition, in February 2011, PPL and several other generating companies and utilities filed a complaint in U.S. District Court in New Jersey challenging the Act on the grounds that it violates well-established principles under the Supremacy Clause and the Commerce Clause of the U.S. Constitution and requesting declaratory and injunctive relief barring implementation of the Act by the BPU Commissioners.  In October 2011, the court denied the BPU's motion to dismiss the proceeding and in September 2012 the U.S. District Court denied all summary judgment motions.  Trial of this matter was completed in June 2013.  In October 2013, the U.S. District Court in New Jersey issued a decision finding the Act unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to regulate the wholesale sale of electricity in interstate commerce.  The decision has been appealed to the U.S. Court of Appeals for the Third Circuit by CPV Power Development, Inc. and is expected to be appealed by the State of New Jersey.  PPL, PPL Energy Supply and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

Maryland Capacity Order

In April 2012, the Maryland Public Service Commission (MD PSC) ordered three electric utilities in Maryland to enter into long-term contracts to support the construction of new electric generating facilities in Maryland, specifically a 661 MW natural gas-fired combined-cycle generating facility to be owned by CPV Maryland, LLC.  PPL believes the intent and effect of the action by the MD PSC is to encourage the construction of new generation in Maryland even when, under the FERC-approved PJM economic model, such new generation would not be economic.  The MD PSC action could depress capacity prices in PJM in the short term, impacting PPL Energy Supply's revenues, and harm the long-term ability of the PJM capacity market to encourage necessary generation investment throughout PJM.

In April 2012, PPL and several other generating companies filed a complaint in U.S. District Court in Maryland challenging the MD PSC order on the grounds that it violates well-established principles under the Supremacy and Commerce clauses of the U.S. Constitution and requested declaratory and injunctive relief barring implementation of the order by the MD PSC Commissioners.  In August 2012, the court denied the MD PSC and CPV Maryland, LLC motions to dismiss the proceeding.  Trial of this matter was completed in March 2013.  In September 2013, the U.S. District Court in Maryland issued a decision finding the MD PSC order unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to regulate the wholesale sale of electricity in interstate commerce.  The decision is expected to be appealed to the U.S. Court of Appeals for the Fourth Circuit.  PPL, PPL Energy Supply, and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

Pacific Northwest Markets (PPL and PPL Energy Supply)

Through its subsidiaries, PPL Energy Supply made spot market bilateral sales of power in the Pacific Northwest during the period from December 2000 through June 2001.  Several parties subsequently claimed refunds at FERC as a result of these sales.  In June 2003, the FERC terminated proceedings to consider whether to order refunds for spot market bilateral sales made in the Pacific Northwest, including sales made by PPL Montana, during the period December 2000 through June 2001.  In August 2007, the U.S. Court of Appeals for the Ninth Circuit reversed the FERC's decision and ordered the FERC to

 
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consider additional evidence.  In October 2011, FERC initiated proceedings to consider additional evidence.  In July 2012, PPL Montana and the City of Tacoma, one of the two parties claiming refunds at FERC, reached a settlement whereby PPL Montana paid $75 thousand to resolve the City of Tacoma's $23 million claim.  The settlement does not resolve the remaining claim outstanding at September 30, 2013 by the City of Seattle for approximately $50 million.  In April 2013, the FERC issued an order on reconsideration allowing the parties to seek refunds for the period January 2000 through December 2000.  As a result, the City of Seattle may be able to seek refunds from PPL Montana for such period.  Hearings before a FERC Administrative Law Judge regarding the City of Seattle's refund claims were completed in October 2013.  A briefing schedule has been set and an initial decision is expected in mid-March 2014.

Although PPL and its subsidiaries believe they have not engaged in any improper trading or marketing practices affecting the Pacific Northwest markets, PPL and PPL Energy Supply cannot predict the outcome of the above-described proceedings or whether any subsidiaries will be the subject of any additional governmental investigations or named in other lawsuits or refund proceedings.  Consequently, PPL and PPL Energy Supply cannot estimate a range of reasonably possible losses, if any, related to this matter.

Electric - Reliability Standards (All Registrants)

The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk power system.  The FERC oversees this process and independently enforces the Reliability Standards.  The Reliability Standards have the force and effect of law and apply to certain users of the bulk power electricity system, including electric utility companies, generators and marketers.  Under the Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.

LG&E, KU, PPL Electric and certain subsidiaries of PPL Energy Supply monitor their compliance with the Reliability Standards and continue to self-report potential violations of certain applicable reliability requirements and submit accompanying mitigation plans, as required.  The resolution of a number of potential violations is pending.  Any Regional Reliability Entity (including RFC or SERC) determination concerning the resolution of violations of the Reliability Standards remains subject to the approval of the NERC and the FERC.

In the course of implementing their programs to ensure compliance with the Reliability Standards by those PPL affiliates subject to the standards, certain other instances of potential non-compliance may be identified from time to time.  The Registrants cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any, other than the amounts currently recorded.

In October 2012, the FERC issued a Notice of Proposed Rulemaking (NOPR) concerning Reliability Standards for geomagnetic disturbances (GMDs).  The FERC proposed to direct the NERC to submit for approval Reliability Standards that address the impact of GMDs on the reliable operation of the bulk-power system.  In May 2013, the FERC issued its Final Rule, Order No. 779, which directs the NERC to submit GMD Reliability Standards to the FERC for approval in two stages.  In the first stage, the NERC must submit one or more Reliability Standards by January 22, 2014 that require owners and operators of the bulk-power system to develop and implement operational procedures to mitigate the effects of GMDs on the bulk-power system.  In the second stage, the NERC must submit one or more Reliability Standards by January 22, 2015 that require owners and operators of bulk-power system facilities to assess yet to be determined "benchmark GMD events" and develop and implement plans to protect the bulk-power system from such GMD events.  The Registrants are unable to predict the specific requirements that will be contained in the Reliability Standards that the NERC has been directed to submit or the amount of any expenditures that may be required as a result of the approval of any such Reliability Standards.

Environmental Matters - Domestic

(All Registrants)

Due to the environmental issues discussed below or other environmental matters, it may be necessary for the Registrants to modify, curtail, replace or cease operation of certain facilities or performance of certain operations to comply with statutes, regulations and other requirements of regulatory bodies or courts.  In addition, legal challenges to new environmental permits or rules add to the uncertainty of estimating the future cost impact of these permits and rules.

LG&E and KU are entitled to recover, through the ECR mechanism, certain costs of complying with the Clean Air Act as amended and those federal, state or local environmental requirements applicable to coal combustion wastes and by-products from facilities that generate electricity from coal in accordance with approved compliance plans.  Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery before the companies' respective state regulatory authorities, or the FERC, if applicable.  Because PPL Electric does not own any generating plants,

 
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its exposure to related environmental compliance costs is reduced.  As PPL Energy Supply is not a rate regulated entity, it cannot seek to recover environmental compliance costs through the mechanism of rate recovery.  PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.

(All Registrants except PPL Electric)

Air

CSAPR (formerly Clean Air Transport Rule) and CAIR

In July 2011, the EPA adopted the CSAPR.  The CSAPR replaced the EPA's previous CAIR which was invalidated in July 2008 by the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court).  CAIR subsequently was effectively reinstated by the D.C. Circuit Court in December 2008, pending finalization of the CSAPR.  Like CAIR, CSAPR targeted sources in the eastern U.S. and required reductions in sulfur dioxide and nitrogen oxides in two phases (2012 and 2014).

In December 2011, the D.C. Circuit Court stayed implementation of the CSAPR and left CAIR in effect pending a final decision on the validity of the rule.  In August 2012, the D.C. Circuit Court issued a ruling invalidating CSAPR, remanding the rule to the EPA for further action, and leaving CAIR in place during the interim.  In June 2013, the U.S. Supreme Court granted the EPA's petition for review of the D.C. Circuit Court's August 2012 decision.  Oral argument before the U.S. Supreme Court has been scheduled for December 2013.  Prior to a revised rule from the EPA, coal-fired generating plants could face tighter nitrous oxide emission limitations through state action.

The Kentucky fossil-fueled generating plants can meet the CAIR sulfur dioxide emission requirements by utilizing sulfur dioxide allowances (including banked allowances and optimizing existing controls).  To meet nitrogen oxide standards under the CAIR, the Kentucky companies will need to buy allowances and/or make operational changes.  LG&E and KU do not currently anticipate that the costs of meeting these reinstated CAIR requirements or standards will be significant.

PPL Energy Supply's Pennsylvania fossil-fueled generating plants can meet the CAIR sulfur dioxide emission requirements with the existing scrubbers that were placed in service in 2008 and 2009.  To meet the CAIR nitrogen oxide standards, PPL Energy Supply will need to buy allowances and/or make operational changes, the costs of which are not anticipated to be significant.

National Ambient Air Quality Standards

PPL fossil-fueled generating plants may face further reductions in emissions as a result of more stringent national ambient air quality standards for ozone, nitrogen oxide, sulfur dioxide and/or fine particulates.

In 2010, the EPA finalized a new one-hour standard for sulfur dioxide, and states are required to identify areas that meet those standards and areas that are in non-attainment.  In July 2013, the EPA finalized non-attainment designations for parts of the country, including part of Yellowstone County in Montana (Billings area), including the Corette plant and its immediate vicinity, and part of Jefferson County in Kentucky.  Attainment must be achieved by 2018.  States are working on designations for other areas.

In December 2012, the EPA issued final rules that strengthen the fine particulate standards.  Under the final rules, states and the EPA have until 2015 to identify non-attainment areas, and states have until 2020 to achieve attainment status for those areas.

PPL, PPL Energy Supply, LKE, LG&E and KU anticipate that some of the measures required for compliance with the CAIR, or the MATS, or the Regional Haze requirements (as discussed below), such as upgraded or new sulfur dioxide scrubbers at certain plants and, in the case of LG&E and KU, the previously announced retirement of coal-fired generating units at the Cane Run, Green River and Tyrone plants, will help to achieve compliance with the new one-hour sulfur dioxide standard.  If additional reductions were to be required, the financial impact could be significant.  The short-term impact on the Corette plant from the EPA's final designation of part of Yellowstone County in Montana as non-attainment as noted above is not expected to be significant, as PPL Energy Supply previously announced its intent to place the plant in long-term reserve status beginning in April 2015 (see "MATS" below).  The longer-term impact will depend on the status of plant operations at that time and what the MDEQ requires in its State Implementation Plan for reestablishing attainment, due in January 2015.

 
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Until particulate matter and sulfur dioxide maintenance and compliance plans are developed by the EPA and state or local agencies, including identification and finalization of attainment designations for particulate matter, PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict the impact of the new standards.

MATS

In May 2011, the EPA published a proposed regulation requiring stringent reductions of mercury and other hazardous air pollutants from power plants.  In February 2012, the EPA published the final rule, known as the MATS, with an effective date of April 2012.  The rule is being challenged by industry groups and states in the D.C. Circuit Court, where oral argument is scheduled for December 2013.  The rule provides for a three-year compliance deadline with the potential for a one-year extension as provided under the statute.  PPL has received two extensions in Kentucky and has requested an extension for one plant in Pennsylvania.  Other extension requests are under consideration.

At the time the MATs rule was proposed, LG&E and KU filed requests with the KPSC for environmental cost recovery based on their expected need to install environmental controls, including chemical additive and fabric-filter baghouses to remove certain air pollutants.  Recovery of the cost of certain controls was granted by the KPSC in December 2011.  LG&E's and KU's anticipated retirement of certain coal-fired electricity generating units is in response to this and other environmental regulations.  LG&E and KU are continuing to assess whether any revisions of their approved compliance plans will be necessary.

With respect to PPL Energy Supply's Pennsylvania plants, PPL Energy Supply believes that installation of chemical additive systems may be necessary at certain coal-fired plants, the capital cost of which is not expected to be significant.  PPL Energy Supply continues to analyze the potential impact of MATS on operating costs.  With respect to PPL Energy Supply's Montana plants, modifications to the air pollution controls installed on Colstrip may be required, the cost of which is not expected to be significant.  For the Corette plant, PPL Energy Supply announced in September 2012 its intention, beginning in April 2015, to place the plant in long-term reserve status, suspending the plant's operation, due to expected market conditions and the costs to comply with the MATS requirements.  The Corette plant asset group's carrying amount at September 30, 2013 was $67 million.  Although the Corette plant asset group was not determined to be impaired at September 30, 2013, it is reasonably possible that an impairment could occur in future periods, as the Company continues to assess its plans for Corette and as higher priced sales contracts settle, adversely impacting projected cash flows.  PPL Energy Supply, LG&E and KU are continuing to conduct in-depth reviews of the MATS, including the potential implications to scrubber wastewater discharges.  See the discussion of effluent limitations guidelines and standards below.

Upon reconsideration of the MATS rule, in March 2013 the EPA revised certain emission limits and related requirements for new power plants.  The revised limits are somewhat less onerous than the original proposal, and thereby pose less of an impediment to the construction of new coal-fired power plants.

Regional Haze and Visibility

The EPA's regional haze programs were developed under the Clean Air Act to eliminate man-made visibility degradation by 2064.  Under the programs, states are required to take action via state plans to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977.

The primary power plant emissions affecting visibility are sulfur dioxide, nitrogen oxide and particulates.  To date, the focus of regional haze activity has been the western U.S. because, until recently, BART requirements for sulfur dioxide and nitrogen oxide reductions in the eastern U.S. were largely addressed through compliance with other regulatory programs, such as CSAPR or CAIR.  More specifically, before CAIR was temporarily invalidated in 2008, the EPA had determined, and the D.C. Circuit Court had affirmed, that a state could accept region-wide reductions under the CAIR trading program to satisfy BART requirements.  After CAIR was temporarily invalidated, the EPA adopted a final rule providing that states subject to CSAPR (which replaced CAIR) may rely on participation in the CSAPR trading program as an alternative to BART.  However, the D.C. Circuit Court's August 2012 decision to vacate and remand CSAPR and to implement CAIR in its place on an interim basis leaves power plants located in the eastern U.S., including PPL's plants in Pennsylvania and Kentucky, exposed to reductions in sulfur dioxide and nitrogen oxides as required by BART, unless the D.C. Circuit Court's decision, now pending before the U.S. Supreme Court, is overturned.

In addition to this exposure stemming from the remand of CSAPR, LG&E's Mill Creek Units 3 and 4 are required to reduce sulfuric acid mist emissions because they were determined to have a significant regional haze impact.  These reductions are in the Kentucky Division of Air Quality's regional haze state implementation plan that was submitted to the EPA.  LG&E is

 
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currently installing sorbent injection technology to comply with these reductions, the costs of which are not expected to be significant.

In Montana, the EPA Region 8 developed the regional haze plan as the MDEQ declined to develop a BART state implementation plan.  In September 2012, the EPA issued its final Federal Implementation Plan (FIP) for the Montana regional haze rule.  The final FIP assumed no additional controls for Corette or Colstrip Units 3 and 4, but proposed tighter limits for Corette and Colstrip Units 1 and 2.  PPL Energy Supply expects to meet these tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" above).  Under the final FIP, Colstrip Units 1 and 2 may require additional controls, including the possible installation of an SNCR and other technology, to meet more stringent nitrogen oxide and sulfur dioxide limits.  The cost of these potential additional controls, if required, could be significant. In November 2012, PPL filed a petition for review of the Montana Regional Haze FIP with the U.S. Court of Appeals for the Ninth Circuit.  Environmental groups have also filed a petition for review.  The two matters have been consolidated, and litigation is on-going.

New Source Review (NSR)

The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants.  The EPA has asserted that modification of these plants has increased their emissions and, consequently, that they are subject to stringent NSR requirements under the Clean Air Act.  In April 2009, PPL received EPA information requests for its Montour and Brunner Island plants.  PPL and the EPA have exchanged certain information regarding this matter.  In January 2009, PPL, PPL Energy Supply and other companies that own or operate the Keystone plant in Pennsylvania received a notice of violation from the EPA alleging that certain projects were undertaken without proper NSR compliance.  In May and November 2012, PPL Montana received information requests from the EPA regarding projects undertaken during a Spring 2012 maintenance outage at Colstrip Unit 1.  In September 2012, PPL Montana received an information request from the Montana Department of Environmental Quality regarding Colstrip Unit 1 and other projects.  PPL and PPL Energy Supply cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.

In March 2009, KU received an EPA notice alleging that KU violated certain provisions of the Clean Air Act's rules governing NSR and prevention of significant deterioration by installing sulfur dioxide scrubbers and SCR controls at its Ghent plant without assessing potential increased sulfuric acid mist emissions.  KU contends that the projects in question were pollution control projects, and therefore exempt from the requirements cited by the EPA.  In December 2009, the EPA issued an information request on this matter.  In September 2012, the parties reached a tentative settlement addressing the Ghent NSR matter that seeks to resolve a September 2007 notice of violation alleging opacity violations at the plant.  The parties subsequently entered into a consent decree which was approved by the court on September 11, 2013.  The consent decree requires the incurrence of non-material costs that have already been accrued.

In August 2007, LG&E received information requests for the Mill Creek and Trimble County plants, and KU received requests for the Ghent plant, but they have received no further communications from the EPA since providing their responses.  PPL, LKE, LG&E and KU cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.

States and environmental groups also have commenced litigation alleging violations of the NSR regulations by coal-fired generating plants across the nation.  See "Legal Matters" above for information on a lawsuit filed by environmental groups in March 2013 against PPL Montana and other owners of Colstrip.

If PPL subsidiaries are found to have violated NSR regulations, PPL, PPL Energy Supply, LKE, LG&E and KU would, among other things, be required to meet permit limits reflecting Best Available Control Technology (BACT) for the emissions of any pollutant found to have significantly increased due to a major plant modification.  The costs to meet such limits, including installation of technology at certain units, could be significant.

TC2 Air Permit (PPL and Kentucky Registrants)

The Sierra Club and other environmental groups petitioned the Kentucky Environmental and Public Protection Cabinet to overturn the air permit issued for the TC2 baseload generating unit, but the agency upheld the permit in an order issued in September 2007.  In response to subsequent petitions by environmental groups, the EPA ordered certain non-material changes to the permit which in January 2010 were incorporated into a final revised permit issued by the KDAQ.  In March 2010, the environmental groups petitioned the EPA to object to the revised state permit.  Until the EPA issues a final ruling on the pending petition and all available appeals are exhausted, PPL, LKE, LG&E and KU cannot predict the outcome of this matter or the potential impact on the capital costs of this project, if any.

 
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Cane Run Environmental Claims (PPL, LKE and LG&E)

On September 6, 2013, PPL, LKE and LG&E received a letter on behalf of two residents adjacent to the Cane Run plant notifying various federal, state, and local agencies of their intent to file a citizen suit for alleged violations of the Clean Air Act and Resource Conservation and Recovery Act.  The claimants allege various environmental harms including an imminent and substantial endangerment to health or the environment and state that they will seek civil penalties, injunctive relief and attorneys' fees.  PPL, LKE and LG&E cannot predict the outcome of this matter or the potential impact on operations of the Cane Run plant.  In the 2011 to 2013 time period, the Louisville Metro Air Pollution Control District issued several notices of violation alleging violations of local air quality rules at the Cane Run plant.  The agency is seeking civil penalties and remedial measures which are not expected to result in the incurrence of material costs.  LG&E is currently in settlement negotiations with the agency.  LG&E has previously announced that it anticipates retiring the coal-fired units at Cane Run before the end of 2015.

(All Registrants)

GHG Regulations and Tort Litigation

As a result of the April 2007 U.S. Supreme Court decision that the EPA has authority under the Clean Air Act to regulate GHG emissions from new motor vehicles, in April 2010, the EPA and the U.S. Department of Transportation issued new light-duty vehicle emissions standards that applied beginning with 2012 model year vehicles.  The EPA also clarified that this standard, beginning in 2011, authorized regulation of GHG emissions from stationary sources under the NSR and Title V operating permit provisions of the Clean Air Act.  As a result, any new sources or major modifications to existing GHG sources causing a net significant emissions increase now require adherence to the BACT permit limits for GHGs.  The rules were challenged, and in June 2012 the D.C. Circuit Court upheld the EPA's regulations.  In December 2012, the D.C. Circuit Court denied petitions for rehearing pertaining to its June 2012 opinion.  On October 15, 2013, the U.S. Supreme Court granted certiorari for several petitions to decide whether the NSR provisions of the Clean Air Act require the EPA to regulate GHG emissions from stationary sources, such as power plants.

In June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum the EPA was directed to issue a new proposal for new power plants by September 20, 2013, with a final rule in a timely fashion thereafter, and to issue proposed standards for existing plants by June 1, 2014 with a final rule to be issued by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and the state implementation plans.  The Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may also lead to more costly regulatory requirements.  Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect PPL and others in the industry as transmission system modifications to improve the ability to withstand major storms may be needed in order to meet those requirements.

The EPA issued its revised proposal (re-proposal) for new sources on September 20, 2013 as directed by the White House.  Unlike the EPA's April 2012 Carbon Dioxide (CO2) New Source Performance Standards (NSPS) for new plants, the re-proposal established separate emission standards for coal and gas units based on the application of different technologies.  The coal standard is based on the application of partial carbon capture and sequestration technology, but because there is no commercially viable CO2 reduction technology available presently to allow new coal plants to meet the proposed standards, this proposal effectively precludes the construction of new coal plants.  The EPA proposed the same standard for natural gas combined-cycle power plants as it had proposed in April 2012.  A slightly less stringent standard, however, was offered in the re-proposal for smaller gas plants.  Simple cycle natural gas plants are no longer explicitly exempt from the standard under the EPA's re-proposal.

At the regional level, ten northeastern states signed a Memorandum of Understanding (MOU) agreeing to establish a GHG emission cap-and-trade program, called the Regional Greenhouse Gas Initiative (RGGI).  The program commenced in January 2009 and calls for stabilizing carbon dioxide emissions, at base levels established in 2005, from electric power plants with capacity greater than 25 MW.  The MOU also provides for a 10% reduction, by 2019, in carbon dioxide emissions from base levels.
 
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Pennsylvania has not stated an intention to join the RGGI, but enacted the Pennsylvania Climate Change Act of 2008 (PCCA).  The PCCA established a Climate Change Advisory Committee to advise the PADEP on the development of a Climate Change Action Plan.  In December 2009, the Advisory Committee finalized its Climate Change Action Report and identified specific actions that could result in reducing GHG emissions by 30% by 2020.  Some of the proposed actions, such as a mandatory 5% efficiency improvement at power plants, could be unachievable.  To date, there have been no regulatory or legislative actions taken to implement the recommendations of the report.

In November 2008, the Governor of Kentucky issued a comprehensive energy plan including non-binding targets aimed at promoting improved energy efficiency, development of alternative energy, development of carbon capture and sequestration projects, and other actions to reduce GHG emissions.  In December 2009, the Kentucky Climate Action Plan Council was established to develop an action plan addressing potential GHG reductions and related measures.  To date, the state has not issued a final plan.  The impact of any such plan is not now determinable, but the costs to comply with the plan could be significant.

A number of lawsuits have been filed asserting common law claims including nuisance, trespass and negligence against various companies with GHG emitting plants and, although the decided cases to date have not sustained claims brought on the basis of these theories of liability, the law remains unsettled on these claims.  In September 2009, the U.S. Court of Appeals for the Second Circuit in the case of AEP v. Connecticut reversed a federal district court's decision and ruled that several states and public interest groups, as well as the City of New York, could sue five electric utility companies under federal common law for allegedly causing a public nuisance as a result of their emissions of GHGs.  In June 2011, the U.S. Supreme Court overturned the Second Circuit and held that such federal common law claims were displaced by the Clean Air Act and regulatory actions of the EPA.  In addition, in Comer v. Murphy Oil (Comer case), the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) declined to overturn a district court ruling that plaintiffs did not have standing to pursue state common law claims against companies that emit GHGs.  The complaint in the Comer case named the previous indirect parent of LKE as a defendant based upon emissions from the Kentucky plants.  In January 2011, the Supreme Court denied a petition to reverse the Fifth Circuit's ruling.  In May 2011, the plaintiffs in the Comer case filed a substantially similar complaint in federal district court in Mississippi against 87 companies, including KU and three other indirect subsidiaries of LKE, under a Mississippi statute that allows the re-filing of an action in certain circumstances.  In March 2012, the Mississippi federal district court granted defendants' motions to dismiss the state common law claims.  Plaintiffs appealed to the U.S. Court of Appeals for the Fifth Circuit and in May 2013 the Fifth Circuit affirmed the district court's dismissal of the case.  Additional litigation in federal and state courts over such issues is continuing.  PPL, LKE and KU cannot predict the outcome of these lawsuits or estimate a range of reasonably possible losses, if any.

Renewable Energy Legislation (All Registrants)

There has been interest in renewable energy legislation at both the state and federal levels.  Federal legislation on renewable energy is not expected to be enacted this year.  In Pennsylvania, bills were recently introduced calling for an increase in AEPS Tier 1 obligations and to create a $25 million permanent funding program for solar generation.  A bill adding new hydropower to Montana's renewable portfolio standard was enacted with an effective date of October 1, 2013.  An interim legislative committee in Montana is reviewing the state's RPS.  PPL and PPL Energy Supply cannot predict at this time whether the committee will recommend any changes to existing laws.

The Registrants believe there are financial, regulatory and logistical uncertainties related to the implementation of renewable energy mandates that will need to be resolved before the impact of such requirements on them can be estimated.  Such uncertainties, among others, include the need to provide back-up supply to augment intermittent renewable generation, potential generation over-supply that could result from such renewable generation and back-up, impacts to PJM's capacity market and the need for substantial changes to transmission and distribution systems to accommodate renewable energy sources.  These uncertainties are not directly addressed by proposed legislation.  PPL and PPL Energy Supply cannot predict at this time the effect on their competitive plants' future competitive position, results of operation, cash flows and financial position of renewable energy mandates that may be adopted, although the costs to implement and comply with any such requirements could be significant.

Water/Waste

Coal Combustion Residuals (CCRs) (All Registrants except PPL Electric)

In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous) under the Resource Conservation and Recovery Act (RCRA).  CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.  Regulating CCRs as a hazardous waste under Subtitle C of the RCRA would materially increase costs and result in early retirements of many coal-fired plants, as it would require plants to retrofit their operations to comply

 
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with full hazardous waste requirements for the generation of CCRs and associated waste waters through generation, transportation and disposal.  This would also have a negative impact on the beneficial use of CCRs and could eliminate existing markets for CCRs.  The EPA's proposed approach to regulate CCRs as non-hazardous waste under Subtitle D of the RCRA would mainly affect disposal and most significantly affect any wet disposal operations.  Under this approach, many of the current markets for beneficial uses would not be affected.  Currently, PPL expects that several of its plants in Kentucky and Montana could be significantly impacted by the EPA's proposed non-hazardous waste regulations, as these plants are using surface impoundments for management and disposal of CCRs.

The EPA has issued information requests on CCR management practices at numerous plants throughout the power industry as it considers whether or not to regulate CCRs as hazardous waste.  PPL has provided information on CCR management practices at most of its plants in response to the EPA's requests.  In addition, the EPA has conducted follow-up inspections to evaluate the structural stability of CCR management facilities at several PPL plants and PPL has implemented or is implementing certain actions in response to recommendations from these inspections.

The EPA is continuing to evaluate the unprecedented number of comments it received on its June 2010 proposed regulations.  In October 2011, the EPA issued a Notice of Data Availability (NODA) requesting comments on selected documents it received during the comment period for the proposed regulations.  On September 20, 2013, in response to the proposed Effluent Limitation Guidelines, PPL submitted comments on the proposed CCR regulations.  Also, on September 3, 2013, PPL commented on a second CCR NODA seeking comment on additional information related to the EPA's proposal.  In July 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from issuing final CCR regulations and would set non-hazardous CCR standards under RCRA and authorize state permit programs.  It remains uncertain whether similar legislation will likely be passed by the U.S. Senate.

A coalition of environmental groups and two CCR recycling companies have filed lawsuits against the EPA for failure to perform nondiscretionary duties under RCRA, which could require a deadline for the EPA to issue strict CCR regulations.  The two CCR recycling companies are asserting that the EPA should regulate CCRs as a non-hazardous waste that would allow for continued recycling.

As a result of litigation by environmental groups, final rulemaking could be issued as early as the end of 2014.

PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict at this time the final requirements of the EPA's CCR regulations or potential changes to the RCRA and what impact they would have on their facilities, but the financial and operational impact is expected to be material if CCRs are regulated as hazardous waste and significant if regulated as non-hazardous.

Trimble County Landfill Permit (PPL and Kentucky Registrants)

In May 2011, LG&E submitted an application for a special waste landfill permit to handle coal combustion residuals generated at the Trimble County plant.  After extensive review of the permit application in May 2013, the Kentucky Division of Waste Management denied the permit application on the grounds that the proposed facility would violate the Kentucky Cave Protection Act because it would eliminate an on-site karst feature considered to be a cave.  LG&E and KU are assessing additional options for managing coal combustion residuals including construction of a landfill at an alternate site adjacent to the plant.  Submittal of a new permit application for an alternative site may result in additional environmental considerations in the course of the permitting process and substantial additional costs.  PPL, LKE, LG&E and KU are unable to determine the precise impact of this matter until they select an alternate management option and complete a detailed engineering design.

Seepages and Groundwater Infiltration - Pennsylvania, Montana and Kentucky

(All Registrants except PPL Electric)

Seepages or groundwater infiltration have been detected at active and retired wastewater basins and landfills at various PPL, PPL Energy Supply, LKE, LG&E and KU plants.  PPL, PPL Energy Supply, LKE, LG&E and KU have completed or are completing assessments of seepages or groundwater infiltration at various facilities and have completed or are working with agencies to implement assessment or abatement measures, where required.  A range of reasonably possible losses cannot currently be estimated.
 
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(PPL and PPL Energy Supply)

In 2007, six plaintiffs filed a lawsuit in the Montana Sixteenth Judicial District Court against the Colstrip plant owners asserting property damage due to seepage from plant wastewater ponds.  A settlement agreement was reached in July 2010 which would have resulted in a payment by PPL Montana, but certain of the plaintiffs later argued the settlement was not final.  The Colstrip plant owners filed a motion to enforce the settlement and in October 2011 the court granted the motion and ordered the settlement to be completed in 60 days.  The plaintiffs appealed the October 2011 order to the Montana Supreme Court, which affirmed the district court's order enforcing the settlement in December 2012 and denied plaintiff's motion for rehearing in February 2013.  Final settlement documents were executed and the settlement was effective on October 28, 2013.  PPL Montana's share of the settlement payment was not significant.
 
In August 2012, PPL Montana entered into an Administrative Order on Consent (AOC) with the MDEQ which establishes a comprehensive process to investigate and remediate groundwater seepage impacts related to the wastewater facilities at the Colstrip power plant.  The AOC requires that within five years, PPL Montana provide financial assurance to the MDEQ for the costs associated with closure and future monitoring of the waste-water treatment facilities.  PPL Montana cannot predict at this time if the actions required under the AOC will create the need to adjust the existing ARO related to these facilities.

In September 2012, Earthjustice filed an affidavit pursuant to Montana's Major Facility Siting Act (MFSA) that sought review of the AOC by Montana's Board of Environmental Review (BER) on behalf of the Sierra Club, the MEIC, and the National Wildlife Federation (NWF).  In September 2012, PPL Montana filed an election with the BER to have this proceeding conducted in Montana state district court as contemplated by the MFSA.  In October 2012, Earthjustice filed a petition for review of the AOC in the Montana state district court in Rosebud County.

In late October 2012, Earthjustice filed a second complaint against the MDEQ and PPL Montana in state district court in Lewis and Clark County on behalf of the Sierra Club, the MEIC and the NWF.  This complaint alleges that the defendants have failed to take action under the MFSA and the Montana Water Quality Act to effectively monitor and correct issues of coal ash disposal and wastewater ponds at the Colstrip plant.  The complaint seeks a declaration that the operations of the impoundments violate the statutes referred to above, requests a writ of mandamus directing the MDEQ to enforce the same and seeks recovery of attorneys' fees and costs.  In May 2013, the court granted MDEQ's and PPL Montana's motion to dismiss.  It is unknown at this time whether the complainants will appeal this decision.

(All Registrants except PPL Electric)

Clean Water Act 316(b)

The EPA published proposed rule 316(b) for existing facilities in April 2011.  The EPA has been evaluating the comments it received to the proposed rule and meeting with industry groups to discuss options.  The proposed rule contains two requirements to reduce impact to aquatic organisms at cooling water intake structures.  The first requires all existing facilities to meet standards for the reduction of mortality of aquatic organisms that become trapped against water intake screens (impingement) regardless of the levels of mortality actually occurring or the cost to achieve the standards.  The second requirement is to determine and install the best technology available to reduce mortality of aquatic organisms pulled through a plant's cooling water system (entrainment).  A form of cost-benefit analysis is allowed for this second requirement involving a site-specific evaluation based on nine factors, including impacts to energy delivery reliability and the remaining useful life of the plant.  The final rule is expected to be issued in November 2013.  Until the final rule is issued, PPL, PPL Energy Supply, LKE, LG&E and KU cannot reasonably estimate a range of reasonably possible costs, if any, that would be required to comply with such a regulation.

Effluent Limitations Guidelines (ELGs) and Standards

In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations contain requirements that would affect the inspection and operation of CCR facilities, if finalized.  The EPA has indicated that it will coordinate these regulations with the regulation of CCRs discussed above.  The proposal contains alternative approaches, some of which could significantly impact PPL's coal-fired plants.  PPL, PPL Energy Supply, LKE, LG&E and KU worked with industry groups to comment on the proposed regulation on September 20, 2013.  The final regulation is expected to be issued in May 2014.  At the present time, PPL, PPL Energy Supply, LKE, LG&E and KU are currently unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.  Pending finalization of the ELGs, states, including Pennsylvania and Kentucky, are proposing more stringent

 
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technology-based limits in permit renewals.  Depending on the final limits imposed, the costs of compliance could be significant and costs could be imposed ahead of federal timelines.

Other Issues

The EPA is reassessing its polychlorinated biphenyls (PCB) regulations under the Toxic Substance Control Act, which currently allow certain PCB articles to remain in use.  In April 2010, the EPA issued an Advanced Notice of Proposed Rulemaking for changes to these regulations.  This rulemaking could lead to a phase-out of all PCB-containing equipment.  The EPA is planning to propose the revised regulations in 2014.  PCBs are found, in varying degrees, in all of the Registrants' operations.  The Registrants cannot predict at this time the outcome of these proposed EPA regulations and what impact, if any, they would have on their facilities, but the costs could be significant.

PPL Energy Supply has investigated alternatives to exclude fish from the discharge channel at its Brunner Island plant, but the subsidiary and the PADEP have concluded that a barrier method to exclude fish is not workable.  In June 2012, a Consent Order and Agreement (COA) was signed that allows the subsidiary to study a change in a cooling tower operational method that may keep fish from entering the channel.  Should this approach fail, the COA requires a retrofit of impingement control technology at the intakes to the cooling towers, the cost of which could be significant.

In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet challenging the Kentucky Pollutant Discharge Elimination System permit issued in April 2010, which covers water discharges from the Trimble County plant.  In November 2010, the Cabinet issued a final order upholding the permit.  In December 2010, the environmental groups appealed the order to the Trimble Circuit Court, but the case was subsequently transferred to the Franklin Circuit Court.  In September 2013, the court reversed the Cabinet order upholding the permit and remanded the permit to the agency for further proceedings.  In October 2013, LG&E filed a notice of appeal with the Kentucky Court of Appeals.  PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible losses, if any.

The EPA and the Army Corps of Engineers are working on a guidance document that will expand the federal government's interpretation of what constitutes "waters of the U.S." subject to regulation under the Clean Water Act.  This change has the potential to affect generation and delivery operations, with the most significant effect being the potential elimination of the existing regulatory exemption for plant waste water treatment systems.  The costs that may be imposed on the Registrants as a result of any eventual expansion of this interpretation cannot reliably be estimated at this time but could be significant.

Superfund and Other Remediation (All Registrants)

PPL Electric is potentially responsible for costs at several sites listed by the EPA under the federal Superfund program, including the Columbia Gas Plant site, the Metal Bank site and the Ward Transformer site.  Clean-up actions have been or are being undertaken at all of these sites, the costs of which have not been significant to PPL Electric.  However, should the EPA require different or additional measures in the future, or should PPL Electric's share of costs at multi-party sites increase substantially more than currently expected, the costs could be significant.

PPL Electric, LG&E and KU are remediating or have completed the remediation of several sites that were not addressed under a regulatory program such as Superfund, but for which PPL Electric, LG&E and KU may be liable for remediation.  These include a number of former coal gas manufacturing plants in Pennsylvania and Kentucky previously owned or operated or currently owned by predecessors or affiliates of PPL Electric, LG&E and KU.  There are additional sites, formerly owned or operated by PPL Electric, LG&E and KU predecessors or affiliates, for which PPL Electric, LG&E and KU lack information on current site conditions and are therefore unable to predict what, if any, potential liability they may have.

Depending on the outcome of investigations at sites where investigations have not begun or been completed or developments at sites for which PPL Electric, LG&E and KU currently lack information, the costs of remediation and other liabilities could be material.  PPL, PPL Electric, LKE, LG&E and KU cannot estimate a range of reasonably possible losses, if any, related to these matters.

The EPA is evaluating the risks associated with polycyclic aromatic hydrocarbons and naphthalene, chemical by-products of coal gas manufacturing.  As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil cleanup.  This could require several PPL subsidiaries to take more extensive assessment and remedial actions at former coal gas manufacturing plants.  PPL, PPL Electric, LKE, LG&E and KU cannot estimate a range of reasonably possible losses, if any, related to these matters.


 
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From time to time, PPL Energy Supply, PPL Electric, LG&E and KU undertake remedial action in response to spills or other releases at various on-site and off-site locations, negotiate with the EPA and state and local agencies regarding actions necessary for compliance with applicable requirements, negotiate with property owners and other third parties alleging impacts from PPL's operations and undertake similar actions necessary to resolve environmental matters which arise in the course of normal operations.  Based on analyses to date, resolution of these environmental matters is not expected to have a significant adverse impact on their operations.

Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in significant additional costs for the Registrants.

Environmental Matters - WPD (PPL)

WPD's distribution businesses are subject to environmental regulatory and statutory requirements.  PPL believes that WPD has taken and continues to take measures to comply with the applicable laws and governmental regulations for the protection of the environment.

Other

Nuclear Insurance (PPL and PPL Energy Supply)

PPL Susquehanna is a member of certain insurance programs that provide coverage for property damage to members' nuclear generating plants.  Effective April 1, 2013, facilities at the Susquehanna plant are insured against property damage losses up to $2.50 billion under these programs.  PPL Susquehanna is also a member of an insurance program that provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions.

Under the property and replacement power insurance programs, PPL Susquehanna could be assessed retroactive premiums in the event of the insurers' adverse loss experience.  Effective April 1, 2013, this maximum assessment was $46 million.

In the event of a nuclear incident at the Susquehanna plant, PPL Susquehanna's public liability for claims resulting from such incident would be limited to $12.6 billion under provisions of The Price-Anderson Act as amended.  PPL Susquehanna is protected against this liability by a combination of commercial insurance and an industry assessment program.

In the event of a nuclear incident at any of the reactors covered by The Price-Anderson Act, as amended, PPL Susquehanna could be assessed up to $235 million per incident, payable at $35 million per year.

Guarantees and Other Assurances

(All Registrants)

In the normal course of business, the Registrants enter into agreements that provide financial performance assurance to third parties on behalf of certain subsidiaries.  Such agreements include, for example, guarantees, stand-by letters of credit issued by financial institutions and surety bonds issued by insurance companies.  These agreements are entered into primarily to support or enhance the creditworthiness attributed to a subsidiary on a stand-alone basis or to facilitate the commercial activities in which these subsidiaries engage.

(PPL)

PPL fully and unconditionally guarantees all of the debt securities of PPL Capital Funding.

(All Registrants)

The table below details guarantees provided at September 30, 2013.  The total recorded liability at September 30, 2013 and December 31, 2012, was $23 million and $24 million for PPL and $20 million for both periods for LKE.  The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures."  For reporting purposes, on a consolidated basis, all guarantees of PPL Energy Supply (other than the letters of credit), PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.

 
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Exposure at
 
Expiration
 
 
September 30, 2013 (a)
 
Date
PPL
 
 
 
 
 
 
Indemnifications related to the WPD Midlands acquisition 
 
 
   
(b)
 
 
WPD indemnifications for entities in liquidation and sales of assets 
 
$
 11 
(c)
 
2018
WPD guarantee of pension and other obligations of unconsolidated entities 
 
 
 125 
(d)
 
2015
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
Letters of credit issued on behalf of affiliates 
 
 
 23 
(e)
 
2013 - 2014
Retrospective premiums under nuclear insurance programs 
 
 
 46 
(f)
 
 
Nuclear claims assessment under The Price-Anderson Act as amended 
 
 
 235 
(g)
 
 
Indemnifications for sales of assets 
 
 
 250 
(h)
 
2025
Indemnification to operators of jointly owned facilities 
 
 
 6 
(i)
 
 
Guarantee of a portion of a divested unconsolidated entity's debt 
 
 
 22 
(j)
 
2018
 
 
 
 
 
 
 
PPL Electric
 
 
 
 
 
 
Guarantee of inventory value 
 
 
 32 
(k)
 
2017
 
 
 
 
 
 
 
LKE
 
 
 
 
 
 
Indemnification of lease termination and other divestitures 
 
 
 301 
(l)
 
2021 - 2023
 
 
 
 
 
 
 
LG&E and KU
 
 
 
 
 
 
LG&E and KU guarantee of shortfall related to OVEC 
 
 
   
(m)
 
 

(a)
Represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee.
(b)
Prior to PPL's acquisition, WPD Midlands Holdings Limited had agreed to indemnify certain former directors of a Turkish entity, in which WPD Midlands Holdings Limited previously owned an interest, for any liabilities that may arise as a result of an investigation by Turkish tax authorities, and PPL WEM has received a cross-indemnity from E.ON AG with respect to these indemnification obligations.  Additionally, PPL subsidiaries agreed to provide indemnifications to subsidiaries of E.ON AG for certain liabilities relating to properties and assets owned by affiliates of E.ON AG that were transferred to WPD Midlands in connection with the acquisition.  The maximum exposure and expiration of these indemnifications cannot be estimated because the maximum potential liability is not capped and the expiration date is not specified in the transaction documents.
(c)
In connection with the liquidation of wholly owned subsidiaries that have been deconsolidated upon turning the entities over to the liquidators, certain affiliates of PPL Global have agreed to indemnify the liquidators, directors and/or the entities themselves for any liabilities or expenses arising during the liquidation process, including liabilities and expenses of the entities placed into liquidation.  In some cases, the indemnifications are limited to a maximum amount that is based on distributions made from the subsidiary to its parent either prior or subsequent to being placed into liquidation.  In other cases, the maximum amount of the indemnifications is not explicitly stated in the agreements.  The indemnifications generally expire two to seven years subsequent to the date of dissolution of the entities.  The exposure noted only includes those cases in which the agreements provide for a specific limit on the amount of the indemnification, and the expiration date was based on an estimate of the dissolution date of the entities.

In connection with their sales of various businesses, WPD and its affiliates have provided the purchasers with indemnifications that are standard for such transactions, including indemnifications for certain pre-existing liabilities and environmental and tax matters.  In addition, in connection with certain of these sales, WPD and its affiliates have agreed to continue their obligations under existing third-party guarantees, either for a set period of time following the transactions or upon the condition that the purchasers make reasonable efforts to terminate the guarantees.  Finally, WPD and its affiliates remain secondarily responsible for lease payments under certain leases that they have assigned to third parties.
(d)
As a result of the privatization of the utility industry in the U.K., certain electric associations' roles and responsibilities were discontinued or modified.  As a result, certain obligations, primarily pension-related, associated with these organizations have been guaranteed by the participating members.  Costs are allocated to the members based on predetermined percentages as outlined in specific agreements.  However, if a member becomes insolvent, costs can be reallocated to and are guaranteed by the remaining members.  At September 30, 2013, WPD has recorded an estimated discounted liability based on its current allocated percentage of the total expected costs for which the expected payment/performance is probable.  Neither the expiration date nor the maximum amount of potential payments for certain obligations is explicitly stated in the related agreements.  Therefore, they have been estimated based on the types of obligations.
(e)
Standby letter of credit arrangements under PPL Energy Supply's credit facilities for the purposes of protecting various third parties against nonperformance by PPL.  This is not a guarantee by PPL on a consolidated basis.
(f)
PPL Susquehanna is contingently obligated to pay this amount related to potential retrospective premiums that could be assessed under its nuclear insurance programs.  See "Nuclear Insurance" above for additional information.
(g)
This is the maximum amount PPL Susquehanna could be assessed for each incident at any of the nuclear reactors covered by this Act.  See "Nuclear Insurance" above for additional information.
(h)
PPL Energy Supply's maximum exposure with respect to certain indemnifications and the expiration of the indemnifications cannot be estimated because, in the case of certain indemnification provisions, the maximum potential liability is not capped by the transaction documents and the expiration date is based on the applicable statute of limitations.  The exposure and expiration dates noted are only for those cases in which the agreements provide for specific limits.  The indemnification provisions described below are in each case subject to certain customary limitations, including thresholds for allowable claims, caps on aggregate liability, and time limitations for claims arising out of breaches of most representations and warranties.

A subsidiary of PPL Energy Supply has agreed to provide indemnification to the purchaser of the Long Island generation business for damages arising out of any breach of the representations, warranties and covenants under the related transaction agreement and for damages arising out of certain other matters, including liabilities relating to certain renewable energy facilities which were previously owned by one of the PPL subsidiaries sold in the transaction but which were unrelated to the Long Island generation business.  The indemnification provisions for most representations and warranties expired in the third quarter of 2011.
 
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A subsidiary of PPL Energy Supply has agreed to provide indemnification to the purchasers of the Maine hydroelectric facilities for damages arising out of any breach of the representations, warranties and covenants under the respective transaction agreements and for damages arising out of certain other matters, including liabilities of the PPL Energy Supply subsidiary relating to the pre-closing ownership or operation of those hydroelectric facilities.  The indemnification provisions for most representations and warranties expired in the fourth quarter of 2012.

Subsidiaries of PPL Energy Supply have agreed to provide indemnification to the purchasers of certain non-core generation facilities sold in March 2011 for damages arising out of any breach of the representations, warranties and covenants under the related transaction agreements and for damages arising out of certain other matters relating to the facilities that were the subject of the transaction, including certain reduced capacity payments (if any) at one of the facilities in the event specified PJM rule changes are proposed and become effective.  The indemnification provisions for most representations and warranties expired in the first quarter of 2012.
(i)
In December 2007, a subsidiary of PPL Energy Supply executed revised owners agreements for two jointly owned facilities, the Keystone and Conemaugh generating plants.  The agreements require that in the event of any default by an owner, the other owners fund contributions for the operation of the generating plants, based upon their ownership percentages.  The non-defaulting owners, who make up the defaulting owner's obligations, are entitled to the generation entitlement of the defaulting owner, based upon their ownership percentage.  The exposure shown reflects the PPL Energy Supply subsidiary's share of the maximum obligation.  The agreements do not have an expiration date.
(j)
A PPL Energy Supply subsidiary owned a one-third equity interest in Safe Harbor Water Power Corporation (Safe Harbor) that was sold in March 2011.  Beginning in 2008, PPL Energy Supply guaranteed one-third of any amounts payable with respect to certain senior notes issued by Safe Harbor.  Under the terms of the sale agreement, PPL Energy Supply continues to guarantee the portion of Safe Harbor's debt, but received a cross-indemnity from the purchaser, secured by a lien on the purchaser's stock of Safe Harbor, in the event PPL Energy Supply is required to make a payment under the guarantee.  The exposure noted reflects principal only.
(k)
PPL Electric entered into contracts with a third party logistics firm that provides inventory procurement and fulfillment services.  Under the contracts, the logistics firm has title to the inventory purchased for PPL Electric's use.  Upon termination of the contracts, PPL Electric has guaranteed to purchase any remaining inventory that has not been used or sold by the logistics firm at the weighted-average cost at which the logistics firm purchased the inventory.
(l)
LKE provides certain indemnifications, the most significant of which relate to the termination of the WKE lease in July 2009.  These guarantees cover the due and punctual payment, performance and discharge by each party of its respective present and future obligations.  The most comprehensive of these guarantees is the LKE guarantee covering operational, regulatory and environmental commitments and indemnifications made by WKE under the WKE Transaction Termination Agreement.  This guarantee has a term of 12 years ending July 2021, and a cumulative maximum exposure of $200 million.  Certain items such as government fines and penalties fall outside the cumulative cap.  LKE has contested the applicability of the indemnification requirement relating to one matter presented by a counterparty under this guarantee.  Another guarantee with a maximum exposure of $100 million covering other indemnifications expires in 2023.  In May 2012, LKE's indemnitee received an arbitration panel's decision affecting this matter, which granted LKE's indemnitee certain rights of first refusal to purchase excess power at a market-based price rather than at an absolute fixed price.  In January 2013, LKE's indemnitee commenced a proceeding in the Kentucky Court of Appeals appealing the December 2012 order of the Henderson Circuit Court, confirming the arbitration award.  A decision in the appellate matter may occur during late 2013 or early 2014.  LKE believes its indemnification obligations in this matter remain subject to various uncertainties, including potential for additional legal challenges regarding the arbitration decision as well as future prices, availability and demand for the subject excess power.  LKE continues to evaluate various legal and commercial options with respect to this indemnification matter.  The ultimate outcomes of the WKE termination-related indemnifications cannot be predicted at this time.  Additionally, LKE has indemnified various third parties related to historical obligations for other divested subsidiaries and affiliates.  The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum; however, LKE is not aware of formal claims under such indemnities made by any party at this time.  LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an indemnified party.  In the second quarter of 2012, LKE adjusted its estimated liability for certain of these indemnifications by $9 million ($5 million after-tax), which is reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income.  The adjustment was recorded in the Kentucky Regulated segment for PPL.  LKE cannot predict the ultimate outcomes of such indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded.
(m)
Pursuant to the OVEC power purchase contract, expiring in June 2040, LG&E and KU are obligated to pay a demand charge which includes, among other charges, debt service and amortization toward principal retirement, decommissioning costs, post-retirement and post-employment benefits costs (other than pensions), and reimbursement of plant operating, maintenance and other expenses.  The demand charge is expected to cover LG&E's and KU's shares of the cost of the listed items over the term of the contract.  However, in the event there is a shortfall in covering these costs, LG&E and KU are obligated to pay their share of the excess debt service, post-retirement and decommissioning costs.  The maximum exposure and the expiration date of these potential obligations are not presently determinable.

The Registrants provide other miscellaneous guarantees through contracts entered into in the normal course of business.  These guarantees are primarily in the form of indemnification or warranties related to services or equipment and vary in duration.  The amounts of these guarantees often are not explicitly stated, and the overall maximum amount of the obligation under such guarantees cannot be reasonably estimated.  Historically, no significant payments have been made with respect to these types of guarantees and the probability of payment/performance under these guarantees is remote.

PPL, on behalf of itself and certain of its subsidiaries, maintains insurance that covers liability assumed under contract for bodily injury and property damage.  The coverage provides maximum aggregate coverage of $225 million.  This insurance may be applicable to obligations under certain of these contractual arrangements.

11.  Related Party Transactions

PLR Contracts/Purchase of Accounts Receivable (PPL Energy Supply and PPL Electric)

PPL Electric holds competitive solicitations for PLR generation supply.  PPL EnergyPlus has been awarded a portion of the PLR generation supply through these competitive solicitations.  The sales and purchases between PPL EnergyPlus and PPL Electric are included in the Statements of Income as "Wholesale energy marketing to affiliate" by PPL Energy Supply and as "Energy purchases from affiliate" by PPL Electric.

 
71
 

Under the standard Default Service Supply Master Agreement for the solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits.  PPL EnergyPlus is required to post collateral with PPL Electric:  (a) when the market price of electricity to be delivered by PPL EnergyPlus exceeds the contract price for the forecasted quantity of electricity to be delivered; and (b) this market price exposure exceeds a contractual credit limit.  Based on the current credit rating of PPL Energy Supply, as guarantor, PPL EnergyPlus' credit limit was $35 million at September 30, 2013.  In no instance is PPL Electric required to post collateral to suppliers under these supply contracts.

PPL Electric's customers may choose an alternative supplier for their generation supply.  See Note 2 for additional information regarding PPL Electric's purchases of accounts receivable from alternative suppliers, including PPL EnergyPlus.

At September 30, 2013, PPL Energy Supply had a net credit exposure of $25 million from PPL Electric from its commitment as a PLR supplier and from the sale of its accounts receivable to PPL Electric.

Allocations of PPL Services Costs (PPL Energy Supply, PPL Electric and LKE)

PPL Services provides corporate functions such as financial, legal, human resources and information technology services.  PPL Services charges the respective PPL subsidiaries for the cost of such services when they can be specifically identified.  The cost of the services that is not directly charged to PPL subsidiaries is allocated to applicable subsidiaries based on an average of the subsidiaries' relative invested capital, operation and maintenance expenses and number of employees.  PPL Services charged the following amounts for the periods ended September 30, which PPL management believes are reasonable, including amounts applied to accounts that are further distributed between capital and expense:

 
 
Three Months
 
Nine Months
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
$
 52 
 
$
 49 
 
$
 161 
 
$
 159 
PPL Electric
 
 
 37 
 
 
 35 
 
 
 109 
 
 
 116 
LKE
 
 
 3 
 
 
 3 
 
 
 11 
 
 
 11 

Intercompany Billings by LKS (LG&E and KU)

LKS provides LG&E and KU with a variety of centralized administrative, management and support services.  The cost of these services is directly charged to the company or, for general costs that cannot be directly attributed, charged based on predetermined allocation factors, including the following measures: number of customers, total assets, revenues, number of employees and/or other statistical information.  LKS charged the amounts in the table below for the periods ended September 30, which LKE management believes are reasonable, including amounts that are further distributed between capital and expense:

 
 
Three Months
 
Nine Months
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E
 
$
53 
 
$
51 
 
$
159 
 
$
132 
KU
 
 
36 
 
 
33 
 
 
146 
 
 
114 

In addition, LG&E and KU provide services to each other and to LKS.  Billings between LG&E and KU relate to labor and overheads associated with union and hourly employees performing work for the other company, charges related to jointly-owned generating units and other miscellaneous charges.  Tax settlements between LKE and LG&E and LKE and KU are reimbursed through LKS.

Intercompany Borrowings (LKE)

LKE maintains a $300 million revolving demand note with a PPL Energy Funding subsidiary whereby LKE can borrow funds on a short-term basis at market-based rates.  The interest rates on borrowings are equal to one-month LIBOR plus a spread.  At September 30, 2013 and December 31, 2012, $52 million and $25 million were outstanding and were reflected in "Notes payable with affiliates" on the Balance Sheet.  The interest rate on the outstanding borrowing at September 30, 2013 was 1.68%.  Interest on the demand note was not significant for the three and nine months ended September 30, 2013 and 2012.  In October 2013, the capacity of the revolving demand note was reduced by $75 million.
 
72
 

Intercompany Derivatives (Kentucky Registrants)

Periodically, LG&E and KU enter into forward-starting interest rate swaps with PPL.  These hedging instruments have terms identical to forward-starting swaps entered into by PPL with third parties.  See Note 14 for additional information on intercompany derivatives.

Intercompany Insurance (PPL Electric)

In May 2013, PPL Electric received $18.25 million from the settlement of its 2012 storm insurance claims with PPL Power Insurance Ltd., a subsidiary of PPL that provides certain insurance coverage to PPL and its subsidiaries.

Effective January 1, 2013, PPL Electric no longer has storm insurance coverage with PPL Power Insurance Ltd.  See Note 6 for discussion regarding the proposed Storm Damage Expense Rider filed with the PUC by PPL Electric.

Other (All Registrants except PPL)

See Note 7 for a discussion regarding capital transactions by PPL Energy Supply, PPL Electric, LKE, LG&E and KU.  For PPL Energy Supply, PPL Electric, LG&E and KU, refer to Note 9 for discussions regarding intercompany allocations associated with defined benefits.

12.  Other Income (Expense) - net

(All Registrants)

The breakdown of "Other Income (Expense) - net" for the periods ended September 30 was:

 
 
 
 
Three Months
 
Nine Months
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
Other Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings on securities in NDT funds
 
$
 4 
 
$
 5 
 
$
 14 
 
$
 17 
 
Interest income
 
 
 1 
 
 
 1 
 
 
 2 
 
 
 4 
 
AFUDC - equity component
 
 
 3 
 
 
 2 
 
 
 8 
 
 
 7 
 
Earnings (losses) from equity method investments
 
 
   
 
 
 (1)
 
 
   
 
 
 (7)
 
Miscellaneous - Domestic
 
 
   
 
 
 3 
 
 
 9 
 
 
 8 
 
Miscellaneous - U.K.
 
 
   
 
 
 (1)
 
 
 1 
 
 
 1 
 
Total Other Income
 
 
 8 
 
 
 9 
 
 
 34 
 
 
 30 
Other Expense
 
 
 
 
 
 
 
 
 
 
 
 
 
Economic foreign currency exchange contracts (Note 14)
 
 
 117 
 
 
 47 
 
 
 (6)
 
 
 40 
 
Charitable contributions
 
 
 5 
 
 
 1 
 
 
 13 
 
 
 7 
 
Miscellaneous - Domestic
 
 
 2 
 
 
 4 
 
 
 7 
 
 
 12 
 
Miscellaneous - U.K.
 
 
   
 
 
 1 
 
 
 1 
 
 
 2 
 
Total Other Expense
 
 
 124 
 
 
 53 
   
 
 15 
 
 
 61 
Other Income (Expense) - net
 
$
 (116)
 
$
 (44)
 
$
 19 
 
$
 (31)
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
Other Income
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings on securities in NDT funds
 
$
 4 
 
$
 5 
 
$
 14 
 
$
 17 
 
Interest income
 
 
 1 
 
 
   
 
 
 3 
 
 
 1 
 
Miscellaneous
 
 
   
 
 
 2 
 
 
 7 
 
 
 5 
 
Total Other Income
 
 
 5 
 
 
 7 
 
 
 24 
 
 
 23 
Other Expense
 
 
 
 
 
 
 
 
 
 
 
 
 
Charitable contributions
 
 
 1 
 
 
 1 
 
 
 3 
 
 
 2 
 
Miscellaneous
 
 
 2 
 
 
 1 
 
 
 3 
 
 
 5 
 
Total Other Expense
 
 
 3 
 
 
 2 
   
 
 6 
 
 
 7 
Other Income (Expense) - net
 
$
 2 
 
$
 5 
 
$
 18 
 
$
 16 

"Other Income (Expense) - net" for the three and nine months ended September 30, 2013 and 2012 for PPL Electric is primarily the equity component of AFUDC.  The components of "Other Income (Expense) - net" for the three and nine months ended September 30, 2013 for LKE, LG&E and KU are not significant.  The components of "Other Income (Expense) - net" for the three months ended September 30, 2012 for LKE, LG&E and KU are not significant.  "Other Income (Expense) - net" for the nine months ended September 30, 2012 for LKE and KU is primarily losses from an equity method investment.  The components of "Other Income (Expense) - net" for the nine months ended September 30, 2012 for LG&E are not significant.

 
73
 
13.  Fair Value Measurements and Credit Concentration

(All Registrants)

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate.  These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability.  These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk.  The fair value of a group of financial assets and liabilities is measured on a net basis.  Transfers between levels are recognized at end-of-reporting-period values.  During the three and nine months ended September 30, 2013 and 2012, there were no transfers between Level 1 and Level 2.  See Note 1 in each Registrant's 2012 Form 10-K for information on the levels in the fair value hierarchy.

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 1,291 
 
$
 1,291 
 
 
   
 
 
   
 
$
 901 
 
$
 901 
 
 
   
 
 
   
 
Restricted cash and cash equivalents (a)
 
 
 120 
 
 
 120 
 
 
   
 
 
   
 
 
 135 
 
 
 135 
 
 
   
 
 
   
 
Price risk management assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
 
 1,480 
 
 
 7 
 
$
 1,421 
 
$
 52 
 
 
 2,068 
 
 
 2 
 
$
 2,037 
 
$
 29 
 
 
Interest rate swaps
 
 
 86 
 
 
   
 
 
 86 
 
 
   
 
 
 15 
 
 
   
 
 
 15 
 
 
   
 
 
Foreign currency contracts
 
 
 1 
 
 
   
 
 
 1 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
Cross-currency swaps
 
 
 28 
 
 
   
 
 
 28 
 
 
   
 
 
 14 
 
 
   
 
 
 13 
 
 
 1 
 
Total price risk management assets
 
 
 1,595 
 
 
 7 
 
 
 1,536 
 
 
 52 
 
 
 2,097 
 
 
 2 
 
 
 2,065 
 
 
 30 
 
NDT funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 14 
 
 
 14 
 
 
   
 
 
   
 
 
 11 
 
 
 11 
 
 
   
 
 
   
 
 
Equity securities
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
U.S. large-cap
 
 
 494 
 
 
 369 
 
 
 125 
 
 
   
 
 
 412 
 
 
 308 
 
 
 104 
 
 
   
 
 
 
U.S. mid/small-cap
 
 
 74 
 
 
 30 
 
 
 44 
 
 
   
 
 
 60 
 
 
 25 
 
 
 35 
 
 
   
 
 
Debt securities
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
U.S. Treasury
 
 
 96 
 
 
 96 
 
 
   
 
 
   
 
 
 95 
 
 
 95 
 
 
   
 
 
   
 
 
 
U.S. government sponsored agency
 
 
 6 
 
 
   
 
 
 6 
 
 
   
 
 
 9 
 
 
   
 
 
 9 
 
 
   
 
 
 
Municipality
 
 
 75 
 
 
   
 
 
 75 
 
 
   
 
 
 82 
 
 
   
 
 
 82 
 
 
   
 
 
 
Investment-grade corporate
 
 
 40 
 
 
   
 
 
 40 
 
 
   
 
 
 40 
 
 
   
 
 
 40 
 
 
   
 
 
 
Other
 
 
 3 
 
 
   
 
 
 3 
 
 
   
 
 
 3 
 
 
   
 
 
 3 
 
 
   
 
 
Receivables (payables), net
 
 
 2 
 
 
   
 
 
 2 
 
 
   
 
 
   
 
 
 (2)
 
 
 2 
 
 
   
 
Total NDT funds
 
 
 804 
 
 
 509 
 
 
 295 
 
 
   
 
 
 712 
 
 
 437 
 
 
 275 
 
 
   
 
Auction rate securities (b)
 
 
 19 
 
 
   
 
 
   
 
 
 19 
 
 
 19 
 
 
   
 
 
 3 
 
 
 16 
Total assets
 
$
 3,829 
 
$
 1,927 
 
$
 1,831 
 
$
 71 
 
$
 3,864 
 
$
 1,475 
 
$
 2,343 
 
$
 46 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price risk management liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
$
 1,235 
 
$
 4 
 
$
 1,226 
 
$
 5 
 
$
 1,566 
 
$
 2 
 
$
 1,557 
 
$
 7 
 
 
Interest rate swaps
 
 
 58 
 
 
   
 
 
 58 
 
 
   
 
 
 80 
 
 
   
 
 
 80 
 
 
   
 
 
Foreign currency contracts
 
 
 67 
 
 
   
 
 
 67 
 
 
   
 
 
 44 
 
 
   
 
 
 44 
 
 
   
 
 
Cross-currency swaps
 
 
 1 
 
 
   
 
 
 1 
 
 
   
 
 
 4 
 
 
   
 
 
 4 
 
 
   
 
Total price risk management liabilities
 
$
 1,361 
 
$
 4 
 
$
 1,352 
 
$
 5 
 
$
 1,694 
 
$
 2 
 
$
 1,685 
 
$
 7 

 
74
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 551 
 
$
 551 
 
 
   
 
 
   
 
$
 413 
 
$
 413 
 
 
   
 
 
   
 
Restricted cash and cash equivalents (a)
 
 
 54 
 
 
 54 
 
 
   
 
 
   
 
 
 63 
 
 
 63 
 
 
   
 
 
   
 
Price risk management assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
 
 1,480 
 
 
 7 
 
$
 1,421 
 
$
 52 
 
 
 2,068 
 
 
 2 
 
$
 2,037 
 
$
 29 
 
Total price risk management assets
 
 
 1,480 
 
 
 7 
 
 
 1,421 
 
 
 52 
 
 
 2,068 
 
 
 2 
 
 
 2,037 
 
 
 29 
 
NDT funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 14 
 
 
 14 
 
 
   
 
 
   
 
 
 11 
 
 
 11 
 
 
   
 
 
   
 
 
Equity securities
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
U.S. large-cap
 
 
 494 
 
 
 369 
 
 
 125 
 
 
   
 
 
 412 
 
 
 308 
 
 
 104 
 
 
   
 
 
 
U.S. mid/small-cap
 
 
 74 
 
 
 30 
 
 
 44 
 
 
   
 
 
 60 
 
 
 25 
 
 
 35 
 
 
   
 
 
Debt securities
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
U.S. Treasury
 
 
 96 
 
 
 96 
 
 
   
 
 
   
 
 
 95 
 
 
 95 
 
 
   
 
 
   
 
 
 
U.S. government sponsored agency
 
 
 6 
 
 
   
 
 
 6 
 
 
   
 
 
 9 
 
 
   
 
 
 9 
 
 
   
 
 
 
Municipality
 
 
 75 
 
 
   
 
 
 75 
 
 
   
 
 
 82 
 
 
   
 
 
 82 
 
 
   
 
 
 
Investment-grade corporate
 
 
 40 
 
 
   
 
 
 40 
 
 
   
 
 
 40 
 
 
   
 
 
 40 
 
 
   
 
 
 
Other
 
 
 3 
 
 
   
 
 
 3 
 
 
   
 
 
 3 
 
 
   
 
 
 3 
 
 
   
 
 
Receivables (payables), net
 
 
 2 
 
 
   
 
 
 2 
 
 
   
 
 
   
 
 
 (2)
 
 
 2 
 
 
   
 
Total NDT funds
 
 
 804 
 
 
 509 
 
 
 295 
 
 
   
 
 
 712 
 
 
 437 
 
 
 275 
 
 
   
 
Auction rate securities (b)
 
 
 16 
 
 
   
 
 
   
 
 
 16 
 
 
 16 
 
 
   
 
 
 3 
 
 
 13 
Total assets
 
$
 2,905 
 
$
 1,121 
 
$
 1,716 
 
$
 68 
 
$
 3,272 
 
$
 915 
 
$
 2,315 
 
$
 42 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price risk management liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
$
 1,235 
 
$
 4 
 
$
 1,226 
 
$
 5 
 
$
 1,566 
 
$
 2 
 
$
 1,557 
 
$
 7 
 
Total price risk management liabilities
 
$
 1,235 
 
$
 4 
 
$
 1,226 
 
$
 5 
 
$
 1,566 
 
$
 2 
 
$
 1,557 
 
$
 7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Electric
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 225 
 
$
 225 
 
 
   
 
 
   
 
$
 140 
 
$
 140 
 
 
   
 
 
   
 
Restricted cash and cash equivalents (c)
 
 
 12 
 
 
 12 
 
 
   
 
 
   
 
 
 13 
 
 
 13 
 
 
   
 
 
   
Total assets
 
$
 237 
 
$
 237 
 
 
   
 
 
   
 
$
 153 
 
$
 153 
 
 
   
 
 
   

LKE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 21 
 
$
 21 
 
 
   
 
 
   
 
$
 43 
 
$
 43 
 
 
   
 
 
   
 
Restricted cash and cash equivalents (d)
 
 
 22 
 
 
 22 
 
 
   
 
 
   
 
 
 32 
 
 
 32 
 
 
   
 
 
   
 
Price risk management assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 14 
 
 
   
 
$
 14 
 
 
   
 
Total price risk management assets
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 14 
 
 
   
 
 
 14 
 
 
   
Total assets
 
$
 43 
 
$
 43 
 
 
   
 
 
   
 
$
 89 
 
$
 75 
 
$
 14 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price risk management liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
 55 
 
 
   
 
$
 55 
 
 
   
 
$
 58 
 
 
   
 
$
 58 
 
 
   
Total price risk management liabilities
 
$
 55 
 
 
   
 
$
 55 
 
 
   
 
$
 58 
 
 
   
 
$
 58 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 12 
 
$
 12 
 
 
   
 
 
   
 
$
 22 
 
$
 22 
 
 
   
 
 
   
 
Restricted cash and cash equivalents (d)
 
 
 22 
 
 
 22 
 
 
   
 
 
   
 
 
 32 
 
 
 32 
 
 
   
 
 
   
 
Price risk management assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 7 
 
 
   
 
$
 7 
 
 
   
 
Total price risk management assets
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 7 
 
 
   
 
 
 7 
 
 
   
Total assets
 
$
 34 
 
$
 34 
 
 
   
 
 
   
 
$
 61 
 
$
 54 
 
$
 7 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price risk management liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
 48 
 
 
   
 
$
 48 
 
 
   
 
$
 58 
 
 
   
 
$
 58 
 
 
   
Total price risk management liabilities
 
$
 48 
 
 
   
 
$
 48 
 
 
   
 
$
 58 
 
 
   
 
$
 58 
 
 
   

 
75
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 9 
 
$
 9 
 
 
   
 
 
   
 
$
 21 
 
$
 21 
 
 
   
 
 
   
 
Price risk management assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 7 
 
 
   
 
$
 7 
 
 
   
 
Total price risk management assets
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 7 
 
 
   
 
 
 7 
 
 
   
Total assets
 
$
 9 
 
$
 9 
 
 
   
 
 
   
 
$
 28 
 
$
 21 
 
$
 7 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price risk management liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
 7 
 
 
 
 
$
 7 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
Total price risk management liabilities
 
$
 7 
 
 
   
 
$
 7 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   

(a)
Current portion is included in "Restricted cash and cash equivalents" and the long-term portion is included in "Other noncurrent assets" on the Balance Sheets.
(b)
Included in "Other investments" on the Balance Sheets.
(c)
Current portion is included in "Other current assets" and the long-term portion is included in "Other noncurrent assets" on the Balance Sheets.
(d)
Included in "Other noncurrent assets" on the Balance Sheets.

A reconciliation of net assets and liabilities classified as Level 3 for the periods ended September 30, 2013 is as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
Energy
 
Auction
 
Cross-
 
 
 
 
Energy
 
Auction
 
Cross-
 
 
 
 
 
 
 
 
 
Commodities,
 
Rate
 
Currency
 
 
 
 
Commodities,
 
 Rate
 
Currency
 
 
 
 
 
 
 
 
 
 net
 
Securities
 
Swaps
 
Total
 
 net
 
Securities
 
Swaps
 
Total
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
period
 
$
 40 
 
$
 19 
 
$
 3 
 
$
 62 
 
$
 22 
 
$
 16 
 
$
 1 
 
$
 39 
 
 
Total realized/unrealized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
 
 
 18 
 
 
   
 
 
   
 
 
 18 
 
 
 23 
 
 
   
 
 
   
 
 
 23 
 
 
 
 
Included in OCI (a)
 
 
   
 
 
   
 
 
 (2)
 
 
 (2)
 
 
   
 
 
   
 
 
 1 
 
 
 1 
 
 
Sales
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 (2)
 
 
   
 
 
   
 
 
 (2)
 
 
Settlements
 
 
 (2)
 
 
   
 
 
   
 
 
 (2)
 
 
 1 
 
 
   
 
 
   
 
 
 1 
 
 
Transfers into Level 3
 
 
 (7)
 
 
   
 
  
   
 
 
 (7)
 
 
 1 
 
 
 3 
 
 
 3 
 
 
 7 
 
 
Transfers out of Level 3
 
 
 (2)
 
 
   
 
 
 (1)
 
 
 (3)
 
 
 2 
 
 
   
 
 
 (5)
 
 
 (3)
Balance at end of period
 
$
 47 
 
$
 19 
 
$
   
 
$
 66 
 
$
 47 
 
$
 19 
 
$
   
 
$
66 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
period
 
$
 40 
 
$
 16 
 
 
 
 
$
 56 
 
$
 22 
 
$
 13 
 
 
 
 
$
 35 
 
 
Total realized/unrealized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
 
 
 18 
 
 
   
 
 
 
 
 
 18 
 
 
 23 
 
 
   
 
 
 
 
 
 23 
 
 
Sales
 
 
   
 
 
   
 
 
 
 
 
   
 
 
 (2)
 
 
   
 
 
 
 
 
 (2)
 
 
Settlements
 
 
 (2)
 
 
   
 
 
 
 
 
 (2)
 
 
 1 
 
 
   
 
 
 
 
 
 1 
 
 
Transfers into Level 3
 
 
 (7)
 
 
   
 
 
 
 
 
 (7)
 
 
 1 
 
 
 3 
 
 
 
 
 
 4 
 
 
Transfers out of Level 3
 
 
 (2)
 
 
   
 
 
 
 
 
 (2)
 
 
 2 
 
 
   
 
 
 
 
 
 2 
Balance at end of period
 
$
 47 
 
$
 16 
 
 
   
 
$
 63 
 
$
 47 
 
$
 16 
 
 
   
 
$
 63 

(a)
"Energy Commodities, net" and "Cross-Currency Swaps" are included in "Qualifying derivatives" and "Auction Rate Securities" are included in "Available-for-sale securities" on the Statements of Comprehensive Income.

A reconciliation of net assets and liabilities classified as Level 3 for the periods ended September 30, 2012 is as follows:

 
76
 
 
 
 
 
 
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
Energy
 
Auction
 
Cross-
 
 
 
 
Energy
 
Auction
 
Cross-
 
 
 
 
 
 
 
 
 
Commodities,
 
Rate
 
Currency
 
 
 
 
Commodities,
 
 Rate
 
Currency
 
 
 
 
 
 
 
 
 
 net
 
Securities
 
Swaps
 
Total
 
 net
 
Securities
 
Swaps
 
Total
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
period
 
$
 34 
 
$
 15 
 
$
 10 
 
$
 59 
 
$
 13 
 
$
 24 
 
$
 4 
 
$
 41 
 
 
Total realized/unrealized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
 
 
 (17)
 
 
   
 
 
   
 
 
 (17)
 
 
 (1)
 
 
   
 
 
 (1)
 
 
 (2)
 
 
 
 
Included in OCI (a)
 
 
   
 
 
 1 
 
 
 (8)
 
 
 (7)
 
 
 1 
 
 
   
 
 
 2 
 
 
 3 
 
 
Sales
 
 
   
 
 
 
 
 
   
 
 
   
 
 
   
 
 
 (5)
 
 
   
 
 
 (5)
 
 
Settlements
 
 
 2 
 
 
   
 
 
   
 
 
 2 
 
 
 (9)
 
 
   
 
 
   
 
 
 (9)
 
 
Transfers into Level 3
 
 
 (2)
 
 
   
 
 
   
 
 
 (2)
 
 
 12 
 
 
   
 
 
   
 
 
 12 
 
 
Transfers out of Level 3
 
 
 8 
 
 
   
 
 
   
 
 
 8 
 
 
 9 
 
 
 (3)
 
 
 (3)
 
 
 3 
Balance at end of period
 
$
 25 
 
$
 16 
 
$
 2 
 
$
 43 
 
$
 25 
 
$
 16 
 
$
 2 
 
$
 43 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
period
 
$
 34 
 
$
 12 
 
 
 
 
$
 46 
 
$
 13 
 
$
 19 
 
 
 
 
$
 32 
 
 
Total realized/unrealized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
gains (losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in earnings
 
 
 (17)
 
 
   
 
 
 
 
 
 (17)
 
 
 (1)
 
 
   
 
 
 
 
 
 (1)
 
 
 
 
Included in OCI (a)
 
 
   
 
 
 1 
 
 
 
 
 
 1 
 
 
 1 
 
 
   
 
 
 
 
 
 1 
 
 
Sales
 
 
   
 
 
   
 
 
 
 
 
   
 
 
   
 
 
 (3)
 
 
 
 
 
 (3)
 
 
Settlements
 
 
 2 
 
 
   
 
 
 
 
 
 2 
 
 
 (9)
 
 
   
 
 
 
 
 
 (9)
 
 
Transfers into Level 3
 
 
 (2)
 
 
   
 
 
 
 
 
 (2)
 
 
 12 
 
 
   
 
 
 
 
 
 12 
 
 
Transfers out of Level 3
 
 
 8 
 
 
   
 
 
 
 
 
 8 
 
 
 9 
 
 
 (3)
 
 
 
 
 
 6 
Balance at end of period
 
$
 25 
 
$
 13 
 
 
   
 
$
 38 
 
$
 25 
 
$
 13 
 
 
   
 
$
 38 

(a)
"Energy Commodities, net" and "Cross-Currency Swaps" are included in "Qualifying derivatives" and "Auction Rate Securities" are included in "Available-for-sale securities" on the Statements of Comprehensive Income.

The significant unobservable inputs used in and quantitative information about the fair value measurement of assets and liabilities classified as Level 3 are as follows:

 
 
 
 
September 30, 2013
 
 
 
 
Fair Value, net
 
 
 
 
 
Range
 
 
 
 
Asset
 
Valuation
 
Unobservable
 
(Weighted
 
 
 
 
(Liability)
 
Technique
 
Input(s)
 
Average) (a)
PPL
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
 
 
 
 
 
 
 
Retail natural gas sales contracts (b)
 
$
 35 
 
Discounted cash flow 
 
Observable wholesale prices used as proxy for retail delivery points 
 
13% - 100% (80%)
   
Heat rate call options (d)
 
 
 9 
 
Discounted cash flow 
 
Implied correlation, implied volatility, and market implied heat rate 
 
33% - 60% (58%)
 
FTR purchase contracts (g)
 
 
 3 
 
Discounted cash flow 
 
Historical settled prices used to model forward prices 
 
 100% (100%)
 
 
 
 
 
 
 
 
 
 
 
Auction rate securities (e)
 
 
 19 
 
Discounted cash flow
 
Modeled from SIFMA Index
 
12% - 80% (64%)
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail natural gas sales contracts (b)
 
$
 35 
 
Discounted cash flow 
 
Observable wholesale prices used as proxy for retail delivery points 
 
13% - 100% (80%)
   
Heat rate call options (d)
 
 
 9 
 
Discounted cash flow 
 
Implied correlation, implied volatility, and market implied heat rate 
 
33% - 60% (58%)
 
FTR purchase contracts (g)
 
 
 3 
 
Discounted cash flow 
 
Historical settled prices used to model forward prices 
 
100% (100%)
 
 
 
 
 
 
 
 
 
 
 
Auction rate securities (e)
 
 
 16 
 
Discounted cash flow 
 
Modeled from SIFMA Index
 
12% - 80% (63%)

 
77
 
 
 
 
 
December 31, 2012
 
 
 
 
Fair Value, net
 
 
 
 
 
Range
 
 
 
 
Asset
 
Valuation
 
Unobservable
 
(Weighted
 
 
 
 
(Liability)
 
Technique
 
Input(s)
 
Average) (a)
PPL
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
 
 
 
 
 
 
 
Retail natural gas sales contracts (b)
 
$
 24 
 
Discounted cash flow 
 
Observable wholesale prices used as proxy for retail delivery points 
 
21% - 100% (75%)
   
Power sales contracts (c)
 
 
 (4)
 
Discounted cash flow 
 
Proprietary model used to calculate forward basis prices 
 
 24% (24%)
 
FTR purchase contracts (g)
 
 
 2 
 
Discounted cash flow 
 
Historical settled prices used to model forward prices 
 
 100% (100%)
 
 
 
 
 
 
 
 
 
 
 
Auction rate securities (e)
 
 
 16 
 
Discounted cash flow
 
Modeled from SIFMA Index
 
54% - 74% (64%)
 
 
 
 
 
 
 
 
 
 
 
Cross-currency swaps (f)
 
 
 1 
 
Discounted cash flow 
 
Credit valuation adjustment
 
 22% (22%)
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail natural gas sales contracts (b)
 
$
 24 
 
Discounted cash flow 
 
Observable wholesale prices used as proxy for retail delivery points 
 
21% - 100% (75%)
   
Power sales contracts (c)
 
 
 (4)
 
Discounted cash flow 
 
Proprietary model used to calculate forward basis prices 
 
 24% (24%)
 
FTR purchase contracts (g)
 
 
 2 
 
Discounted cash flow 
 
Historical settled prices used to model forward prices 
 
100% (100%)
 
 
 
 
 
 
 
 
 
 
 
Auction rate securities (e)
 
 
 13 
 
Discounted cash flow 
 
Modeled from SIFMA Index
 
57% - 74% (65%)

(a)
For energy commodities and auction rate securities, the range and weighted average represent the percentage of fair value derived from the unobservable inputs.  For cross-currency swaps, the range and weighted average represent the percentage decrease in fair value due to the unobservable inputs used in the model to calculate the credit valuation adjustment.
(b)
At September 30, 2013, retail natural gas sales contracts extend through 2019, and $14 million of the fair value is scheduled to deliver within the next 12 months.  As the forward price of natural gas increases/(decreases), the fair value of the contracts (decreases)/increases.
(c)
As the forward price of basis increases/(decreases), the fair value of the contracts (decreases)/increases.
(d)
At September 30, 2013, heat rate call options extend through 2020, and $1 million of the fair value is scheduled to deliver within the next 12 months.  As the implied correlation in heat rate call options increases/(decreases), the fair value of the heat rate call options  (decreases)/increases, as all implied volatilities in heat rate call options increase/(decrease), the fair value of the heat rate call options increases/(decreases), and as the market implied heat rate increases/(decreases), the fair value of the heat rate call options increases/(decreases).
(e)
At September 30, 2013, auction rate securities have a weighted average contractual maturity of 22 years.  The model used to calculate fair value incorporates an assumption that the auctions will continue to fail.  As the modeled forward rates of the SIFMA Index increase/(decrease), the fair value of the securities increases/(decreases).
(f)
The credit valuation adjustment incorporates projected probabilities of default and estimated recovery rates.  As the credit valuation adjustment increases/(decreases), the fair value of the swaps (decreases)/increases.
(g)
At September 30, 2013, FTR purchase contracts extend through 2015, and $1 million of the fair value is scheduled to deliver within the next 12 months.  As the forward implied spread increases/(decreases), the fair value of the contracts increases/(decreases).

Net gains and losses on assets and liabilities classified as Level 3 and included in earnings for the periods ended September 30 are reported in the Statements of Income as follows:

 
 
 
Three Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy Commodities, net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unregulated
 
Wholesale
 
 
 
 
 
 
 
 
 
Retail
 
Energy
 
Net Energy
 
 
 
Energy
 
 
 
Electric and Gas
 
Marketing
 
Trading Margins
 
Fuel
 
Purchases
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
PPL and PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total gains (losses) included in earnings
 
$
 3 
 
$
 (3)
 
$
 (8)
 
$
 (4)
 
$
 11 
 
$
 (8)
 
$
 3 
 
 
   
 
$
 9 
 
$
 (2)
Change in unrealized gains (losses) relating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to positions still held at the reporting date
 
 
 3 
 
 
 (2)
 
 
   
 
 
 (1)
 
 
 17 
 
 
 2 
 
 
   
 
 
   
 
 
   
 
 
   

 
78
 
 
 
 
Nine Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cross-Currency
 
 
 
Energy Commodities, net
 
Swaps
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unregulated
 
Wholesale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail
 
Energy
 
Net Energy
 
 
 
Energy
 
 
 
 
 
Electric and Gas
 
Marketing
 
Trading Margins
 
Fuel
 
Purchases
 
Interest Expense
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
 
2013 
 
2012 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total gains (losses) included
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in earnings
 
$
 18 
 
$
 16 
 
$
 (15)
 
$
 (7)
 
$
 8 
 
$
 (9)
 
$
 3 
 
 
   
 
$
 9 
 
$
 (1)
 
 
   
 
$
 (1)
Change in unrealized gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(losses) relating to positions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
still held at the reporting date
 
 
 18 
 
 
 29 
 
 
 (1)
 
 
   
 
 
 8 
 
 
 2 
 
 
   
 
 
   
 
 
 5 
 
 
 1 
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total gains (losses) included
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in earnings
 
$
 18 
 
$
 16 
 
$
 (15)
 
$
 (7)
 
$
 8 
 
$
 (9)
 
$
 3 
 
 
   
 
$
 9 
 
$
 (1)
 
 
 
 
 
 
Change in unrealized gains
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(losses) relating to positions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
still held at the reporting date
 
 
 18 
 
 
 29 
 
 
 (1)
 
 
   
 
 
 8 
 
 
 2 
 
 
   
 
 
   
 
 
 5 
 
 
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Price Risk Management Assets/Liabilities - Energy Commodities (PPL and PPL Energy Supply)

Energy commodity contracts for electricity, gas, oil and/or emission allowances are generally valued using the income approach, except for exchange-traded derivative gas and oil contracts, which are valued using the market approach and are classified as Level 1.  When the lowest level inputs that are significant to the fair value measurement of a contract are observable, the contract is classified as Level 2.  Level 2 contracts are valued using inputs which may include quotes obtained from an exchange (where there is insufficient market liquidity to warrant inclusion in Level 1), binding and non-binding broker quotes, prices posted by ISOs or published tariff rates.  Furthermore, independent quotes are obtained from the market to validate the forward price curves.  Energy commodity contracts include forwards, futures, swaps, options and structured transactions and may be offset with similar positions in exchange-traded markets.  To the extent possible, fair value measurements utilize various inputs that include quoted prices for similar contracts or market-corroborated inputs.  In certain instances, these contracts may be valued using models, including standard option valuation models and standard industry models.  For example, the fair value of a full-requirement sales contract that delivers power to an illiquid delivery point may be measured by valuing the nearest liquid trading point plus the value of the basis between the two points.  The basis input may be from market quotes or historical prices.

When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3.  Level 3 contracts are valued using PPL proprietary models which include significant unobservable inputs such as delivery at a location where pricing is unobservable, assumptions for customer migration, delivery dates that are beyond the dates for which independent quotes are available, implied volatilities, implied correlations, and market implied heat rates.  Forward transactions, including forward transactions classified as Level 3, are analyzed by PPL's Risk Management department, which reports to the Chief Financial Officer (CFO).  Accounting personnel, who also report to the CFO, interpret the analysis quarterly to appropriately classify the forward transactions in the fair value hierarchy.  Valuation techniques are evaluated periodically.  Additionally, Level 2 and Level 3 fair value measurements include adjustments for credit risk based on PPL's own creditworthiness (for net liabilities) and its counterparties' creditworthiness (for net assets).  PPL's credit department assesses all reasonably available market information which is used by accounting personnel to calculate the credit valuation adjustment.

In certain instances, energy commodity contracts are transferred between Level 2 and Level 3.  The primary reasons for the transfers during 2013 and 2012 were changes in the availability of market information and changes in the significance of the unobservable inputs utilized in the valuation of the contract.  As the delivery period of a contract becomes closer, market information may become available.  When this occurs, the model's unobservable inputs are replaced with observable market information.

Price Risk Management Assets/Liabilities - Interest Rate Swaps/Foreign Currency Contracts/Cross-Currency Swaps (PPL and Kentucky Registrants)

To manage interest rate risk, PPL, LKE, LG&E and KU use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps.  To manage foreign currency exchange risk, PPL uses foreign currency contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency contracts.  An income approach is used to measure the fair value of these contracts, utilizing readily observable inputs, such as forward interest rates (e.g., LIBOR and government security rates) and forward foreign currency exchange rates (e.g.,

 
79
 

GBP), as well as inputs that may not be observable, such as credit valuation adjustments.  In certain cases, market information cannot practicably be obtained to value credit risk and therefore internal models are relied upon.  These models use projected probabilities of default and estimated recovery rates based on historical observances.  When the credit valuation adjustment is significant to the overall valuation, the contracts are classified as Level 3.  For PPL, the primary reason for the transfers during 2013 and 2012 was the change in the significance of the credit valuation adjustment.  Cross-currency swaps classified as Level 3 are valued by PPL's Treasury department, which reports to the CFO.  Accounting personnel, who also report to the CFO, interpret analysis quarterly to classify the contracts in the fair value hierarchy.  Valuation techniques are evaluated periodically.

(PPL and PPL Energy Supply)

NDT Funds

The market approach is used to measure the fair value of equity securities held in the NDT funds.

·
The fair value measurements of equity securities classified as Level 1 are based on quoted prices in active markets and are comprised of securities that are representative of the Wilshire 5000 Total Market Index.

·
Investments in commingled equity funds are classified as Level 2 and represent securities that track the S&P 500 Index, Dow Jones U.S. Total Stock Market Index and the Dow Jones U.S. Completion Total Stock Market Index.  These fair value measurements are based on firm quotes of net asset values per share, which are not obtained from a quoted price in an active market.

Debt securities are generally measured using a market approach, including the use of matrix pricing.  Common inputs include reported trades, broker/dealer bid/ask prices, benchmark securities and credit valuation adjustments.  When necessary, the fair value of debt securities is measured using the income approach, which incorporates similar observable inputs as well as benchmark yields, credit valuation adjustments, reference data from market research publications, monthly payment data, collateral performance and new issue data.

The debt securities held in the NDT funds at September 30, 2013 have a weighted-average coupon of 3.94% and a weighted-average maturity of 7.8 years.

Auction Rate Securities

Auction rate securities include Federal Family Education Loan Program guaranteed student loan revenue bonds, as well as various municipal bond issues.  The probability of realizing losses on these securities is not significant.

The fair value of auction rate securities is estimated using an income approach that includes readily observable inputs, such as principal payments and discount curves for bonds with credit ratings and maturities similar to the securities, and unobservable inputs, such as future interest rates that are estimated based on the SIFMA Index, creditworthiness, and liquidity assumptions driven by the impact of auction failures.  When the present value of future interest payments is significant to the overall valuation, the auction rate securities are classified as Level 3.  The primary reason for the transfers in and out of Level 3 in 2013 and 2012 was the change in discount rates and SIFMA Index.

Auction rate securities are valued by PPL's Treasury department, which reports to the CFO.  Accounting personnel, who also report to the CFO, interpret the analysis quarterly to classify the contracts in the fair value hierarchy.  Valuation techniques are evaluated periodically.

Financial Instruments Not Recorded at Fair Value (All Registrants)

The carrying amounts of contract adjustment payments related to the Purchase Contract component of the Equity Units and long-term debt on the Balance Sheets and their estimated fair values are set forth below.  The fair values of these instruments were estimated using an income approach by discounting future cash flows at estimated current cost of funding rates, which incorporate the credit risk of the Registrants.  These instruments are classified as Level 2.  The effect of third-party credit enhancements is not included in the fair value measurement.

 
80
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
Carrying
 
 
 
 
Carrying
 
 
 
 
 
 
Amount
 
Fair Value
 
Amount
 
Fair Value
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract adjustment payments (a)
 
$
 32 
 
$
 32 
 
$
 105 
 
$
 106 
 
Long-term debt
 
 
 19,843 
 
 
 21,537 
 
 
 19,476 
 
 
 21,671 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
 
 2,962 
 
 
 3,127 
 
 
 3,272 
 
 
 3,556 
PPL Electric
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
 
 2,315 
 
 
 2,505 
 
 
 1,967 
 
 
 2,333 
LKE
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
 
 4,076 
 
 
 4,222 
 
 
 4,075 
 
 
 4,423 
LG&E
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
 
 1,112 
 
 
 1,137 
 
 
 1,112 
 
 
 1,178 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
 
 1,843 
 
 
 1,940 
 
 
 1,842 
 
 
 2,056 

(a)
Reflected in "Other current liabilities" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets.

The carrying value of short-term debt (including notes between affiliates), when outstanding, approximates fair value due to the variable interest rates associated with the short-term debt and is classified as Level 2.

Credit Concentration Associated with Financial Instruments

(All Registrants)

Contracts are entered into with many entities for the purchase and sale of energy.  Many of these contracts qualify for NPNS and, as such, the fair value of these contracts is not reflected in the financial statements.  However, the fair value of these contracts is considered when committing to new business from a credit perspective.  See Note 14 for information on credit policies used to manage credit risk, including master netting arrangements and collateral requirements.

(PPL)

At September 30, 2013, PPL had credit exposure of $1.1 billion from energy trading partners, excluding the effects of netting arrangements, reserves and collateral.  As a result of netting arrangements, reserves and collateral, PPL's credit exposure was reduced to $541 million.  The top ten counterparties including their affiliates accounted for $292 million, or 54%, of this exposure.  Nine of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 95% of the top ten exposure.  The remaining counterparty has not been rated by S&P or Moody's, but is current on its obligations.

(PPL Energy Supply)

At September 30, 2013, PPL Energy Supply had credit exposure of $1.1 billion from energy trading partners, excluding exposure from related parties and the effects of netting arrangements, reserves and collateral.  As a result of netting arrangements, reserves and collateral, this credit exposure was reduced to $540 million.  The top ten counterparties including their affiliates accounted for $292 million, or 54%, of this exposure.   Nine of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 95% of the top ten exposure.  The remaining counterparty has not been rated by S&P or Moody's, but is current on its obligations.  See Note 11 for information regarding the related party credit exposure.

(PPL Electric)

PPL Electric is exposed to credit risk under energy supply contracts (including its supply contracts with PPL EnergyPlus); however, its PUC-approved cost recovery mechanism is anticipated to substantially eliminate this exposure.

(Kentucky Registrants)

At September 30, 2013, LKE's, LG&E's and KU's credit exposure was not significant.

 
81
 
14.  Derivative Instruments and Hedging Activities

Risk Management Objectives

(All Registrants)

PPL has a risk management policy approved by the Board of Directors to manage market risk (including price, liquidity and volumetric risk) and credit risk (including non-performance risk and payment default risk).  The RMC, comprised of senior management and chaired by the Chief Risk Officer, oversees the risk management function.  Key risk control activities designed to ensure compliance with the risk policy and detailed programs include, but are not limited to, credit review and approval, validation of transactions and market prices, verification of risk and transaction limits, VaR analyses, portfolio stress tests, gross margin at risk analyses, sensitivity analyses, and daily portfolio reporting, including open positions, determinations of fair value, and other risk management metrics.

Market Risk

Market risk includes the potential loss that may be incurred as a result of price changes associated with a particular financial or commodity instrument as well as liquidity and volumetric risks.  Forward contracts, futures contracts, options, swaps and structured transactions, such as tolling agreements, are utilized as part of risk management strategies to minimize unanticipated fluctuations in earnings caused by changes in commodity prices, volumes of full-requirement sales contracts, basis exposure, interest rates and/or foreign currency exchange rates.  Many of the contracts meet the definition of a derivative.  All derivatives are recognized on the Balance Sheets at their fair value, unless they qualify for NPNS.

The table below summarizes the market risks that affect PPL and its Subsidiary Registrants.

 
 
 
 
 
 
PPL
 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
Energy Supply
 
Electric
 
LKE
 
LG&E
 
KU
Commodity price risk (including basis and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
volumetric risk)
 
X
 
X
 
M
 
M
 
M
 
M
Interest rate risk:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt issuances
 
X
 
X
 
M
 
M
 
M
 
M
 
Defined benefit plans
 
X
 
X
 
M
 
M
 
M
 
M
 
NDT securities
 
X
 
X
 
 
 
 
 
 
 
 
Equity securities price risk:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Defined benefit plans
 
X
 
X
 
M
 
M
 
M
 
M
 
NDT securities
 
X
 
X
 
 
 
 
 
 
 
 
 
Future stock transactions
 
X
 
 
 
 
 
 
 
 
 
 
Foreign currency risk - WPD investment and
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
earnings
 
X
 
 
 
 
 
 
 
 
 
 

X
= PPL and PPL Energy Supply actively mitigate market risks through their risk management programs described above.
M
= The regulatory environments for PPL's regulated entities, by definition, significantly mitigate market risk.

Commodity price and volumetric risks

·
PPL is exposed to market and commodity price, basis and volumetric risk through its domestic subsidiaries as described below.  Volumetric risk is significantly mitigated at WPD as a result of the method of regulation in the U.K.

·
PPL Energy Supply is exposed to commodity price, basis and volumetric risks for energy and energy-related products associated with the sale of electricity from its generating assets and other electricity and gas marketing activities and the purchase of fuel and fuel-related commodities for generating assets, as well as for proprietary trading activities.

·
PPL Electric is exposed to commodity price and volumetric risks from its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to these risks.  PPL Electric also mitigates its exposure to volumetric risk by entering into full-requirement supply agreements to serve its PLR customers.  These supply agreements transfer the volumetric risk associated with the PLR obligation to the energy suppliers.

·
LG&E's and KU's rates include certain mechanisms for fuel, gas supply and environmental expenses.  These mechanisms generally provide for timely recovery of market price and volumetric fluctuations associated with these expenses.


 
82
 

Interest rate risk

·
PPL and its subsidiaries are exposed to interest rate risk associated with forecasted fixed-rate and existing floating-rate debt issuances.  WPD holds over-the-counter cross currency swaps to limit exposure to market fluctuations on interest and principal payments from changes in foreign currency exchange rates and interest rates.  LG&E utilizes over-the-counter interest rate swaps to limit exposure to market fluctuations on floating-rate debt and LG&E and KU utilize forward starting interest rate swaps to hedge changes in benchmark interest rates.

·
PPL and its subsidiaries are exposed to interest rate risk associated with debt securities held by defined benefit plans.  This risk is significantly mitigated to the extent that the plans are sponsored at, or sponsored on behalf of, the regulated domestic utilities and for certain plans at WPD due to the recovery mechanisms in place.  Additionally, PPL Energy Supply is exposed to interest rate risk associated with debt securities held by the NDT.

Equity securities price risk

·
PPL and its subsidiaries are exposed to equity securities price risk associated with defined benefit plans.  This risk is significantly mitigated at the regulated domestic utilities and for certain plans at WPD due to the recovery mechanisms in place.  Additionally, PPL Energy Supply is exposed to equity securities price risk in the NDT funds.

·
PPL is exposed to equity securities price risk from future stock sales and/or purchases.

Foreign currency risk

·
PPL is exposed to foreign currency exchange risk primarily associated with its investments in U.K. affiliates.

Credit Risk

Credit risk is the potential loss that may be incurred due to a counterparty's non-performance.

PPL is exposed to credit risk from "in-the-money" interest rate and foreign currency derivatives with financial institutions, as well as additional credit risk through certain of its subsidiaries, as discussed below.

PPL Energy Supply is exposed to credit risk from "in-the-money" commodity derivatives with its energy trading partners, which include other energy companies, fuel suppliers and financial institutions.

LKE, LG&E and KU are exposed to credit risk from interest rate derivatives with PPL.  LKE and LG&E are also exposed to credit risk from interest rate derivatives with third-party financial institutions.

The majority of PPL and PPL Energy Supply's credit risk stems from commodity derivatives for multi-year contracts for energy sales and purchases.  If PPL Energy Supply's counterparties fail to perform their obligations under such contracts and PPL Energy Supply could not replace the sales or purchases at the same or better prices as those under the defaulted contracts, PPL Energy Supply would incur financial losses.  Those losses would be recognized immediately or through lower revenues or higher costs in future years, depending on the accounting treatment for the defaulted contracts.  In the event a supplier of LKE (through its subsidiaries LG&E and KU) or PPL Electric defaults on its obligation, those entities would be required to seek replacement power or replacement fuel in the market.  In general, incremental costs incurred by these entities would be recoverable from customers in future rates, thus mitigating the financial risk for these entities.

PPL and its subsidiaries have credit policies in place to manage credit risk, including the use of an established credit approval process, daily monitoring of counterparty positions and the use of master netting agreements or provisions.  These agreements generally include credit mitigation provisions, such as margin, prepayment or collateral requirements.  PPL and its subsidiaries may request additional credit assurance, in certain circumstances, in the event that the counterparties' credit ratings fall below investment grade, their tangible net worth falls below specified percentages or their exposures exceed an established credit limit.  See Note 13 for credit concentration associated with energy trading partners.

Master Netting Arrangements

Net derivative positions on the balance sheets are not offset against the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.

 
83
 
PPL's and PPL Energy Supply's obligation to return counterparty cash collateral under master netting arrangements was $14 million and $112 million at September 30, 2013 and December 31, 2012.

PPL Electric, LKE and LG&E had no obligation to return cash collateral under master netting arrangements at September 30, 2013 and December 31, 2012.

PPL, LKE and LG&E had posted cash collateral under master netting arrangements of $22 million and $32 million at September 30, 2013 and December 31, 2012.

PPL Energy Supply, PPL Electric and KU had not posted any cash collateral under master netting arrangements at September 30, 2013 and December 31, 2012.

(PPL and PPL Energy Supply)

Commodity Price Risk (Non-trading)

Commodity price risk, including basis and volumetric risk, is among PPL's and PPL Energy Supply's most significant risks due to the level of investment that PPL and PPL Energy Supply maintain in their competitive generation assets, as well as the extent of their marketing activities.  Several factors influence price levels and volatilities.  These factors include, but are not limited to, seasonal changes in demand, weather conditions, available generating assets within regions, transportation/transmission availability and reliability within and between regions, market liquidity, and the nature and extent of current and potential federal and state regulations.

PPL Energy Supply maximizes the value of its wholesale and retail energy portfolios through the use of non-trading strategies that include sales of competitive baseload generation, optimization of competitive intermediate and peaking generation and marketing activities.

PPL Energy Supply has a formal hedging program to economically hedge the forecasted purchase and sale of electricity and related fuels for its competitive baseload generation fleet, which includes 7,298 MW (summer rating) of nuclear, coal and hydroelectric generating capacity.  PPL Energy Supply attempts to optimize the overall value of its competitive intermediate and peaking fleet, which includes 3,316 MW (summer rating) of natural gas and oil-fired generation.  PPL Energy Supply's marketing portfolio is comprised of full-requirement sales contracts and related supply contracts, retail natural gas and electricity sales contracts and other marketing activities.  The strategies that PPL Energy Supply uses to hedge its full-requirement sales contracts include purchasing energy (at a liquid trading hub or directly at the load delivery zone), capacity and RECs in the market and/or supplying the energy, capacity and RECs from its generation assets.

PPL and PPL Energy Supply enter into financial and physical derivative contracts, including forwards, futures, swaps and options, to hedge the price risk associated with electricity, natural gas, oil and other commodities.  Certain contracts qualify for NPNS or are non-derivatives and are therefore not reflected in the financial statements until delivery.  PPL and PPL Energy Supply segregate their non-trading activities into two categories:  cash flow hedges and economic activity, as discussed below.

Cash Flow Hedges

Certain derivative contracts have qualified for hedge accounting so that the effective portion of a derivative's gain or loss is deferred in AOCI and reclassified into earnings when the forecasted transaction occurs.  Certain cash flow hedge positions were dedesignated during the nine months ended September 30, 2013 and 2012 and the unamortized portion remained in AOCI because the original forecasted transaction is still expected to occur.  There were no active cash flow hedges at September 30, 2013.  At September 30, 2013, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $47 million for PPL and PPL Energy Supply.  Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time periods and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedge transaction is probable of not occurring.  For the three and nine months ended September 30, 2013 and 2012, such reclassifications were insignificant.

For the three and nine months ended September 30, 2013 and 2012, hedge ineffectiveness associated with energy derivatives was insignificant.
 
84
 
Economic Activity

Many derivative contracts economically hedge the commodity price risk associated with electricity, natural gas, oil and other commodities but do not receive hedge accounting treatment because they were not eligible for hedge accounting or because hedge accounting was not elected.  These derivatives hedge a portion of the economic value of PPL Energy Supply's competitive generation assets and unregulated full-requirement and retail contracts, which are subject to changes in fair value due to market price volatility and volume expectations.  Additionally, economic activity would also include the ineffective portion of qualifying cash flow hedges (see "Cash Flow Hedges" above).  The derivative contracts in this category that existed at September 30, 2013 range in maturity through 2019.

Examples of economic activity may include hedges on sales of baseload generation, certain purchase contracts used to supply full-requirement sales contracts, FTRs or basis swaps used to hedge basis risk associated with the sale of competitive generation or supplying full-requirement sales contracts, Spark Spread hedging contracts, retail electric and natural gas activities, and fuel oil swaps used to hedge price escalation clauses in coal transportation and other fuel-related contracts.  PPL Energy Supply also uses options, which include the sale of call options and the purchase of put options tied to a particular generating unit.  Since the physical generating capacity is owned, price exposure is generally capped at the price at which the generating unit would be dispatched and therefore does not expose PPL Energy Supply to uncovered market price risk.

Commodity Price Risk (Trading)

PPL Energy Supply has a proprietary trading strategy which is utilized to take advantage of market opportunities.  As a result, PPL Energy Supply may at times create a net open position in its portfolio that could result in losses if prices do not move in the manner or direction anticipated.  The proprietary trading portfolio shown in "Net energy trading margins" on the Statements of Income is not a significant part of PPL Energy Supply's business.

Commodity Volumes

At September 30, 2013, the net volumes of derivative (sales)/purchase contracts used in support of the various strategies discussed above were as follows.

 
 
 
 
Volume (a)
Commodity
 
Unit of Measure
 
2013 (b)
 
2014 
 
2015 
 
Thereafter
 
 
 
 
 
 
 
 
 
 
 
Power
 
MWh
 
 (9,950,950)
 
 (28,280,182)
 
 (4,110,530)
 
 10,991,752 
Capacity
 
MW-Month
 
 (5,114)
 
 (14,418)
 
 (309)
 
 1,990 
Gas
 
MMBtu
 
 12,653,279 
 
 18,794,545 
 
 (3,852,725)
 
 5,320,453 
Coal
 
Tons
 
   
 
 (30,000)
 
 
 
 
FTRs
 
MW-Month
 
 5,056 
 
 8,724 
 
 1,465 
 
 
Oil
 
Barrels
 
 (15,335)
 
 300,000 
 
 384,334 
 
 371,466 

(a)
Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.
(b)
Represents balance of the current year.

Interest Rate Risk

(PPL and Kentucky Registrants)

PPL and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk.  Various financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in their debt portfolio, adjust the duration of the debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate.  Risk limits under PPL's risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolio due to changes in benchmark interest rates.

Cash Flow Hedges

(PPL)

Interest rate risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financings.  Financial interest rate swap contracts that qualify as cash flow hedges may be entered into to hedge floating interest rate risk associated with both existing and anticipated debt issuances.  At September 30, 2013, outstanding interest rate swap contracts range in maturity through 2024 for WPD and through 2044 for PPL's domestic interest rate swaps.  These swaps had an aggregate notional value of $2.3 billion at September 30, 2013 of which £300 million
 
85
 
(approximately $464 million based on spot rates) was related to WPD.  Also included in this total are forward-starting interest rate swaps entered into by PPL on behalf of LG&E and KU.  Realized gains and losses from these swaps are probable of recovery through regulated rates; as such, the fair value of these derivatives have been reclassified from AOCI to regulatory assets or liabilities.  The gains and losses will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt when the hedged transaction occurs.

At September 30, 2013, PPL held a notional position in cross-currency interest rate swaps totaling $1.3 billion that range in maturity through 2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.

For the three and nine months ended September 30, 2013 and 2012, hedge ineffectiveness associated with interest rate derivatives was insignificant.

Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time period and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedged transaction is probable of not occurring.  PPL had no such reclassifications for the three and nine months ended September 30, 2013 and 2012.

At September 30, 2013, the accumulated net unrecognized after-tax gains (losses) on qualifying derivatives that are expected to be reclassified into earnings during the next 12 months were $(11) million.  Amounts are reclassified as the hedged interest payments are made.

(Kentucky Registrants)

In November 2012 and April 2013, LG&E and KU entered into forward-starting interest rate swaps with PPL that hedge the interest payments on new debt that is expected to be issued in 2013.  In September 2013, these hedges were terminated and LG&E and KU entered into new forward-starting interest rate swaps with PPL, effectively extending the start date of the prior hedges from September 2013 to December 2013.  Both the terminated swaps and the swaps entered into in September have terms identical to forward-starting swaps entered into by PPL with third parties.  A cash settlement of $98 million (LG&E and KU each received $49 million) was received on the terminated swaps, which is included in "Cash Flows from Operating Activities" on the Statements of Cash Flows.  Realized gains and losses on all of these swaps are probable of recovery through regulated rates; as such, the September settlements and the fair value of the new derivatives were reclassified from AOCI to regulatory assets or liabilities and are expected to be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt when the hedged transaction occurs.  For the three and nine months ended September 30, 2013, there was no hedge ineffectiveness recorded for the interest rate derivatives.  At September 30, 2013, the total notional amount outstanding was $500 million (LG&E and KU each held contracts of $250 million) that matures in 2043.

Economic Activity (PPL, LKE and LG&E)

LG&E enters into interest rate swap contracts that economically hedge interest payments on variable rate debt.  Because realized gains and losses from the swaps, including a terminated swap contract, are recoverable through regulated rates, any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities until they are realized as interest expense.  Realized gains and losses are recognized in "Interest Expense" on the Statements of Income when the hedged transaction occurs.  At September 30, 2013, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033.

Foreign Currency Risk (PPL)

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities, anticipated transactions and net investments.  In addition, PPL enters into financial instruments to protect against foreign currency translation risk of expected earnings.

Net Investment Hedges

PPL enters into foreign currency contracts on behalf of a subsidiary to protect the value of a portion of its net investment in WPD.  The contracts outstanding at September 30, 2013 had a notional amount of £320 million (approximately $505 million based on contracted rates).  The settlement dates of these contracts range from November 2013 through June 2015.
 
86
 

Additionally, a PPL Global subsidiary that has a U.S. dollar functional currency entered into GBP intercompany loans payable with PPL WEM subsidiaries that have GBP functional currency.  The loans qualify as a net investment hedge for the PPL Global subsidiary.  As such, the foreign currency gains and losses on the intercompany loans for the PPL Global subsidiary are recorded to the foreign currency translation adjustment component of OCI.  At September 30, 2013, the outstanding balances of the intercompany loans were £77 million (approximately $119 million based on spot rates).  For the three and nine months ended September 30, 2013, PPL recognized net investment hedge gains (losses) on the intercompany loans of $(9) million and $(3) million in the foreign currency translation adjustment component of OCI.  Such amounts for the three and nine months ended September 30, 2012 were not significant.

At September 30, 2013, PPL had $5 million of accumulated net investment hedge gains (losses), after-tax, in the foreign currency translation adjustment component of AOCI, compared to $14 million of gains (losses), after-tax at December 31, 2012.

Economic Activity

PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings.  At September 30, 2013, the total exposure hedged by PPL was approximately £1.3 billion (approximately $2.1 billion based on contracted rates).  These contracts had termination dates ranging from October 2013 through October 2015.

Accounting and Reporting

(All Registrants)

All derivative instruments are recorded at fair value on the Balance Sheet as an asset or liability unless they qualify for NPNS.  NPNS contracts for PPL and PPL Energy Supply include certain full-requirement sales contracts, other physical purchase and sales contracts and certain retail energy and physical capacity contracts, and for PPL Electric include certain full-requirement purchase contracts and other physical purchase contracts.  Changes in the fair value of derivatives not designated as NPNS are recognized currently in earnings unless specific hedge accounting criteria are met and designated as such, except for the change in fair value of LG&E's and KU's interest rate swaps that are recognized as regulatory assets or regulatory liabilities.  See Note 6 for amounts recorded in regulatory assets and regulatory liabilities at September 30, 2013 and December 31, 2012.

See Notes 1 and 19 in each Registrant's 2012 Form 10-K for additional information on accounting policies related to derivative instruments.

(PPL)

The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.

 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
Derivatives designated as
 
Derivatives not designated
 
Derivatives designated as
 
Derivatives not designated
 
 
 
 
 
 
 
hedging instruments
 
as hedging instruments (a)
 
hedging instruments
 
as hedging instruments (a)
 
 
 
 
 
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price Risk Management
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets/Liabilities (b):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (c)
 
$
 83 
 
$
 16 
 
 
  
 
$
 4 
 
$
 14 
 
$
 22 
 
 
  
 
$
 5 
 
 
 
Cross-currency swaps
 
 
 1 
 
 
 1 
 
 
  
 
 
  
 
 
  
 
 
 3 
 
 
  
 
 
  
 
 
 
Foreign currency
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
contracts
 
 
  
 
 
 5 
 
$
  
 
 
 24 
 
 
  
 
 
 2 
 
 
  
 
 
 23 
 
 
 
Commodity contracts
 
 
  
 
 
  
 
 
 961 
 
 
 773 
 
 
 59 
 
 
  
 
$
 1,452 
 
 
 1,010 
 
 
 
 
 
Total current
 
 
 84 
 
 
 22 
 
 
 961 
 
 
 801 
 
 
 73 
 
 
 27 
 
 
 1,452 
 
 
 1,038 
Noncurrent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price Risk Management
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets/Liabilities (b):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (c)
 
 
 3 
 
 
 1 
 
 
  
 
 
 37 
 
 
 1 
 
 
  
 
 
  
 
 
 53 
 
 
 
Cross-currency swaps
 
 
 27 
 
 
  
 
 
  
 
 
  
 
 
 14 
 
 
 1 
 
 
  
 
 
  
 
 
 
Foreign currency
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
contracts
 
 
  
 
 
 6 
 
 
 1 
 
 
 32 
 
 
  
 
 
  
 
 
  
 
 
 19 
 
 
 
Commodity contracts
 
 
  
 
 
  
 
 
 519 
 
 
 462 
 
 
 27 
 
 
  
 
 
 530 
 
 
 556 
 
 
 
 
 
Total noncurrent
 
 
 30 
 
 
 7 
 
 
 520 
 
 
 531 
 
 
 42 
 
 
 1 
 
 
 530 
 
 
 628 
Total derivatives
 
$
 114 
 
$
 29 
 
$
 1,481 
 
$
 1,332 
 
$
 115 
 
$
 28 
 
$
 1,982 
 
$
 1,666 

(a)
$216 million and $300 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at September 30, 2013 and December 31, 2012.

 
87
 
(b)
Represents the location on the Balance Sheets.
(c)
Excludes accrued interest, if applicable.

The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $87 million and $132 million at September 30, 2013 and December 31, 2012.  The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $231 million and $527 million at September 30, 2012 and December 31, 2011.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the periods ended September 30, 2013.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
 
 
 
 
Gain (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized
 
 
 
 
Recognized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in Income
 
 
 
 
in Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on Derivative
 
Gain (Loss)
 
on Derivative
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
 
(Ineffective
 
Reclassified
 
(Ineffective
 
 
 
 
 
 
 
 
Location of
 
Reclassified
 
Portion and
 
from AOCI
 
Portion and
 
 
 
 
 
Derivative Gain
 
Gain (Loss)
 
from AOCI
 
Amount
 
into
 
Amount
 
 
 
 
 
(Loss) Recognized in
 
Recognized
 
into Income
 
Excluded from
 
Income
 
Excluded from
Derivative
 
 OCI (Effective Portion)
 
 
in Income
 (Effective
 
Effectiveness
 
(Effective
 
Effectiveness
Relationships
 
Three Months
 
Nine Months
 
on Derivative
 
Portion)
 
Testing)
 
Portion)
 
Testing)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
 25 
 
$
 102 
 
Interest expense
 
$
 (5)
 
 
   
 
$
 (14)
 
 
   
 
Cross-currency swaps
 
 
 (36)
 
 
 16 
 
Interest expense
 
 
 (1)
 
 
   
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(expense) - net
 
 
 (25)
 
 
   
 
 
 45 
 
 
   
 
Commodity contracts
 
 
   
 
 
   
 
Wholesale energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
marketing
 
 
 58 
 
 
   
 
 
 198 
 
$
 1 
 
 
 
 
 
 
 
 
 
 
 
Depreciation
 
 
 1 
 
 
   
 
 
 2 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
 
 
 (11)
 
 
   
 
 
 (41)
 
 
   
Total
 
$
 (11)
 
$
 118 
 
 
 
 
$
 17 
 
 
   
 
$
 190 
 
$
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Investment Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
 (22)
 
$
 (5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Derivatives Not Designated as
 
Location of Gain (Loss) Recognized in
 
 
 
 
 
 
 Hedging Instruments
 
 Income on Derivative
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other income (expense) - net
 
$
 (117)
 
$
 6 
Interest rate swaps
 
Interest expense
 
 
 (2)
 
 
 (6)
Commodity contracts
 
Unregulated retail electric and gas
 
 
 3 
 
 
 18 
 
 
Wholesale energy marketing
 
 
 104 
 
 
 144 
 
 
Net energy trading margins (a)
 
 
 14 
 
 
 8 
 
 
Fuel
 
 
 4 
 
 
 2 
 
 
Energy purchases
 
 
 (86)
 
 
 (99)
 
 
Total
 
$
 (80)
 
$
 73 
 
Derivatives Not Designated as
 
Location of Gain (Loss) Recognized as
 
 
 
 
 
 
 Hedging Instruments
 
Regulatory Liabilities/Assets
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Regulatory assets - noncurrent
 
$
 2 
 
$
 18 
 
 
 
 
 
 
 
 
 
 
Derivatives Designated as
 
Location of Gain (Loss) Recognized as
 
 
 
 
 
 
 Hedging Instruments
 
Regulatory Liabilities/Assets
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Regulatory liabilities - noncurrent
 
$
 12 
 
$
 70 

(a)
Differs from the Statement of Income due to intra-month transactions that PPL defines as spot activity, which is not accounted for as a derivative.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI, or regulatory assets and regulatory liabilities for the periods ended September 30, 2012.

Derivatives in
 
Hedged Items in
 
 
Location of Gain
 
Gain (Loss) Recognized
 
Gain (Loss) Recognized
Fair Value Hedging
 
Fair Value Hedging
 
 
(Loss) Recognized in
 
in Income on Derivative
 
in Income on Related Item
Relationships
 
Relationships
 
 
Income on Derivative
 
Three Months
 
Nine Months
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Fixed rate debt
 
Interest expense
 
$
 (1)
 
 
   
 
$
 1 
 
$
 3 
 
88
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
 
 
 
 
Gain (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized
 
 
 
 
Recognized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in Income
 
 
 
 
in Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on Derivative
 
Gain (Loss)
 
on Derivative
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
 
(Ineffective
 
Reclassified
 
(Ineffective
 
 
 
 
 
 
 
 
Location of
 
Reclassified
 
Portion and
 
from AOCI
 
Portion and
 
 
 
 
 
Derivative Gain
 
Gain (Loss)
 
from AOCI
 
Amount
 
into
 
Amount
 
 
 
 
 
(Loss) Recognized in
 
Recognized
 
into Income
 
Excluded from
 
Income
 
Excluded from
Derivative
 
 OCI (Effective Portion)
 
 
in Income
 (Effective
 
Effectiveness
 
(Effective
 
Effectiveness
Relationships
 
Three Months
 
Nine Months
 
on Derivative
 
Portion)
 
Testing)
 
Portion)
 
Testing)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
 (6)
 
$
 (28)
 
Interest expense
 
$
 (4)
 
 
   
 
$
 (13)
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Other income
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(expense) - net
 
 
 1 
 
 
   
 
 
 1 
 
 
   
 
Cross-currency swaps
 
 
 (49)
 
 
 (3)
 
Interest expense
 
 
   
 
 
   
 
 
 (1)
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(expense) - net
 
 
 (40)
 
 
   
 
 
 (12)
 
 
   
 
Commodity contracts
 
 
   
 
 
 99 
 
Wholesale energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
marketing
 
 
 174 
 
 
   
 
 
 673 
 
$
 (1)
 
 
 
 
 
 
 
 
 
 
 
Depreciation
 
 
 1 
 
 
   
 
 
 2 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
 
 
 (20)
 
$
 1 
 
 
 (105)
 
 
 (2)
Total
 
$
 (55)
 
$
 68 
 
 
 
 
$
 112 
 
$
 1 
 
$
 545 
 
$
 (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Investment Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
 (4)
 
$
 (5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Derivatives Not Designated as
 
Location of Gain (Loss) Recognized in
 
 
 
 
 
 
 Hedging Instruments
 
 Income on Derivative
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other income (expense) - net
 
$
 (47)
 
$
 (40)
Interest rate swaps
 
Interest expense
 
 
 (2)
 
 
 (4)
Commodity contracts
 
Unregulated retail electric and gas
 
 
 (3)
 
 
 20 
 
 
Wholesale energy marketing
 
 
 (476)
 
 
 900 
 
 
Net energy trading margins (a)
 
 
 (10)
 
 
 12 
 
 
Fuel
 
 
 6 
 
 
   
 
 
Energy purchases
 
 
 364 
 
 
 (717)
 
 
Total
 
$
 (168)
 
$
 171 
 
Derivatives Not Designated as
 
Location of Gain (Loss) Recognized as
 
 
 
 
 
 
 Hedging Instruments
 
Regulatory Liabilities/Assets
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Regulatory assets - noncurrent
 
$
 1 
 
$
 (2)

(a)
Differs from the Statement of Income due to intra-month transactions that PPL defines as spot activity, which is not accounted for as a derivative.

(PPL Energy Supply)

The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.

 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
Derivatives not designated
 
Derivatives designated as
 
Derivatives not designated
 
 
 
 
 
 
 
as hedging instruments (a)
 
hedging instruments
 
as hedging instruments (a)
 
 
 
 
 
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price Risk Management
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets/Liabilities (b):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
$
 961 
 
$
 773 
 
$
 59 
 
 
   
 
$
 1,452 
 
$
 1,010 
 
 
 
 
 
Total current
 
 
 961 
 
 
 773 
 
 
 59 
 
 
   
 
 
 1,452 
 
 
 1,010 
Noncurrent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price Risk Management
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets/Liabilities (b):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 519 
 
 
 462 
 
 
 27 
 
 
   
 
 
 530 
 
 
 556 
 
 
 
 
 
Total noncurrent
 
 
 519 
 
 
 462 
 
 
 27 
 
 
   
 
 
 530 
 
 
 556 
Total derivatives
 
$
 1,480 
 
$
 1,235 
 
$
 86 
 
 
   
 
$
 1,982 
 
$
 1,566 

(a)
$216 million and $300 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at September 30, 2013 and December 31, 2012.
(b)
Represents the location on the Balance Sheets.
 
89
 

The after-tax balances of accumulated net gains (losses) in AOCI were $115 million and $211 million at September 30, 2013 and December 31, 2012.  The after-tax balances of accumulated net gains (losses) in AOCI were $312 million and $605 million at September 30, 2012 and December 31, 2011.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended September 30, 2013.

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
 
 
 
 
Gain (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized
 
 
 
 
Recognized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in Income
 
 
 
 
in Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on Derivative
 
 
 
 
on Derivative
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
 
(Ineffective
 
Gain (Loss)
 
(Ineffective
 
 
 
 
 
 
 
 
Location of
 
Reclassified
 
Portion and
 
Reclassified
 
Portion and
 
 
 
 
 
Derivative Gain
 
Gains (Losses)
 
from AOCI
 
Amount
 
from AOCI
 
Amount
 
 
 
 
 
(Loss) Recognized in
 
Recognized
 
into Income
 
Excluded from
 
into Income
 
Excluded from
Derivative
 
OCI (Effective Portion)
 
 
in Income
(Effective
 
Effectiveness
 
(Effective
 
Effectiveness
Relationships
 
Three Months
 
Nine Months
 
on Derivative
 
 Portion)
 
 Testing)
 
Portion)
 
Testing)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
 
 
 
 
 
Wholesale energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
   
 
 
marketing
 
$
 58 
 
 
   
 
$
 198 
 
$
 1 
 
 
 
 
 
 
 
 
 
 
 
Depreciation
 
 
 1 
 
 
   
 
 
 2 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
 
 
 (11)
 
 
   
 
 
 (41)
 
 
   
Total
 
 
   
 
 
   
 
 
 
 
$
 48 
 
 
   
 
$
 159 
 
$
 1 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Derivatives Not Designated as
 
Location of Gain (Loss) Recognized in
 
 
 
 
 
 
 Hedging Instrument
 
 Income on Derivative
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Unregulated retail electric and gas
 
$
 3 
 
$
 18 
 
 
Wholesale energy marketing
 
 
 104 
 
 
 144 
 
 
Net energy trading margins (a)
 
 
 14 
 
 
 8 
 
 
Fuel
 
 
 4 
 
 
 2 
 
 
Energy purchases
 
 
 (86)
 
 
 (99)
 
 
Total
 
$
 39 
 
$
 73 

(a)
Differs from the Statements of Income due to intra-month transactions that PPL Energy Supply defines as spot activity, which is not accounted for as a derivative.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended September 30, 2012.

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
 
 
 
 
Gain (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recognized
 
 
 
 
Recognized
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in Income
 
 
 
 
in Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on Derivative
 
 
 
 
on Derivative
 
 
 
 
 
 
 
 
 
 
Gain (Loss)
 
(Ineffective
 
Gain (Loss)
 
(Ineffective
 
 
 
 
 
 
 
 
Location of
 
Reclassified
 
Portion and
 
Reclassified
 
Portion and
 
 
 
 
 
Derivative Gain
 
Gains (Losses)
 
from AOCI
 
Amount
 
from AOCI
 
Amount
 
 
 
 
 
(Loss) Recognized in
 
Recognized
 
into Income
 
Excluded from
 
into Income
 
Excluded from
Derivative
 
OCI (Effective Portion)
 
 
in Income
(Effective
 
Effectiveness
 
(Effective
 
Effectiveness
Relationships
 
Three Months
 
Nine Months
 
on Derivative
 
 Portion)
 
 Testing)
 
Portion)
 
Testing)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
 
   
 
$
 99 
 
 
marketing
 
$
 174 
 
 
   
 
$
 673 
 
$
 (1)
 
 
 
 
 
 
 
 
 
 
 
Depreciation
 
 
   
 
 
   
 
 
 1 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
 
 
 (20)
 
$
 1 
 
 
 (105)
 
 
 (2)
Total
 
 
   
 
$
 99 
 
 
 
 
$
 154 
 
$
 1 
 
$
 569 
 
$
 (3)

Derivatives Not Designated as
 
Location of Gain (Loss) Recognized in
 
 
 
 
 
 
 Hedging Instruments
 
 Income on Derivative
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Unregulated retail electric and gas
 
$
 (3)
 
$
 20 
 
 
Wholesale energy marketing
 
 
 (476)
 
 
 900 
 
 
Net energy trading margins (a)
 
 
 (10)
 
 
 12 
 
 
Fuel
 
 
 6 
 
 
   
 
 
Energy purchases
 
 
 364 
 
 
 (717)
 
 
Total
 
$
 (119)
 
$
 215 
 
90
 

(a)
Differs from the Statements of Income due to intra-month transactions that PPL Energy Supply defines as spot activity, which is not accounted for as a derivative.

(LKE)

The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.

 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
Assets
 
Liabilities
 
 
Assets
 
Liabilities
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price Risk Management
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets/Liabilities (a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
  
 
$
 14 
 
 
$
 14 
 
 
  
 

(a)
Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities for the periods ended September 30, 2013.

Derivative Instruments
 
Location of Gain (Loss)
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Regulatory liabilities - noncurrent
 
$
 12 
 
$
 70 

(LG&E)

The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.

 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
Assets
 
Liabilities
 
 
Assets
 
Liabilities
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price Risk Management
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets/Liabilities (a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
  
 
$
 7 
 
 
$
 7 
 
 
  
 

(a)
Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities for the periods ended September 30, 2013.

Derivative Instruments
 
Location of Gain (Loss)
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Regulatory liabilities - noncurrent
 
$
 6 
 
$
 35 

(KU)

The following table presents the fair value and the location on the Balance Sheets of derivative instruments designated as cash flow hedges.

 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
Assets
 
Liabilities
 
 
Assets
 
Liabilities
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price Risk Management
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets/Liabilities (a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
  
 
$
 7 
 
 
$
 7 
 
 
  
 

(a)
Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities for the periods ended September 30, 2013.

 
91
 
Derivative Instruments
 
Location of Gain (Loss)
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Regulatory liabilities - noncurrent
 
$
 6 
 
$
 35 

(LKE and LG&E)

The following table presents the fair value and the location on the Balance Sheets of derivatives not designated as hedging instruments.

 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
Assets
 
Liabilities
 
 
Assets
 
Liabilities
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price Risk Management
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets/Liabilities (a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
  
 
$
 4 
 
 
 
  
 
$
 5 
 
 
 
 
 
 
Total current
 
 
  
 
 
 4 
 
 
 
  
 
 
 5 
 
Noncurrent:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Price Risk Management
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets/Liabilities (a):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
  
 
 
 37 
 
 
 
  
 
 
 53 
 
 
 
 
 
 
Total noncurrent
 
 
  
 
 
 37 
 
 
 
  
 
 
 53 
 
Total derivatives
 
 
  
 
$
 41 
 
 
 
  
 
$
 58 
 

(a)
Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivatives not designated as hedging instruments recognized in income or regulatory assets for the periods ended September 30, 2013.

 
 
Location of Gain (Loss) Recognized in
 
 
 
 
Derivative Instruments
 
Income on Derivatives
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
 (2)
 
$
 (6)
 
 
 
Location of Gain (Loss) Recognized in
 
 
 
 
Derivative Instruments
 
Regulatory Assets
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Regulatory assets - noncurrent (a)
 
$
 2 
 
$
 18 

(a)
Includes both realized and unrealized gains (losses).

The following tables present the pre-tax effect of derivatives not designated as hedging instruments recognized in income or regulatory assets for the periods ended September 30, 2012.

 
 
Location of Gain (Loss) Recognized in
 
 
 
 
Derivative Instruments
 
Income on Derivatives
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Interest expense
 
$
 (2)
 
$
 (6)
 
 
 
Location of Gain (Loss) Recognized in
 
 
 
 
Derivative Instruments
 
Regulatory Assets
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Regulatory assets - noncurrent (a)
 
$
 1 
 
$
 (2)

(a)
Includes both realized and unrealized gains (losses).

(All Registrants except PPL Electric)

Offsetting Derivative Instruments

PPL, PPL Energy Supply, LKE, LG&E and KU or certain of their subsidiaries have master netting arrangements or similar agreements in place including derivative clearing agreements with futures commission merchants (FCMs) to permit the trading of cleared derivative products on one or more futures exchanges.  The clearing arrangements permit an FCM to use and apply any property in its possession as a set off to pay amounts or discharge obligations owed by a customer upon default of the customer and typically do not place any restrictions on the FCM's use of collateral posted by the customer.  PPL, PPL Energy Supply, LKE, LG&E and KU and their subsidiaries also enter into agreements pursuant to which they trade certain
 
92
 
energy and other products.  Under the agreements, upon termination of the agreement as a result of a default or other termination event, the non-defaulting party typically would have a right to setoff amounts owed under the agreement against any other obligations arising between the two parties (whether under the agreement or not), whether matured or contingent and irrespective of the currency, place of payment or place of booking of the obligation.

PPL, PPL Energy Supply, LKE, LG&E and KU have elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivatives agreements.  The table below summarizes the derivative positions presented in the balance sheets where a right of setoff exists under these arrangements and related cash collateral received or pledged.

 
 
 
 
 
Assets
 
Liabilities
 
 
 
 
 
 
 
 
Eligible for Offset
 
 
 
 
 
 
 
Eligible for Offset
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
 
 
 
 
 
 
 
 
 
Cash
 
 
 
 
 
 
 
 
 
 
 
Derivative
 
Collateral
 
 
 
 
 
 
 
Derivative
 
Collateral
 
 
 
 
 
 
 
 
Gross
 
Instruments
 
Received
 
Net
 
Gross
 
Instruments
 
Pledged
 
Net
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy Commodities
 
$
 1,480 
 
$
 1,122 
 
$
 14 
 
$
 344 
 
$
 1,235 
 
$
 1,122 
 
 
   
 
$
 113 
 
Treasury Derivatives
 
 
 115 
 
 
 47 
 
 
   
 
 
 68 
 
 
 126 
 
 
 47 
 
$
 22 
 
 
 57 
Total
 
$
 1,595 
 
$
 1,169 
 
$
 14 
 
$
 412 
 
$
 1,361 
 
$
 1,169 
 
$
 22 
 
$
 170 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy Commodities
 
$
 1,480 
 
$
 1,122 
 
$
 14 
 
$
 344 
 
$
 1,235 
 
$
 1,122 
 
 
   
 
$
 113 

LKE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Derivatives
 
 
 
 
 
   
 
 
   
 
 
   
 
$
 55 
 
 
   
 
$
 22 
 
$
 33 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Derivatives
 
 
 
 
 
   
 
 
   
 
 
   
 
$
 48 
 
 
   
 
$
 22 
 
$
 26 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Derivatives
 
 
 
 
 
   
 
 
   
 
 
   
 
$
 7 
 
 
 
 
 
   
 
$
 7 

December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy Commodities
 
$
 2,068 
 
$
 1,413 
 
$
 111 
 
$
 544 
 
$
 1,566 
 
$
 1,413 
 
$
 9 
 
$
 144 
 
Treasury Derivatives
 
 
 29 
 
 
 19 
 
 
   
 
 
 10 
 
 
 128 
 
 
 19 
 
 
 30 
 
 
 79 
Total
 
$
 2,097 
 
$
 1,432 
 
$
 111 
 
$
 554 
 
$
 1,694 
 
$
 1,432 
 
$
 39 
 
$
 223 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy Commodities
 
$
 2,068 
 
$
 1,413 
 
$
 111 
 
$
 544 
 
$
 1,566 
 
$
 1,413 
 
$
 9 
 
$
 144 

LKE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Derivatives
 
$
 14 
 
 
   
 
 
   
 
$
 14 
 
$
 58 
 
 
   
 
$
 30 
 
$
 28 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Derivatives
 
$
 7 
 
 
   
 
 
   
 
$
 7 
 
$
 58 
 
 
   
 
$
 30 
 
$
 28 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Treasury Derivatives
 
$
 7 
 
 
   
 
 
   
 
$
 7 
 
 
   
 
 
   
 
 
   
 
 
   

Credit Risk-Related Contingent Features

Certain derivative contracts contain credit risk-related contingent features which, when in a net liability position, would permit the counterparties to require the transfer of additional collateral upon a decrease in the credit ratings of PPL, PPL Energy Supply, LKE, LG&E and KU or certain of their subsidiaries.  Most of these features would require the transfer of additional collateral or permit the counterparty to terminate the contract if the applicable credit rating were to fall below investment grade.  Some of these features also would allow the counterparty to require additional collateral upon each decrease in the credit rating at levels that remain above investment grade.  In either case, if the applicable credit rating were to fall below investment grade (i.e., below BBB- for S&P or Fitch, or Baa3 for Moody's), and assuming no assignment to an investment grade affiliate were allowed, most of these credit contingent features require either immediate payment of the net liability as a termination payment or immediate and ongoing full collateralization on derivative instruments in net liability positions.

Additionally, certain derivative contracts contain credit risk-related contingent features that require adequate assurance of performance be provided if the other party has reasonable concerns regarding the performance of PPL's obligation under the
 
93
 
contract.  A counterparty demanding adequate assurance could require a transfer of additional collateral or other security, including letters of credit, cash and guarantees from a creditworthy entity.  This would typically involve negotiations among the parties.  However, amounts disclosed below represent assumed immediate payment or immediate and ongoing full collateralization for derivative instruments in net liability positions with "adequate assurance" features.

At September 30, 2013, the effect of a decrease in credit ratings below investment grade on derivative contracts that contain credit risk-related contingent features and were in a net liability position is summarized as follows:

 
 
 
 
 
 
 
PPL
 
 
 
 
 
 
 
 
 
 
PPL
 
Energy Supply
 
LKE
 
LG&E
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aggregate fair value of derivative instruments in a net liability
 
 
 
 
 
 
 
 
 
 
 
 
 
position with credit risk-related contingent features
 
$
 178 
 
$ 
 115 
 
$ 
 29 
 
$ 
 29 
Aggregate fair value of collateral posted on these derivative instruments
 
 
 39 
 
 
 17 
 
 
 22 
 
 
 22 
Aggregate fair value of additional collateral requirements in the event of
 
 
   
 
 
 
 
 
   
 
 
 
 
a credit downgrade below investment grade (a)
 
 
 167 
 
 
127 
 
 
 7 
 
 
7 

(a)
Includes the effect of net receivables and payables already recorded on the Balance Sheet.

15.  Goodwill

(PPL)

The change in the carrying amount of goodwill for the nine months ended September 30, 2013 was due to the effect of foreign currency exchange rates on the U.K. Regulated segment.

16.  Asset Retirement Obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(All Registrants except PPL Electric)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The changes in the carrying amounts of AROs were as follows.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
Energy Supply
 
LKE
 
LG&E
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
 552 
 
$
 375 
 
$
 131 
 
$
 62 
 
$
 69 
 
Accretion expense
 
 
 27 
 
 
 22 
 
 
 4 
 
 
 2 
 
 
 2 
 
Obligations incurred
 
 
 6 
 
 
 6 
 
 
   
 
 
   
 
 
   
 
Changes in estimated cash flow or settlement date
 
 
 123 
 
 
 1 
 
 
 122 
 
 
 17 
 
 
 105 
 
Effect of foreign currency exchange rates
 
 
 (2)
 
 
   
 
 
   
 
 
   
 
 
   
 
Obligations settled
 
 
 (12)
 
 
 (6)
 
 
 (6)
 
 
 (6)
 
 
   
Balance at September 30, 2013
 
$
 694 
 
$
 398 
 
$
 251 
 
$
 75 
 
$
 176 

Substantially all of the ARO balances are classified as noncurrent at September 30, 2013 and December 31, 2012.

(PPL and PPL Energy Supply)

The most significant ARO recorded by PPL and PPL Energy Supply relates to the decommissioning of the Susquehanna nuclear plant.  The accrued nuclear decommissioning obligation was $335 million and $316 million at September 30, 2013 and December 31, 2012.

Assets in the NDT funds are legally restricted for purposes of settling PPL's and PPL Energy Supply's ARO related to the decommissioning of the PPL Susquehanna nuclear plant.  The aggregate fair value of these assets was $804 million and $712 million at September 30, 2013 and December 31, 2012, and is included in "Nuclear plant decommissioning trust funds" on the Balance Sheets.  See Notes 13 and 17 for additional information on these assets.

(PPL and Kentucky Registrants)

Accretion and depreciation expense recorded by LG&E and KU is reversed on the income statement and recorded as a regulatory asset, such that there is no net earnings impact.  AROs were revalued primarily due to updates in the estimated cash flows for ash ponds and CCR surface impoundments based on updated cost estimates.

 
94
 
17.  Available-for-Sale Securities

(PPL and PPL Energy Supply)

Securities held by the NDT funds and auction rate securities are classified as available-for-sale.  Available-for-sale securities are carried on the Balance Sheets at fair value.  Unrealized gains and losses on these securities are reported, net of tax, in OCI or are recognized currently in earnings when a decline in fair value is determined to be other-than-temporary.  The specific identification method is used to calculate realized gains and losses.

The following table shows the amortized cost, the gross unrealized gains and losses recorded in AOCI, and the fair value of available-for-sale securities.

 
 
 
 
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
 
 
 
Amortized
 
 Unrealized
 
 Unrealized
 
 
 
Amortized
 
 Unrealized
 
 Unrealized
 
 
 
 
 
 
 
 
 
Cost
 
Gains
 
Losses
 
Fair Value
 
 Cost
 
 Gains
 
Losses
 
Fair Value
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NDT funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 14 
 
 
  
 
 
  
 
$
 14 
 
$
 11 
 
 
  
 
 
  
 
$
 11 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. large-cap
 
 
 230 
 
$
 264 
 
 
  
 
 
 494 
 
 
 222 
 
$
 190 
 
 
  
 
 
 412 
 
 
 
 
U.S. mid/small-cap
 
 
 31 
 
 
 43 
 
 
  
 
 
 74 
 
 
 30 
 
 
 30 
 
 
  
 
 
 60 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
 
 90 
 
 
 6 
 
 
  
 
 
 96 
 
 
 86 
 
 
 9 
 
 
  
 
 
 95 
 
 
 
 
U.S. government sponsored
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
agency
 
 
 5 
 
 
 1 
 
 
  
 
 
 6 
 
 
 8 
 
 
 1 
 
 
  
 
 
 9 
 
 
 
 
Municipality
 
 
 74 
 
 
 2 
 
$
 1 
 
 
 75 
 
 
 78 
 
 
 5 
 
$
 1 
 
 
 82 
 
 
 
 
Investment-grade corporate
 
 
 39 
 
 
 2 
 
 
 1 
 
 
 40 
 
 
 36 
 
 
 4 
 
 
  
 
 
 40 
 
 
 
 
Other
 
 
 3 
 
 
  
 
 
  
 
 
 3 
 
 
 3 
 
 
  
 
 
  
 
 
 3 
 
 
 
Receivables/payables, net
 
 
 2 
 
 
  
 
 
  
 
 
 2 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total NDT funds
 
 
 488 
 
 
 318 
 
 
 2 
 
 
 804 
 
 
 474 
 
 
 239 
 
 
 1 
 
 
 712 
 
Auction rate securities
 
 
 20 
 
 
  
 
 
 1 
 
 
 19 
 
 
 20 
 
 
  
 
 
 1 
 
 
 19 
 
Total
 
$
 508 
 
$
 318 
 
$
 3 
 
$
 823 
 
$
 494 
 
$
 239 
 
$
 2 
 
$
 731 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NDT funds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 14 
 
 
  
 
 
  
 
$
 14 
 
$
 11 
 
 
  
 
 
  
 
$
 11 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. large-cap
 
 
 230 
 
$
 264 
 
 
  
 
 
 494 
 
 
 222 
 
$
 190 
 
 
  
 
 
 412 
 
 
 
 
U.S. mid/small-cap
 
 
 31 
 
 
 43 
 
 
  
 
 
 74 
 
 
 30 
 
 
 30 
 
 
  
 
 
 60 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
 
 90 
 
 
 6 
 
 
  
 
 
 96 
 
 
 86 
 
 
 9 
 
 
  
 
 
 95 
 
 
 
 
U.S. government sponsored
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
agency
 
 
 5 
 
 
 1 
 
 
  
 
 
 6 
 
 
 8 
 
 
 1 
 
 
  
 
 
 9 
 
 
 
 
Municipality
 
 
 74 
 
 
 2 
 
$
 1 
 
 
 75 
 
 
 78 
 
 
 5 
 
$
 1 
 
 
 82 
 
 
 
 
Investment-grade corporate
 
 
 39 
 
 
 2 
 
 
 1 
 
 
 40 
 
 
 36 
 
 
 4 
 
 
  
 
 
 40 
 
 
 
 
Other
 
 
 3 
 
 
  
 
 
  
 
 
 3 
 
 
 3 
 
 
  
 
 
  
 
 
 3 
 
 
 
Receivables/payables, net
 
 
 2 
 
 
  
 
 
  
 
 
 2 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total NDT funds
 
 
 488 
 
 
 318 
 
 
 2 
 
 
 804 
 
 
 474 
 
 
 239 
 
 
 1 
 
 
 712 
 
Auction rate securities
 
 
 17 
 
 
  
 
 
 1 
 
 
 16 
 
 
 17 
 
 
  
 
 
 1 
 
 
 16 
 
Total
 
$
 505 
 
$
 318 
 
$
 3 
 
$
 820 
 
$
 491 
 
$
 239 
 
$
 2 
 
$
 728 

There were no securities with credit losses at September 30, 2013 and December 31, 2012.

The following table shows the scheduled maturity dates of debt securities held at September 30, 2013.

 
 
 
Maturity
 
Maturity
 
Maturity
 
Maturity
 
 
 
 
 
 
 Less Than
1-5
6-10
in Excess
 
 
 
 
 
1 Year
Years
Years
of 10 Years
Total
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
 6 
 
$
 92 
 
$
 56 
 
$
 77 
 
$
 231 
Fair value
 
 
 6 
 
 
 96 
 
 
 58 
 
 
 79 
 
 
 239 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortized cost
 
$
 6 
 
$
 92 
 
$
 56 
 
$
 74 
 
$
 228 
Fair value
 
 
 6 
 
 
 96 
 
 
 58 
 
 
 76 
 
 
 236 


 
95
 

The following table shows proceeds from and realized gains and losses on sales of available-for-sale securities for the periods ended September 30.

 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
2013 
 
2012 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sales of NDT securities (a)
 
$
 33 
 
$
 23 
 
$ 
 92 
 
$ 
 102 
Other proceeds from sales
 
 
   
 
 
   
 
 
   
 
 
 5 
Gross realized gains (b)
 
 
 3 
 
 
 2 
 
 
 10 
 
 
 15 
Gross realized losses (b)
 
 
 2 
 
 
 2 
 
 
 6 
 
 
 8 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sales of NDT securities (a)
 
$
 33 
 
$
 23 
 
$ 
 92 
 
$ 
 102 
Other proceeds from sales
 
 
   
 
 
   
 
 
   
 
 
 3 
Gross realized gains (b)
 
 
 3 
 
 
 2 
 
 
 10 
 
 
 15 
Gross realized losses (b)
 
 
 2 
 
 
 2 
 
 
 6 
 
 
 8 

(a)
These proceeds are used to pay income taxes and fees related to managing the trust.  Remaining proceeds are reinvested in the trust.
(b)
Excludes the impact of other-than-temporary impairment charges recognized on the Statements of Income.         

18.  Accumulated Other Comprehensive Income (Loss)

(PPL and PPL Energy Supply)

The after-tax changes in AOCI by component for the three and nine months ended September 30, 2013 were as follows.

 
 
Foreign 
 
Unrealized gains (losses) 
 
 
 
 
Defined benefit plans 
 
 
 
 
 
currency 
 
Available- 
 
 
 
 
Equity 
 
Prior 
 
Actuarial 
 
Transition 
 
 
 
 
 
translation 
 
for-sale 
 
Qualifying 
 
investees' 
 
service 
 
gain 
 
asset 
 
 
 
 
 
adjustments 
 
securities 
 
derivatives 
 
AOCI 
 
costs 
 
(loss) 
 
(obligation) 
 
Total 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
$ 
 (401)
 
$ 
 135 
 
$ 
 102 
 
$ 
 1 
 
$ 
 (11)
 
$ 
 (1,955)
 
$ 
 1 
 
$ 
 (2,128)
Amounts arising during the period
 
 87 
 
 
 15 
 
 
 (9)
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 93 
Reclassifications from AOCI
 
   
 
 
   
 
 
 (6)
 
 
 (1)
 
 
 2 
 
 
 33 
 
 
   
 
 
 28 
Net OCI during the period
 
 87 
 
 
 15 
 
 
 (15)
 
 
 (1)
 
 
 2 
 
 
 33 
 
 
   
 
 
 121 
September 30, 2013
$ 
 (314)
 
$ 
 150 
 
$ 
 87 
 
$ 
   
 
$ 
 (9)
 
$ 
 (1,922)
 
$ 
 1 
 
$ 
 (2,007)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
$ 
 (149)
 
$ 
 112 
 
$ 
 132 
 
$ 
 1 
 
$ 
 (14)
 
$ 
 (2,023)
 
$ 
 1 
 
$ 
 (1,940)
Amounts arising during the period
 
 (165)
 
 
 40 
 
 
 77 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 (48)
Reclassifications from AOCI
 
   
 
 
 (2)
 
 
 (122)
 
 
 (1)
 
 
 5 
 
 
 101 
 
 
   
 
 
 (19)
Net OCI during the period
 
 (165)
 
 
 38 
 
 
 (45)
 
 
 (1)
 
 
 5 
 
 
 101 
 
 
   
 
 
 (67)
September 30, 2013
$ 
 (314)
 
$ 
 150 
 
$ 
 87 
 
$ 
   
 
$ 
 (9)
 
$ 
 (1,922)
 
$ 
 1 
 
$ 
 (2,007)
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2013
 
   
 
$ 
 135 
 
$ 
 144 
 
 
 
 
$ 
 (8)
 
$ 
 (257)
 
 
   
 
$ 
 14 
Amounts arising during the period
 
   
 
 
 15 
 
 
   
 
 
 
 
 
   
 
 
   
 
 
   
 
 
 15 
Reclassifications from AOCI
 
   
 
 
   
 
 
 (29)
 
 
 
 
 
 1 
 
 
 3 
 
 
   
 
 
 (25)
Net OCI during the period
 
   
 
 
 15 
 
 
 (29)
 
 
 
 
 
 1 
 
 
 3 
 
 
   
 
 
 (10)
September 30, 2013
 
   
 
$ 
 150 
 
$ 
 115 
 
 
 
 
$ 
 (7)
 
$ 
 (254)
 
 
   
 
$ 
 4 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
$ 
 112 
 
$ 
 211 
 
 
 
 
$ 
 (10)
 
$ 
 (265)
 
 
   
 
$ 
 48 
Amounts arising during the period
 
 
 
 
 40 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 40 
Reclassifications from AOCI
 
 
 
 
 (2)
 
 
 (96)
 
 
   
 
 
 3 
 
 
 11 
 
 
   
 
 
 (84)
Net OCI during the period
 
 
 
 
 38 
 
 
 (96)
 
 
   
 
 
 3 
 
 
 11 
 
 
   
 
 
 (44)
September 30, 2013
 
 
 
$ 
 150 
 
$ 
 115 
 
  
   
 
$ 
 (7)
 
$ 
 (254)
 
 
   
 
$ 
 4 

The following table presents the gains (losses) and related income taxes for reclassifications from AOCI for the periods ended September 30, 2013.  The defined benefit plan components of AOCI are not reflected in their entirety in the statement of income during the periods; rather, they are included in the computation of net periodic defined benefit costs (credits).  See Note 9 for additional information.

 
96
 


 
 
 
Three Months
 
 
 
Affected Line Item on the Statements of Income
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale
 
 
 
 
 
 
 
Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
energy
 
Energy
 
 
 
 
(Expense),
 
Interest
 
Total
 
Income
 
Total
Details about AOCI
 
marketing
 
purchases
 
Depreciation
 
net
 
Expense
 
Pre-tax
 
Taxes
 
After-tax
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
$ 
 1 
 
 
 
 
$ 
 1 
 
$ 
 (1)
 
  
   
Qualifying derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
 (5)
 
 
 (5)
 
 
 2 
 
$ 
 (3)
 
Cross-currency swaps
 
 
 
 
 
 
 
 
 
 
 
 (25)
 
 
 (1)
 
 
 (26)
 
 
 7 
 
 
 (19)
 
Energy commodities
 
$ 
 58 
 
$ 
 (11)
 
$ 
 1 
 
 
 
 
 
 
 
 
 48 
 
 
 (20)
 
 
 28 
 
Total
 
$ 
 58 
 
$ 
 (11)
 
$ 
 1 
 
$ 
 (25)
 
$ 
 (6)
 
 
 17 
 
 
 (11)
 
 
 6 
Equity investees' AOCI
 
 
 
 
 
 
 
 
 
 
$ 
 1 
 
 
 
 
 
 1 
 
 
   
 
 
 1 
Defined benefit plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (3)
 
 
 1 
 
 
 (2)
 
Net actuarial loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (45)
 
 
 12 
 
 
 (33)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
 (48)
 
$ 
 13 
 
 
 (35)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
during the period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
 (28)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
$ 
 1 
 
 
 
 
$ 
 1 
 
$ 
 (1)
 
  
   
Qualifying derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
$ 
 58 
 
$ 
 (11)
 
$ 
 1 
 
 
 
 
 
 
 
 
 48 
 
 
 (19)
 
$ 
 29 
Defined benefit plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (2)
 
 
 1 
 
 
 (1)
 
Net actuarial loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (5)
 
 
 2 
 
 
 (3)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
 (7)
 
$ 
 3 
 
 
 (4)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
during the period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
 25 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months
 
 
 
Affected Line Item on the Statements of Income
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale
 
 
 
 
 
 
 
Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
energy
 
Energy
 
 
 
 
(Expense),
 
Interest
 
Total
 
Income
 
Total
Details about AOCI
 
marketing
 
purchases
 
Depreciation
 
net
 
Expense
 
Pre-tax
 
Taxes
 
After-tax
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
$ 
 4 
 
 
 
 
$ 
 4 
 
$ 
 (2)
 
$ 
 2 
Qualifying derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
 (14)
 
 
 (14)
 
 
 6 
 
 
 (8)
 
Cross-currency swaps
 
 
 
 
 
 
 
 
 
 
 
 45 
 
 
   
 
 
 45 
 
 
 (10)
 
 
 35 
 
Energy commodities
 
$ 
 198 
 
$ 
 (41)
 
$ 
 2 
 
 
 
 
 
 
 
 
 159 
 
 
 (64)
 
 
 95 
 
Total
 
$ 
 198 
 
$ 
 (41)
 
$ 
 2 
 
$ 
 45 
 
$ 
 (14)
 
 
 190 
 
 
 (68)
 
 
 122 
Equity investees' AOCI
 
 
 
 
 
 
 
 
 
 
$ 
 1 
 
 
 
 
 
 1 
 
 
 
 
 
 1 
Defined benefit plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (8)
 
 
 3 
 
 
 (5)
 
Net actuarial loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (138)
 
 
 37 
 
 
 (101)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
 (146)
 
$ 
 40 
 
 
 (106)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
during the period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
 19 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
$ 
 4 
 
 
 
 
$ 
 4 
 
$ 
 (2)
 
$ 
 2 
Qualifying derivatives
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy commodities
 
$ 
 198 
 
$ 
 (41)
 
$ 
 2 
 
 
 
 
 
 
 
 
 159 
 
 
 (63)
 
 
 96 
Defined benefit plans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service costs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (5)
 
 
 2 
 
 
 (3)
 
Net actuarial loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 (18)
 
 
 7 
 
 
 (11)
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 
 (23)
 
$ 
 9 
 
 
 (14)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
during the period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
 84 
 
97
 

(LKE and KU)

For the three and nine months ended September 30, 2013, the changes in AOCI and the effect of reclassifications from AOCI on the statement of income for LKE and KU were insignificant.

19.  New Accounting Guidance Pending Adoption

(All Registrants)

Accounting for Obligations Resulting from Joint and Several Liability Arrangements

Effective January 1, 2014, the Registrants will retrospectively adopt accounting guidance for the recognition, measurement and disclosure of certain obligations resulting from joint and several liability arrangements when the amount of the obligation is fixed at the reporting date.  If the obligation is determined to be in the scope of this guidance, it will be measured as the sum of the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors.  This guidance also requires additional disclosures for these obligations.

The Registrants are assessing the potential impact of adoption, which is not expected to be material.

Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity

Effective January 1, 2014, PPL will prospectively adopt accounting guidance that requires a cumulative translation adjustment to be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity.  For the step acquisition of previously held equity method investments that are foreign entities, this guidance clarifies that the amount of accumulated other comprehensive income that is reclassified and included in the calculation of a gain or loss shall include any foreign currency translation adjustment related to that previously held investment.

The initial adoption of this guidance is not expected to have a significant impact on PPL; however, the impact in future periods could be material. 

Presentation of Unrecognized Tax Benefits When Net Operating Loss Carryforwards, Similar Tax Losses, or Tax Credit Carryforwards Exist

Effective January 1, 2014, the Registrants will prospectively adopt accounting guidance that requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward.  To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.

The adoption of this guidance is not expected to have a significant impact on the Registrants.

 
98
 

Item 2.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations


(All Registrants)

This combined Item 2.  "Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL Corporation and its Subsidiary Registrants: PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company.  Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant.  The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrant's related activities and disclosures.  Within combined disclosures, amounts are disclosed for any Registrant when significant.

The following should be read in conjunction with the Registrants' Condensed Financial Statements and the accompanying Notes and with the Registrants' 2012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, except per share data, unless otherwise noted.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:

·  
"Overview" provides a description of each Registrant and its business strategy, selected information on PPL's segment earnings, a description of key factors expected to impact future earnings and a discussion of important financial and operational developments.

·  
"Results of Operations" provides a summary of earnings and ends with "Statement of Income Analysis," which includes explanations of non-GAAP financial measures and significant changes in principal line items on the Statements of Income, comparing the three and nine months ended September 30, 2013 with the same periods in 2012.

·  
"Financial Condition - Liquidity and Capital Resources" provides an analysis of the Registrants' liquidity position and credit profiles.  This section also includes a discussion of rating agency actions.

·  
"Financial Condition - Risk Management" provides an explanation of the Registrants' risk management programs relating to market and credit risk.

Overview

Introduction

(PPL)

PPL, headquartered in Allentown, Pennsylvania, is an energy and utility holding company that through subsidiaries generates electricity from power plants in the northeastern, northwestern and southeastern U.S., markets wholesale and retail energy primarily in the northeastern and northwestern portions of the U.S., delivers electricity to customers in the U.K., Pennsylvania, Kentucky, Virginia and Tennessee and delivers natural gas to customers in Kentucky.
 
99
 
PPL's principal subsidiaries are shown below (* denotes an SEC registrant):
 
                 
PPL Corporation*
                
                                                       
                                   
PPL Capital Funding
            
       
                                                 
                                               
     
PPL Global
● Engages in the regulated distribution of electricity in the U.K.
    
LKE*
 
  
PPL Electric*
● Engages in the regulated transmission and distribution of electricity in Pennsylvania
    
PPL Energy Supply*
 
    
                                                       
                                                       
     
LG&E*
● Engages in the regulated generation, transmission, distribution and sale of electricity in Kentucky, and distribution and sale of natural gas in Kentucky
    
KU*
● Engages in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky
    
PPL EnergyPlus
● Performs energy marketing and trading activities
● Purchases fuel
    
PPL Generation
● Engages in the competitive generation of electricity, primarily in Pennsylvania and Montana
                                               
     
U.K. Regulated
Segment
  
Kentucky Regulated Segment
  
Pennsylvania Regulated Segment
  
Supply
Segment
    

PPL's reportable segments' results primarily represent the results of its related Subsidiary Registrant(s), except that the reportable segments are also allocated certain corporate level financing and other costs that are not included in the results of the applicable Subsidiary Registrant.  The U.K. Regulated segment does not have a related Subsidiary Registrant.

(PPL Energy Supply)

PPL Energy Supply, headquartered in Allentown, Pennsylvania is an energy company that through its principal subsidiaries is primarily engaged in the competitive generation and marketing of electricity in two key markets - the northeastern and northwestern U.S.  PPL Energy Supply's principal subsidiaries are PPL EnergyPlus, its marketing and trading subsidiary, and PPL Generation, the owner of its generating facilities in Pennsylvania and Montana.

(PPL Electric)

PPL Electric, headquartered in Allentown, Pennsylvania, is an electricity transmission and distribution service provider in eastern and central Pennsylvania.  PPL Electric is subject to regulation as a public utility by the PUC, and certain of its transmission activities are subject to the jurisdiction of FERC under the Federal Power Act.  PPL Electric delivers electricity in its Pennsylvania service area and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.

(LKE)

LKE, headquartered in Louisville, Kentucky, is a holding company and a wholly owned subsidiary of PPL.  LKE owns regulated utility operations through its subsidiaries, LG&E and KU, which constitute substantially all of LKE's assets.  LG&E and KU are engaged in the generation, transmission, distribution and sale of electricity.  LG&E also engages in the distribution and sale of natural gas.  LG&E and KU maintain their separate identities and serve customers in Kentucky under their respective names.  KU also serves customers in Virginia under the Old Dominion Power name and in Tennessee under the KU name.

(LG&E)

LG&E, headquartered in Louisville, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electricity and distribution and sale of natural gas in Kentucky.  LG&E is subject to regulation as a public utility by the KPSC, and certain of its transmission activities are subject to the jurisdiction of FERC under the Federal Power Act.  LG&E is a wholly owned subsidiary of LKE.

 
100
 
(KU)

KU, headquartered in Lexington, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electricity in Kentucky, Virginia and Tennessee.  KU is subject to regulation as a public utility by the KPSC, the VSCC and the TRA, and certain of its transmission and wholesale power activities are subject to the jurisdiction of FERC under the Federal Power Act.  KU is a wholly owned subsidiary of LKE.

(All Registrants except PPL Electric)

The capacity (summer rating) of regulated and competitive electricity generation facilities at September 30, 2013 was:

 
 
 
Ownership or Lease Interest in MW (a)
 
 
 
 
 
PPL Energy
 
 
 
 
 
 
Primary Fuel
 
PPL
 
Supply
 
LKE
 
LG&E
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
Regulated
 
 
 
 
 
 
 
 
 
 
 
Coal (c)
 
5,940 
 
 
 
5,940 
 
2,656 
 
3,284 
 
Natural Gas/Oil (b)
 
2,098 
 
 
 
2,098 
 
644 
 
1,454 
 
Hydro
 
78 
 
 
 
78 
 
54 
 
24 
 
 
 
 
 
 
 
 
 
 
 
 
Total Regulated
 
8,116 
 
 
 
8,116 
 
3,354 
 
4,762 
 
 
 
 
 
 
 
 
 
 
 
 
Competitive
 
 
 
 
 
 
 
 
 
 
 
Coal (b) (c)
 
4,146 
 
4,146 
 
 
 
 
 
 
 
Natural Gas/Oil
 
3,316 
 
3,316 
 
 
 
 
 
 
 
Nuclear (c)
 
2,275 
 
2,275 
 
 
 
 
 
 
 
Hydro (d)
 
807 
 
807 
 
 
 
 
 
 
 
Other (e)
 
70 
 
70 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Competitive
 
10,614 
 
10,614 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
18,730 
 
10,614 
 
8,116 
 
3,354 
 
4,762 

(a)
The capacity of generation units is based on a number of factors, including the operating experience and physical conditions of the units, and may be revised periodically to reflect changed circumstances.  See "Item 2. Properties" in the 2012 Form 10-K for additional information on ownership percentages.
(b)
Includes leasehold interests.  See Note 11 to the Financial Statements in the 2012 Form 10-K for additional information.
(c)
Includes units that are jointly owned or subject to a power purchase agreement.  Each owner is entitled to its proportionate share of the unit's total output and funds its proportionate share of fuel and other operating costs.  See Notes 14 and 15 to the Financial Statements in the 2012 Form 10-K for additional information.
(d)
In September 2013, PPL Montana executed a definitive agreement to sell its 11 hydroelectric facilities, which have a combined generating capacity of 633 MW, to NorthWestern for $900 million in cash, subject to certain adjustments.  The sale is not expected to close before the second half of 2014 and is subject to closing conditions, including receipt of regulatory approvals by the FERC and Montana Public Service Commission and certain third party consents.  See Note 8 to the Financial Statements for additional information.
(e)
Includes facilities owned, controlled or for which PPL Energy Supply has the rights to the output.

Business Strategy

(PPL and PPL Energy Supply)

The strategy for PPL Energy Supply is to achieve disciplined optimization of energy supply margins while mitigating near-term volatility in both cash flows and earnings.  More specifically, the strategy is to optimize the value from its competitive generation and marketing portfolios.  PPL Energy Supply endeavors to do this by matching energy supply with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL Energy Supply is focused on maintaining profitability during the current and projected period of low commodity prices.  See "Financial and Operational Developments - Economic and Market Conditions" below for additional information.

(All Registrants except PPL Energy Supply)

The strategy for the regulated businesses of WPD, PPL Electric, LKE, LG&E and KU is to achieve stable, long-term growth in earnings and rate base, or RAV, as applicable.  Both rate base and RAV are expected to grow as a result of significant capital expenditure programs to maintain existing assets and improving system reliability and, for LKE, LG&E and KU, to comply with federal and state environmental regulations related to electric generation facilities.  These regulated businesses

 
101
 
focus on timely recovery of costs, efficient, reliable and safe operations, strong customer service and constructive regulatory relationships.

Recovery of capital project costs is attained through various rate-making mechanisms, including periodic base rate case proceedings, FERC formula rate mechanisms, and other regulatory agency-approved recovery mechanisms.  In Kentucky, the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on certain construction work-in-progress) that reduce regulatory lag and provide for timely recovery of prudently incurred costs.  In Pennsylvania, the recently approved DSIC mechanism will help PPL Electric reduce regulatory lag and provide for timely recovery of distribution reliability-related capital investment.  See "Distribution System Improvement Charge" below for additional information on the implementation of the DSIC mechanism in 2013 and "RIIO-ED1" below for changes to the regulatory framework intended to encourage investment in regulated infrastructure applicable to WPD in 2015.

(All Registrants)

To manage financing costs and access to credit markets and to fund capital expenditure programs, a key objective for the Registrants is to maintain strong credit profiles and liquidity positions.  In addition, the Registrants have financial and operational risk management programs that, among other things, are designed to monitor and manage exposure to earnings and cash flow volatility related to, as applicable, changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of their generating units.

Financial and Operational Developments

Earnings (PPL)

Earnings by component of PPL's reportable segments for the periods ended September 30 were as follows.

 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
% Change
 
2013 
 
2012 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.K. Regulated
 
$
 183 
 
$
 202 
 
 
 (9)
 
$
 741 
 
$
 563 
 
 
 32 
 
Kentucky Regulated
 
 
 93 
 
 
 72 
 
 
 29 
 
 
 227 
 
 
 148 
 
 
 53 
 
Pennsylvania Regulated
 
 
 51 
 
 
 33 
 
 
 55 
 
 
 160 
 
 
 95 
 
 
 68 
 
Supply
 
 
 91 
 
 
 48 
 
 
 90 
 
 
 122 
 
 
 361 
 
 
 (66)
 
Corporate and Other (a)
 
 
 (8)
 
 
 
 
 
n/a 
 
 
 (22)
 
 
 
 
 
n/a 
Net Income Attributable to
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Shareowners
 
$
 410 
 
$
 355 
 
 
 15 
 
$
 1,228 
 
$
 1,167 
 
 
 5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EPS - basic
 
$
 0.65 
 
$
 0.61 
 
 
 7 
 
$
 2.03 
 
$
 2.00 
 
 
 2 
EPS - diluted (b)
 
$
 0.62 
 
$
 0.61 
 
 
 2 
 
$
 1.90 
 
$
 2.00 
 
 
 (5)

(a)
Primarily represents financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, which are presented to reconcile segment information to PPL's consolidated results.  For 2012, there were no significant amounts in this category.
(b)
See "Equity Units" below for information on the Equity Units' impact on the calculation of 2013 diluted EPS.

The following after-tax gains (losses), in total, which management considers special items, impacted PPL's reportable segments results during the periods ended September 30.  See PPL's "Results of Operations - Segment Earnings" for details of these special items.

 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
Change
 
2013 
 
2012 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.K. Regulated
 
$
 (16)
 
$
 41 
 
$
 (57)
 
$
 78 
 
$
 39 
 
$
 39 
Kentucky Regulated
 
 
   
 
 
   
 
 
   
 
 
 2 
 
 
 (1)
 
 
 3 
Supply
 
 
 (6)
 
 
 (105)
 
 
 99 
 
 
 (49)
 
 
 3 
 
 
 (52)
Total PPL
 
$
 (22)
 
$
 (64)
 
$ 
 42 
 
$
 31 
 
$ 
 41 
 
$
 (10)

The changes in PPL's reportable segments results for the three and nine-month periods, excluding the impact of special items, were due to the following factors (on an after-tax basis):

·
Increase at the U.K. Regulated segment for the three-month period primarily due to higher electricity delivery prices and lower U.K. income taxes, partially offset by an accrual for over-recovery of current-year revenues, lower sales volume due to weather and higher operation and maintenance expense.  Increase at the U.K. Regulated segment for the nine-month period primarily due to higher electricity delivery prices, increased sales volume due to weather, and lower U.K.
 
102
 

income taxes, partially offset by an accrual for over-recovery of current-year revenues, higher operation and maintenance expense and higher depreciation.
·
Increases at the Kentucky Regulated segment for both periods primarily due to higher base rates that became effective January 1, 2013 and returns from additional environmental capital investments.  The three-month period was also partially offset by lower sales volume due to weather.
·
Increases at the Pennsylvania Regulated segment for both periods primarily due to higher electricity base rates that became effective January 1, 2013 and higher transmission margins from additional capital investments.  The increase for the nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.
·
Decrease at the Supply segment for the three-month period primarily due to lower baseload energy prices, lower baseload generation, higher operation and maintenance expense and higher income taxes.  The decline in segment earnings was partially offset by higher capacity prices.  Decrease at the Supply segment for the nine-month period primarily due to lower baseload energy prices, higher fuel costs, higher income taxes and higher depreciation.  The decline in segment earnings was partially offset by higher capacity prices, higher intermediate and peaking margins and higher baseload generation.  The higher income taxes for both periods resulted primarily from a non-cash adjustment of deferred tax assets.

See "Results of Operations" below for further discussion of PPL's reportable segments and analysis of results of operations.

2013 Outlook

(PPL)

Excluding special items, higher earnings are expected in 2013 compared with 2012.  However, 2013 earnings are expected to decline on a diluted EPS basis due to higher average shares treated as outstanding.  The factors underlying these projections by segment and Subsidiary Registrant are reflected below (on an after-tax basis).

(PPL's U.K. Regulated Segment)

Excluding special items, higher earnings are projected in 2013 compared with 2012, primarily driven by higher electricity delivery prices and lower income taxes, partially offset by higher operation and maintenance expense, higher depreciation and higher interest expense.

(PPL's Kentucky Regulated Segment and Kentucky Registrants)

Excluding special items, higher earnings are projected in 2013 compared with 2012, primarily driven by base rate increases and returns on additional environmental capital investments.

(PPL's Pennsylvania Regulated Segment and PPL Electric)

Excluding special items, higher earnings are projected in 2013 compared with 2012, primarily driven by higher distribution revenues from the January 1, 2013 base rate increase and higher transmission margins due to additional capital investment, partially offset by higher depreciation and higher interest expense.

(PPL's Supply Segment and PPL Energy Supply)

Excluding special items, lower earnings are projected in 2013 compared with 2012, primarily driven by lower energy prices, higher fuel costs, higher depreciation, higher taxes and higher financing costs, partially offset by lower operation and maintenance expense, higher capacity prices and higher baseload generation output.

(All Registrants)

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Notes 6 and 10 to the Financial Statements in this Form 10-Q (as applicable) and "Item 1. Business" and "Item 1A. Risk Factors" in the Registrants' 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

 
103
 
Other Financial and Operational Developments

Economic and Market Conditions

(PPL and PPL Energy Supply)

Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development and additional renewable energy sources, primarily wind in the western U.S.  Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in energy and capacity market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, transmission constraints that impact the locational pricing of electricity at PPL Energy Supply's power plants, fuel transportation costs and the level and price of hedging activities.  As a result of these factors, lower future energy margins are expected when compared to the 2012 energy margins.  See "Changes in Non-GAAP Financial Measures - Unregulated Gross Energy Margins in Statement of Income Analysis" below for additional information on energy margins.  As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, its hedging strategies and potential plant modifications to burn lower cost fuels.

(All Registrants except PPL Electric)

As previously disclosed, the businesses of PPL Energy Supply, LKE, LG&E and KU are subject to extensive federal, state and local environmental laws, rules and regulations, including those pertaining to coal combustion residuals, GHG, effluent limitation guidelines and MATS.  See "Financial Condition - Environmental Matters" below for additional information on these requirements.  These and other stringent environmental requirements, combined with low energy margins for competitive generation, have led several energy companies, including PPL, PPL Energy Supply, LKE, LG&E and KU, to announce plans to either temporarily or permanently close, or place in long-term reserve status, certain of their coal-fired generating plants.

(PPL and PPL Energy Supply)

In 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with MATS.  PPL Energy Supply continues to monitor its Corette plant for potential impairment.  The Corette plant asset group's carrying value at September 30, 2013 was $67 million.  See "Environmental Matters - Domestic - Air - MATS" in Note 10 to the Financial Statements for additional information.

PPL Energy Supply believes its remaining competitive coal-fired generation assets are well positioned to meet the environmental requirements described above based on prior and planned investments.  Management continues to monitor energy and PJM capacity prices.  A further decline in energy and/or capacity prices could negatively impact PPL Energy Supply's operations and potentially result in future asset impairment charges for coal-fired plants or goodwill.

(PPL and Kentucky Registrants)

The environmental requirements discussed above have also resulted in LKE's projected $2.2 billion ($1.1 billion each at LG&E and KU) in capital investment over the next five years and the anticipated retirement by 2015 of five coal-fired units (three at LG&E and two at KU) with a combined summer capacity rating of 726 MW (563 MW at LG&E and 163 MW at KU).  KU retired the 71 MW unit at the Tyrone plant in February 2013.  The retirement of these coal-fired units is not expected to have a material impact on the financial condition or results of operations of PPL, LKE, LG&E and KU.  See Note 8 to the Financial Statements in the 2012 Form 10-K for PPL, LKE, LG&E and KU for additional information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky.

The KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on certain construction work-in-progress) that provide for recovery of prudently incurred costs.  The Kentucky utility businesses are impacted by changes in customer usage levels which can be driven by a number of factors including weather conditions and economic factors that impact the load utilized by industrial and commercial customers.
 
104
 

(All Registrants)

The Registrants cannot predict the future impact that economic and market conditions and changes in regulatory requirements may have on their financial condition or results of operations.

(PPL)

Ofgem Review of Line Loss Calculation

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4.  Based on information received from Ofgem in 2013, WPD currently estimates the potential loss exposure for this matter to be in the range of $93 million to $226 million as of September 30, 2013.  During the three and nine months ended September 30, 2013, WPD recorded $21 million and $45 million of increases to the liability with reductions to "Utility" revenue on the Statement of Income.  PPL cannot predict the outcome of this matter.  See Note 6 to the Financial Statements for additional information.

RIIO-ED1

In October 2010, Ofgem announced changes to the regulatory framework that will be effective for the U.K. electricity distribution sector, including WPD, beginning April 2015.  The framework, known as RIIO (Revenues = Incentives + Innovation + Outputs), is intended to encourage investment in regulated infrastructure.  The next electricity distribution price control review is referred to as RIIO-ED1.  Key components of the RIIO-ED1 are: an extension of the price review period to eight years, increased emphasis on outputs and incentives, enhanced stakeholder engagement including network customers, a stronger incentive framework to encourage more efficient investment and innovation, and continued use of a single weighted average cost of capital.  Ofgem has also indicated that the depreciation of the RAV, for RAV additions after April 1, 2015, will change from 20 years to 45 years, but that it will consider transition arrangements.

As previously reported, on July 1, 2013, WPD filed its business plans with Ofgem for the RIIO-ED1 period and gave a webcast presentation to highlight the contents of the plans as well as provide potential earnings ranges of the U.K. Regulated segment for the first two years of the RIIO-ED1 period.  The ranges provided are subject to certain assumptions including foreign currency exchange rates, interest rates, inflation rates and WPD being "fast-tracked" through the price control review process and therefore earning the fast-track bonus revenue.  These assumptions and other future events affecting the potential earnings ranges are subject to significant uncertainties.  Although management believes that the business plans submitted by WPD meet the criteria to be fast-tracked, management cannot predict the outcome of the price control review process or the future financial effect on WPD's businesses of the RIIO-ED1 regulatory framework.  Ofgem has notified WPD that it intends to announce preliminary fast-track determinations on November 22, 2013 with a final determination to be announced in February 2014.  See "Item 1. Business - Background - U.K. Regulated Segment - Revenue and Regulation" in the 2012 Form 10-K for additional information.

Equity Forward Agreements

In the second quarter of 2013, PPL settled forward sale agreements for 10.5 million shares of PPL common stock by issuing 8.4 million shares and cash settling the remaining 2.1 million shares.  PPL received net cash proceeds of $201 million, which was used to repay short-term debt obligations and for other general corporate purposes.  See Note 7 to the Financial Statements for additional information.  Prior to settlement, incremental shares were included within the calculation of diluted EPS using the treasury stock method.  See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Equity Units

During 2013, several events occurred related to the components of the 2010 Equity Units.  During the first quarter of 2013, financing plans were finalized to remarket the Junior Subordinated Notes component of the 2010 Equity Units and in the second quarter, PPL Capital Funding completed the remarketing of the Junior Subordinated Notes and simultaneously exchanged the remarketed notes for three tranches of Senior Notes.  The transaction resulted in a $10 million loss on extinguishment of the Junior Subordinated Notes.  Additionally, in July 2013, PPL issued 40 million shares of common stock at $28.73 per share to settle the 2010 Purchase Contracts.  PPL received net cash proceeds of $1.150 billion, which will be used to repay short-term and long-term debt obligations and for other general corporate purposes.  See Note 7 to the Financial Statements for additional information.

The If-Converted Method of calculating diluted EPS was applied to the Equity Units prior to settlement beginning in the first quarter of 2013.  This resulted in $7 million and $37 million of interest charges (after-tax) being added back to income

 
105
 

available to PPL common shareowners, and 32 million and 59 million weighted-average incremental shares of PPL common stock being treated as outstanding for purposes of the diluted EPS calculation for the three and nine months ended September 30, 2013.  See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Tax Litigation

In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U. S. Court of Appeals for the Third Circuit, on the creditability for U.S. income tax purposes of the U.K. Windfall Profits Tax paid by a U.K. subsidiary of PPL.  As a result of this decision, PPL recorded an income tax benefit of $44 million for the nine months ended September 30, 2013.  See Note 5 to the Financial Statements for additional information.

U.K. Tax Rate Change

In July 2013, the U.K. Finance Act 2013 was enacted, which reduces the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015.  As a result of these changes, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit of $93 million in the third quarter of 2013.

Pennsylvania Net Operating Loss Valuation Allowance

PPL assesses the realizability of its deferred tax assets for Pennsylvania's net operating loss carryforwards based on, among other things, projections of future taxable income for the net operating loss carryforward periods.  In the third quarter of 2013, PPL determined that its projected future taxable income would likely decrease, resulting in an increase to the valuation allowance related to Pennsylvania net operating loss carryforwards.  As a result, PPL recorded a $38 million increase in state deferred income tax expense.

FERC Audit Proceedings (All Registrants except PPL Energy Supply)

In November 2011, the FERC commenced an audit of PPL and its subsidiaries, including an audit of the FERC transmission formula rate mechanisms at PPL Electric, LG&E and KU beginning in April 2012.  The audit identified several matters related to separate aspects of formula rate mechanics at PPL Electric, LG&E and KU.  As previously reported, among the audit matters related to PPL Electric was the determination that PPL Electric had not obtained a waiver of the equity method accounting requirement with respect to its wholly owned subsidiary, PPL Receivables Corporation, which was formed in 2004 to purchase eligible accounts receivable and unbilled revenue from PPL Electric to collateralize commercial paper issuances and reduce borrowing costs.  PPL, PPL Electric, LKE, LG&E and KU currently believe that the total amount of refunds, if any, that may be required with respect to the formula rate and all other issues identified during the course of the audit will not be material to any of these Registrants.  PPL, PPL Electric, LKE, LG&E and KU, however, cannot predict the ultimate outcome of these matters.

(PPL and PPL Energy Supply)

Montana Transactions

In September 2013, PPL Montana executed a definitive agreement to sell 633MW of hydroelectric facilities to NorthWestern for $900 million in cash, subject to certain adjustments.  The sale is not expected to close before the second half of 2014.  The sale is subject to closing conditions, including receipt of regulatory approvals by the FERC and Montana Public Service Commission and certain third-party consents.  In a related transaction, in September 2013, PPL Montana negotiated and entered into an agreement to pay $271 million to terminate a sale-leaseback arrangement and reacquire its interests in the Colstrip coal-fired facilities.  This transaction is anticipated to occur by the end of the first quarter of 2014, subject to approval by the FERC.  At lease termination, in addition to recording a charge for the cash payment, a non-cash charge is expected to be recorded related to the existing lease-related assets on PPL's and PPL Energy Supply's Balance Sheets.  The book value of these assets was approximately $450 million at September 30, 2013.  These lease-related assets will be written-off and the reacquired Colstrip assets will be recorded at fair value as of the acquisition date.  The total loss is currently estimated at between $310 million and $430 million, after-tax, which is dependent on the fair value assigned to the reacquired Colstrip assets.  See Note 8 to the Financial Statements for additional information.

Susquehanna Turbine Blade Inspection

In the spring of 2013, PPL Susquehanna made modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011.  The modifications were made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  In September 2013, data from the extensive vibration monitoring equipment installed on the turbine blades identified cracks in a small number of the blades on both units.  Unit 2 completed a blade

 
106
 

inspection and replacement outage on September 23, 2013.  Based upon the evaluation of the conditions on Unit 1 and the latest inspection of previously removed blades, PPL Susquehanna will continue to operate Unit 1 and monitor the blades through the vibration monitoring equipment.  The financial impact of the Unit 2 outage is not material.  PPL Susquehanna continues to work with the turbine manufacturer to identify and resolve the issues causing the blade cracking.

Colstrip Unit 4 Outage (PPL Energy Supply)

On July 1, 2013, Colstrip Unit 4 automatically shut down as a result of damage that occurred in the unit's generator.  The repair to Unit 4 is estimated to cost between $30 million and $40 million and is expected to take at least six months to complete.  Property damage insurance for Unit 4 is subject to a $2.5 million self-insured retention.  PPL Montana operates Unit 4 pursuant to an agreement with the owners and, pursuant to a separate agreement with NorthWestern, is entitled to receive 15% of Unit 4's electricity output and is responsible for 15% of the capital, operating, maintenance and repair costs associated with Unit 4.  PPL Montana's estimated pre-tax loss of earnings attributable to the Unit 4 outage is between $5 million and $10 million.

(PPL and PPL Electric)

Distribution System Improvement Charge

Act 11 authorizes the PUC to approve two specific ratemaking mechanisms - the use of a fully projected future test year in base rate proceedings and, subject to certain conditions, the use of a DSIC.  Such alternative ratemaking procedures and mechanisms provide opportunity for accelerated cost-recovery.  In May 2013, the PUC approved PPL Electric's proposed DSIC, with an initial rate effective July 1, 2013, subject to refund after hearings.  See Note 6 to the Financial Statements for additional information.

Rate Case Proceedings

(PPL and PPL Electric)

In December 2012, the PUC approved a total distribution revenue increase of about $71 million for PPL Electric, using a 10.4% return on equity.  The approved rates became effective January 1, 2013.

(PPL and Kentucky Registrants)

In December 2012, the KPSC approved a rate case settlement agreement providing for increases in annual base electricity rates of $34 million for LG&E and $51 million for KU and an increase in annual base gas rates of $15 million for LG&E using a 10.25% return on equity.  The approved rates became effective January 1, 2013.

(KU)

In September 2013, KU filed an application with the FERC to adjust the formula rate under which KU provides wholesale requirements power sales to 12 municipal customers.  Among other changes, the application requests an amended formula whereby KU would recover costs based on forward-looking estimates with a subsequent true-up, replacing the current formula which uses prior-year cost amounts.  KU's application proposed an authorized 10.7% return on equity.  Subject to regulatory approval, the new formula rate may become effective during mid-2014.

In April 2013, KU filed an application with the VSCC to increase annual Virginia base electricity revenue by approximately $7 million, representing an increase of 9.6%.  KU proposed an authorized 10.8% return on equity.  In October 2013, KU filed a stipulation reached with VSCC staff proposing a revenue increase of $4.7 million, representing an increase of 6.9%.  If approved by the VSCC, new base rates would go into effect on December 1, 2013.

Results of Operations

(PPL)

The discussion for PPL provides a review of results by reportable segment and concludes with a "Statement of Income Analysis," which includes explanations of Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins.  The "Statement of Income Analysis" also addresses significant changes in principal line items on PPL's Statements of Income, comparing the three and nine months ended September 30, 2013 with the same periods in 2012.  "Segment Earnings and Statement of Income Analysis" is presented separately for PPL.


 
107
 
Tables analyzing changes in amounts between periods within "Segment Earnings" and "Statement of Income Analysis" are presented on a constant U.K. foreign currency exchange rate basis, where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained.  Results computed on a constant U.K. foreign currency exchange rate basis are calculated by translating current year results at the prior year weighted-average U.K. foreign currency exchange rate.

(Subsidiary Registrants)

The discussion for each of PPL Energy Supply, PPL Electric, LKE, LG&E and KU provides a summary of earnings and concludes with a "Statement of Income Analysis," which includes a reconciliation of a non-GAAP financial measure to "Operating Income" and significant changes in principal line items on the Statements of Income, comparing the three and nine months ended September 30, 2013 with the same periods in 2012.  "Earnings and Statement of Income Analysis" is presented separately for PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

(All Registrants)

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

PPL:  Segment Earnings and Statement of Income Analysis

Segment Earnings

U.K. Regulated Segment

The U.K. Regulated segment consists of PPL Global which primarily includes WPD's regulated electricity distribution operations and certain costs, such as U.S. income taxes, administrative costs and allocated financing costs.  The U.K. Regulated segment represents 60% of Net Income Attributable to PPL Shareowners for nine months ended September 30, 2013 and 32% of PPL's assets at September 30, 2013.

Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results:

 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
% Change
 
2013 
 
2012 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Utility revenues
 
$
 534 
 
$
 518 
 
 3 
 
$
 1,731 
 
$
 1,613 
 
 7 
Energy-related businesses
 
 
 9 
 
 
 10 
 
 (10)
 
 
 32 
 
 
 34 
 
 (6)
 
Total operating revenues
 
 
 543 
 
 
 528 
 
 3 
 
 
 1,763 
 
 
 1,647 
 
 7 
Other operation and maintenance
 
 
 111 
 
 
 101 
 
 10 
 
 
 340 
 
 
 326 
 
 4 
Depreciation
 
 
 73 
 
 
 69 
 
 6 
 
 
 219 
 
 
 206 
 
 6 
Taxes, other than income
 
 
 36 
 
 
 36 
 
   
 
 
 109 
 
 
 108 
 
 1 
Energy-related businesses
 
 
 7 
 
 
 8 
 
 (13)
 
 
 21 
 
 
 24 
 
 (13)
 
Total operating expenses
 
 
 227 
 
 
 214 
 
 6 
 
 
 689 
 
 
 664 
 
 4 
Other Income (Expense) - net
 
 
 (117)
 
 
 (50)
 
 134 
 
 
 7 
 
 
 (39)
 
 (118)
Interest Expense
 
 
 102 
 
 
 106 
 
 (4)
 
 
 313 
 
 
 314 
 
   
Income Taxes
 
 
 (86)
 
 
 (44)
 
 95 
 
 
 27 
 
 
 67 
 
 (60)
Net Income Attributable to PPL Shareowners
 
$
 183 
 
$
 202 
 
 (9)
 
$
 741 
 
$
 563 
 
 32 

The changes in the components of the U.K. Regulated segment's results between these periods were due to the factors set forth below, which reflect reclassifications for certain items that management considers special.  See below for additional detail of these special items.

 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
U.K.
 
 
 
 
 
 
 
Utility revenues
 
$
 44 
 
$ 
 187 
 
Other operation and maintenance
 
 
 (9)
 
 
 (19)
 
Depreciation
 
 
 (6)
 
 
 (17)
 
Interest expense
 
 
 3 
 
 
 (4)
 
Other
 
 
 2 
 
 
 2 
 
Income taxes
 
 
 8 
 
 
 (13)
U.S.
 
 
 
 
 
 
 
Interest expense and other
 
 
   
 
 
 1 
 
Income taxes
 
 
 (5)
 
 
 4 
 
108
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
Foreign currency exchange rates, after-tax (a)
 
 
 1 
 
 
 (2)
Special items, after-tax
 
 
 (57)
 
 
 39 
Total
 
$
 (19)
 
$
 178 

(a)
Includes the effect of realized gains (losses) on foreign currency economic hedges.

U.K.

·
Higher utility revenues for the three-month period primarily due to $74 million from the April 1, 2013 price increase, partially offset by a $22 million accrual for over-recovered revenue and $10 million of lower volume due primarily to weather.

 
Higher utility revenues for the nine-month period primarily due to $187 million from the April 1, 2013 and 2012 price increases and $18 million of higher volume due primarily to weather, partially offset by a $22 million accrual for over-recovered revenue.

·  
Higher other operation and maintenance for the three- and nine-month periods primarily due to higher network maintenance expense.

·  
Higher depreciation for the three- and nine-month periods primarily due to PP&E additions.

·  
Lower income taxes for the three-month period due to $16 million from U.K. tax rate changes, partially offset by higher pre-tax income, which increased income taxes by $8 million.

Higher income taxes for the nine-month period primarily due to higher pre-tax income, which increased income taxes by $38 million, and $13 million from a benefit recorded in 2012 due to the tax deductibility of interest on the acquisition financing for WPD Midlands, partially offset by $27 million from U.K. tax rate changes and $6 million of prior year adjustments.

U.S.

·
Higher income taxes for the three-month period due to an $8 million increase to income tax expense attributable to a revision in the expected taxable amount of cash repatriation in 2013.

 
Lower income taxes for the nine-month period due to a $19 million 2013 adjustment primarily related to an IRS ruling regarding 2010 U.K. earnings and profits calculations and $11 million of lower income taxes on intercompany loans, partially offset by a $23 million increase to income tax expense attributable to a revision in the expected taxable amount of cash repatriation in 2013.

The following after-tax gains (losses), which management considers special items, also impacted the U.K. Regulated segment's results during the periods ended September 30.

 
 
 
Income Statement
 
Three Months
 
Nine Months
 
 
 
Line Item
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income  
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency-related economic hedges, net of tax of $44, $18, $5, $17 (a) 
(Expense)-net 
 
$
 (82)
 
$
 (30)
 
$
 (8)
 
$
 (28)
WPD Midlands acquisition-related adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Operation 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separation benefits, net of tax of $1, $1, $1, $3
and Maintenance 
 
 
 (2)
 
 
 (1)
 
 
 (4)
 
 
 (9)
 
 
 
Other Operation 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other acquisition-related adjustments, net of tax of $0, $0, $0, ($1)
and Maintenance 
 
 
   
 
 
 (2)
 
 
 (2)
 
 
 2 
Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Windfall Profits Tax litigation (b)
Income Taxes 
 
 
   
 
 
 
 
 
 43 
 
 
 
 
Change in WPD line loss accrual, net of tax of $5, $0, $10, $0 (c)
Utility 
 
 
 (16)
 
 
 
 
 
 (35)
 
 
 
 
Change in U.K. tax rate (d)
Income Taxes 
 
 
 84 
 
 
 74 
 
 
 84 
 
 
 74 
Total
 
 
$
 (16)
 
$
 41 
 
$
 78 
 
$
 39 

(a)
Represents unrealized gains (losses) on contracts that economically hedge anticipated earnings denominated in GBP.
(b)
In May 2013, the U.S. Supreme Court reversed the December 2011 ruling, by the U.S. Court of Appeals for the Third Circuit, on the creditability for income tax purposes of the U.K. Windfall Profits Tax.  As a result of the U.S. Supreme Court ruling, PPL recorded an income tax benefit during the nine-month 2013 period.  See Note 5 to the Financial Statements for additional information.

 
109
 

(c)
WPD Midlands recorded adjustments to its line loss accrual based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4, a price control period that ended prior to PPL's acquisition of WPD Midlands.  See Note 6 to the Financial Statements for additional information.
(d)
The U.K. Finance Act of 2013, enacted in July 2013, reduced the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015.  The U.K. Finance Act of 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liability and recognized a deferred tax benefit in the three and nine-month periods of 2013 and 2012.

Kentucky Regulated Segment

The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations.  This segment also includes LKE's regulated distribution and sale of natural gas.  In addition, certain financing costs are allocated to the Kentucky Regulated segment.  The Kentucky Regulated segment represents 19% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 2013 and 25% of PPL's assets at September 30, 2013.

Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results:

 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
% Change
 
2013 
 
2012 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Utility revenues
 
$
 744 
 
$ 
 732 
 
 2 
 
$
 2,226 
 
$
 2,095 
 
 6 
Fuel
 
 
 237 
 
 
 249 
 
 (5)
 
 
 684 
 
 
 677 
 
 1 
Energy purchases
 
 
 23 
 
 
 27 
 
 (15)
 
 
 146 
 
 
 135 
 
 8 
Other operation and maintenance
 
 
 188 
 
 
 186 
 
 1 
 
 
 582 
 
 
 589 
 
 (1)
Depreciation
 
 
 84 
 
 
 87 
 
 (3)
 
 
 249 
 
 
 259 
 
 (4)
Taxes, other than income
 
 
 12 
 
 
 11 
 
 9 
 
 
 36 
 
 
 34 
 
 6 
 
Total operating expenses
 
 
 544 
 
 
 560 
 
 (3)
 
 
 1,697 
 
 
 1,694 
 
   
Other Income (Expense) - net
 
 
 (4)
 
 
 (4)
 
   
 
 
 (6)
 
 
 (14)
 
 (57)
Interest Expense
 
 
 49 
 
 
 54 
 
 (9)
 
 
 165 
 
 
 163 
 
 1 
Income Taxes
 
 
 54 
 
 
 42 
 
 29 
 
 
 132 
 
 
 70 
 
 89 
Income (Loss) from Discontinued Operations
 
 
   
 
 
   
 
n/a 
 
 
 1 
 
 
 (6)
 
 (117)
Net Income Attributable to PPL Shareowners
 
$
 93 
 
$
 72 
 
 29 
 
$
 227 
 
$
 148 
 
 53 

The changes in the components of the Kentucky Regulated segment's results between these periods were due to the factors set forth below, which reflect reclassifications for items included in Kentucky Gross Margins and certain items that management considers special.  See below for additional detail of these special items.

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Kentucky Gross Margins
 
$
 42 
 
$
 151 
Other operation and maintenance
 
 
 (4)
 
 
 4 
Depreciation
 
 
 (9)
 
 
 (26)
Taxes, other than income
 
 
 (1)
 
 
 (2)
Other Income (Expense) - net
 
 
   
 
 
 7 
Interest Expense
 
 
 5 
 
 
 (2)
Income Taxes
 
 
 (12)
 
 
 (56)
Special items, after-tax
 
 
   
 
 
 3 
Total
 
$
 21 
 
$
 79 

·
See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Kentucky Gross Margins.

·
Lower other operation and maintenance for the nine-month period primarily due to $18 million of lower costs due to the timing and scope of scheduled coal plant maintenance outages.  This decrease was partially offset by $8 million of higher administrative and general expenses and $4 million of adjustments to regulatory assets and liabilities.

·
Higher depreciation for the three and nine-month periods primarily due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates, which added $13 million and $39 million to depreciation that is excluded from Kentucky Gross Margins.  This increase was partially offset by lower depreciation of $5 and $16 million due to revised rates that were effective January 1, 2013.  Both events are the result of the 2012 rate case proceedings.

·
Higher other income (expense) - net for the nine-month period primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.
 
110
 

·
Higher income taxes for the three and nine-month periods primarily due to the change in pre-tax income at current period tax rates.

The following after-tax gains (losses), which management considers special items, also impacted the Kentucky Regulated segment's results during the periods ended September 30.

 
 
 
Income Statement
 
Three Months
 
Nine Months
 
 
 
Line Item
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LKE acquisition-related adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Taxes and Other
 
 
 
 
 
 
 
 
 
 
 
 
 
Net operating loss carryforward and other tax-related adjustments
Operation and Maintenance
 
 
 
 
 
 
 
 
 
 
$
 4 
Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LKE discontinued operations (a) 
Discontinued Operations 
 
 
   
 
 
   
 
$
 1 
 
 
 (5)
 
EEI adjustments, net of tax of $0, $0, $0, $0 (b) 
Other Income (Expense)-net 
 
 
   
 
 
 
 
 
 1 
 
 
 
Total
 
 
 
   
 
 
   
 
$
 2 
 
$
 (1)

(a)
2012 period includes an adjustment to an indemnification liability.
(b)
Impact recorded at KU.

Pennsylvania Regulated Segment

The Pennsylvania Regulated segment includes PPL Electric's regulated electricity transmission and distribution operations.  In addition, certain financing costs are allocated to the Pennsylvania Regulated segment.  The Pennsylvania Regulated segment represents 13% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 2013 and 15% of PPL's assets at September 30, 2013.

Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
% Change
 
2013 
 
2012 
 
% Change
Utility revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
 
$
 463 
 
$
 443 
 
 5 
 
$
 1,388 
 
$
 1,303 
 
 7 
 
Intersegment
 
 
 1 
 
 
 1 
 
   
 
 
 3 
 
 
 3 
 
   
 
Total utility revenues
 
 
 464 
 
 
 444 
 
 5 
 
 
 1,391 
 
 
 1,306 
 
 7 
Energy purchases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
 
 
 144 
 
 
 137 
 
 5 
 
 
 436 
 
 
 410 
 
 6 
 
Intersegment
 
 
 11 
 
 
 23 
 
 (52)
 
 
 37 
 
 
 61 
 
 (39)
Other operation and maintenance
 
 
 134 
 
 
 148 
 
 (9)
 
 
 391 
 
 
 431 
 
 (9)
Depreciation
 
 
 45 
 
 
 41 
 
 10 
 
 
 132 
 
 
 119 
 
 11 
Taxes, other than income
 
 
 25 
 
 
 24 
 
 4 
 
 
 77 
 
 
 72 
 
 7 
 
Total operating expenses
 
 
 359 
 
 
 373 
 
 (4)
 
 
 1,073 
 
 
 1,093 
 
 (2)
Other Income (Expense) - net
 
 
 2 
 
 
 3 
 
 (33)
 
 
 5 
 
 
 6 
 
 (17)
Interest Expense
 
 
 30 
 
 
 25 
 
 20 
 
 
 80 
 
 
 73 
 
 10 
Income Taxes
 
 
 26 
 
 
 16 
 
 63 
 
 
 83 
 
 
 47 
 
 77 
Net Income
 
 
 51 
 
 
 33 
 
 55 
 
 
 160 
 
 
 99 
 
 62 
Net Income Attributable to Noncontrolling Interests
 
 
   
 
 
   
 
n/a 
 
 
   
 
 
 4 
 
 (100)
Net Income Attributable to PPL Shareowners
 
$
 51 
 
$
 33 
 
 55 
 
$
 160 
 
$
 95 
 
 68 

The changes in the components of the Pennsylvania Regulated segment's results between these periods were due to the factors set forth below, which reflect reclassifications for items included in Pennsylvania Gross Delivery Margins.

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Pennsylvania Gross Delivery Margins
 
$
 31 
 
$
 92 
Other operation and maintenance
 
 
 8 
 
 
 28 
Depreciation
 
 
 (4)
 
 
 (13)
Interest Expense
 
 
 (5)
 
 
 (7)
Other
 
 
 (2)
 
 
 (3)
Income Taxes
 
 
 (10)
 
 
 (36)
Noncontrolling Interests
 
 
   
 
 
 4 
Total
 
$
 18 
 
$
 65 

·
See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Pennsylvania Gross Delivery Margins.
 
111
 
·
Lower other operation and maintenance for the three-month period primarily due to lower storm costs of $8 million, lower corporate service costs of $3 million and lower rent expense of $3 million, partially offset by higher vegetation management expense of $6 million.

Lower other operation and maintenance for the nine-month period primarily due to lower storm costs of $9 million, lower corporate service costs of $13 million and lower rent expense of $4 million.

·
Higher depreciation for the three and nine-month periods primarily due to the impact of PP&E additions related to the ongoing efforts to ensure the reliability of the delivery system and replace aging infrastructure.

·
Higher interest expense for the three and nine-month periods primarily due to the issuance of first mortgage bonds in August 2012 and July 2013.

·
Higher income taxes for the three and nine-month periods primarily due to higher pre-tax income.

Supply Segment

The Supply segment primarily consists of PPL Energy Supply's energy marketing and trading activities, as well as its competitive generation operations.  In addition, certain financing costs are allocated to the Supply segment.  The Supply segment represents 10% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 2013 and 27% of PPL's assets at September 30, 2013.

Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
2013 
 
2012 
 
% Change
 
2013 
 
2012 
 
% Change
Energy revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External (a)
 
$
 1,209 
 
$
 567 
 
 113 
 
$
 3,248 
 
$
 3,673 
 
 (12)
 
Intersegment
 
 
 11 
 
 
 23 
 
 (52)
 
 
 37 
 
 
 61 
 
 (39)
Energy-related businesses
 
 
 143 
 
 
 133 
 
 8 
 
 
 378 
 
 
 346 
 
 9 
 
Total operating revenues
 
 
 1,363 
 
 
 723 
 
 89 
 
 
 3,663 
 
 
 4,080 
 
 (10)
Fuel (a)
 
 
 258 
 
 
 321 
 
 (20)
 
 
 780 
 
 
 728 
 
 7 
Energy purchases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External (a)
 
 
 388 
 
 
 (150)
 
 (359)
 
 
 1,085 
 
 
 1,288 
 
 (16)
 
Intersegment
 
 
 1 
 
 
 1 
 
   
 
 
 3 
 
 
 2 
 
 50 
Other operation and maintenance
 
 
 243 
 
 
 221 
 
 10 
 
 
 748 
 
 
 769 
 
 (3)
Depreciation
 
 
 80 
 
 
 75 
 
 7 
 
 
 237 
 
 
 210 
 
 13 
Taxes, other than income
 
 
 18 
 
 
 19 
 
 (5)
 
 
 51 
 
 
 54 
 
 (6)
Energy-related businesses
 
 
 138 
 
 
 129 
 
 7 
 
 
 366 
 
 
 339 
 
 8 
 
Total operating expenses
 
 
 1,126 
 
 
 616 
 
 83 
 
 
 3,270 
 
 
 3,390 
 
 (4)
Other Income (Expense) - net
 
 
 2 
 
 
 6 
 
 (67)
 
 
 18 
 
 
 15 
 
 20 
Other-Than-Temporary Impairments
 
 
 1 
 
 
   
 
n/a 
 
 
 1 
 
 
 1 
 
   
Interest Expense
 
 
 54 
 
 
 62 
 
 (13)
 
 
 174 
 
 
 163 
 
 7 
Income Taxes
 
 
 92 
 
 
 3 
 
 2,967 
 
 
 113 
 
 
 180 
 
 (37)
Net Income Attributable to Noncontrolling Interests
 
 
 1 
 
 
   
 
n/a 
 
 
 1 
 
 
   
 
n/a 
Net Income Attributable to PPL Shareowners
 
$
 91 
 
$
 48 
 
 90 
 
$
 122 
 
$
 361 
 
 (66)

(a)
Includes the impact from energy-related economic activity.  See "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements for additional information.

The changes in the components of the Supply segment's results between these periods were due to the factors set forth below, which reflect reclassifications for items included in Unregulated Gross Energy Margins and certain items that management considers special.  See below for additional detail of these special items.

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Unregulated Gross Energy Margins
 
$
 (9)
 
$
 (204)
Other operation and maintenance
 
 
 (18)
 
 
 11 
Depreciation
 
 
 (5)
 
 
 (27)
Taxes, other than income
 
 
 (1)
 
 
 3 
Other Income (Expense) - net
 
 
 (4)
 
 
 6 
Interest expense
 
 
 8 
 
 
 (11)
Other
 
 
 (4)
 
 
 (2)
Income Taxes
 
 
 (23)
 
 
 37 
Special items, after-tax
 
 
 99 
 
 
 (52)
Total
 
$
 43 
 
$
 (239)
 
112
 
·
See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Unregulated Gross Energy Margins.

·
Higher other operation and maintenance for the three-month period primarily due to Montour outage costs in 2013 with no comparable outage in 2012.

Lower other operation and maintenance for the nine-month period primarily due to $23 million of outage costs at Brunner Island mainly due to timing and $9 million due to lower project costs at PPL Susquehanna, partially offset by $13 million of Montour outage costs in 2013 with no comparable outage in 2012 and $6 million of Ironwood outage costs in 2013 with no comparable outage in 2012.

·
Higher depreciation for the three and nine-month periods primarily due to PP&E additions.  The nine-month period also includes $6 million attributable to the Ironwood Acquisition.

·
Higher interest expense for the nine-month period primarily due to lower capitalized interest in 2013.

·
Higher income taxes for the three-month period primarily due to $26 million of higher adjustments to valuation allowances in 2013 on Pennsylvania net operating loss carryforwards and a $6 million benefit from a state tax rate change recorded in 2012, partially offset by lower pre-tax income in 2013, which reduced income taxes by $10 million.

Lower income taxes for the nine-month period primarily due to lower pre-tax income in 2013, which reduced income taxes by $87 million, partially offset by $26 million of higher adjustments to valuation allowances in 2013 on Pennsylvania net operating loss carryforwards and a $17 million benefit from a state tax rate change recorded in 2012.

The following after-tax gains (losses), which management considers special items, also impacted the Supply segment's results during the periods ended September 30.
 
 
 
Income Statement
 
Three Months
 
Nine Months
 
 
 
Line Item
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted energy-related economic activity - net, net of tax of $4, $63, $32, ($16)
(a)
 
$
 (6)
 
$
 (95)
 
$
 (47)
 
$
 23 
Impairments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustments - nuclear decommissioning trust investments, net of tax of $0, $0, $0, ($2)
Other Income-net 
 
 
   
 
 
 
 
 
   
 
 
 1 
Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in tax accounting method related to repairs
Income Taxes 
 
 
   
 
 
 
 
 
 (3)
 
 
 
 
 
Other Operation 
 
 
 
 
 
 
 
 
 
 
 
 
 
Counterparty bankruptcy, net of tax of $0, $0, ($1), $5 (b)
and Maintenance 
 
 
   
 
 
 
 
 
 1 
 
 
 (6)
 
Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0
(c) 
 
 
 
 
 
   
 
 
 
 
 
 1 
 
 
 
Other Operation 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ash basin leak remediation adjustment, net of tax of $0, $0, $0, ($1)
and Maintenance 
 
 
 
 
 
 
 
 
 
 
 
 1 
 
Coal contract modification payments, net of tax of $0, $7, $0, $12 (d)
Fuel 
 
 
 
 
 
 (10)
 
 
 
 
 
 (17)
Total
 
 
$
 (6)
 
$
 (105)
 
$
 (49)
 
$
 3 

(a)
See "Reconciliation of Economic Activity" below.
(b)
In October 2011, a wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy code.  In 2012, PPL EnergyPlus recorded an additional allowance for unpaid amounts under the long-term power contract.  In March 2012, the U.S. Bankruptcy Court for the District of Montana approved the request to terminate the contract, effective April 1, 2012.  In June 2013, PPL EnergyPlus received an approval for an administrative claim in the amount of $2 million.
(c)
Recorded in "Wholesale energy marketing - Realized" on the Statement of Income.
(d)
As a result of lower electricity and natural gas prices, coal-fired generation output decreased during 2012.  Contract modification payments were incurred to reduce 2012 and 2013 contracted coal deliveries.

Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended September 30, to the special item identified as "Adjusted energy-related economic activity - net."

 
 
 
 
Three Months
 
Nine Months
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unregulated retail electric and gas
 
$
 (2)
 
$
 (13)
 
$
 10 
 
$
 (15)
 
 
Wholesale energy marketing
 
 
 (49)
 
 
 (716)
 
 
 (281)
 
 
 (322)
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 3 
 
 
 3 
 
 
 (2)
 
 
 (11)
 
 
Energy Purchases
 
 
 37 
 
 
 569 
 
 
 192 
 
 
 420 
Energy-related economic activity (a)
 
 
 (11)
 
 
 (157)
 
 
 (81)
 
 
 72 
 
113
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
2013 
 
2012 
 
2013 
 
2012 
Option premiums
 
 
 1 
 
 
   
 
 
 2 
 
 
 1 
Adjusted energy-related economic activity
 
 
 (10)
 
 
 (157)
 
 
 (79)
 
 
 73 
Less:  Economic activity realized, associated with the monetization of
 
 
 
 
 
 
 
 
 
 
 
 
 
certain full-requirement sales contracts in 2010
 
 
   
 
 
 1 
 
 
   
 
 
 34 
Adjusted energy-related economic activity - net, pre-tax
 
$
 (10)
 
$
 (158)
 
$
 (79)
 
$
 39 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted energy-related economic activity - net, after-tax
 
$
 (6)
 
$
 (95)
 
$
 (47)
 
$
 23 

(a)
See Note 14 to the Financial Statements for additional information.

Statement of Income Analysis --

Margins

Non-GAAP Financial Measures

Management utilizes the following non-GAAP financial measures as indicators of performance for its businesses.

·
"Kentucky Gross Margins" is a single financial performance measure of LKE's, LG&E's and KU's electricity generation, transmission and distribution operations as well as its distribution and sale of natural gas.  In calculating this measure, fuel and energy purchases are deducted from revenues.  In addition, utility revenues and expenses associated with approved cost recovery mechanisms are offset.  These mechanisms allow for recovery of certain expenses, return on capital investments and performance incentives.  Certain costs associated with these mechanisms, primarily ECR, DSM and GLT, are recorded as "Other operation and maintenance" and "Depreciation."  As a result, this measure represents the net revenues from the electric and gas operations.

·
"Pennsylvania Gross Delivery Margins" is a single financial performance measure of PPL Electric's electric delivery operations, which includes transmission and distribution activities.  In calculating this measure, utility revenues and expenses associated with approved recovery mechanisms, including energy provided as a PLR, are offset with minimal impact on earnings.  Costs associated with these mechanisms are recorded in "Energy purchases," "Other operation and maintenance," which is primarily Act 129 costs, and "Taxes, other than income," which is primarily gross receipts tax.  This performance measure includes PLR energy purchases by PPL Electric from PPL EnergyPlus, which are reflected in "PLR intersegment utility revenue (expense)" in the reconciliation table below (in "Energy purchases from affiliate" in PPL Electric's reconciliation table).  As a result, this measure represents the net revenues from PPL Electric's electric delivery operations.

·
"Unregulated Gross Energy Margins" is a single financial performance measure of PPL Energy Supply's competitive energy non-trading and trading activities.  Non-trading activities are managed on a geographic basis that is aligned with the generation fleet.  In calculating this measure, energy revenues are offset by the cost of fuel, energy purchases and certain other operation and maintenance expenses, primarily ancillary charges and gross receipts tax, which is recorded in "Taxes, other than income."  This performance measure is relevant to PPL due to the volatility in the individual revenue and expense lines on the Statements of Income that comprise "Unregulated Gross Energy Margins."  This volatility stems from a number of factors, including the required netting of certain transactions with ISOs and significant fluctuations in unrealized gains and losses.  Such factors could result in gains or losses being recorded in either "Wholesale energy marketing" or "Energy purchases" on the Statements of Income.  This performance measure includes PLR revenues from energy sales to PPL Electric by PPL EnergyPlus, which are recorded in "PLR intersegment utility revenue (expense)" in the reconciliation table below (in "Wholesale energy marketing to affiliate" in PPL Energy Supply's reconciliation table).  "Unregulated Gross Energy Margins" excludes adjusted energy-related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of the competitive generation assets, full-requirement sales contracts and retail activities.  This economic value is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power) prior to the delivery period that was hedged.  Adjusted energy-related economic activity also includes the premium amortization associated with options and for 2012 the ineffective portion of qualifying cash flow hedges and realized economic activity associated with the monetization of certain full-requirement sales contracts in 2010.  This economic activity was deferred, with the exception of the full-requirement sales contracts that were monetized, and included in "Unregulated Gross Energy Margins" over the delivery period that was hedged or upon realization.
 
114
 

These measures are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  Management believes that these measures provide additional criteria to make investment decisions.  These performance measures are used, in conjunction with other information, internally by senior management and PPL's Board of Directors to manage the operations, analyze actual results compared with budget and, in certain cases, to measure certain corporate financial goals used in determining variable compensation.

Reconciliation of Non-GAAP Financial Measures

The following tables contain the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the periods ended September 30.

 
 
 
 
 
 
2013 Three Months
 
2012 Three Months
 
 
 
 
 
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
 
 
 
 
 
Kentucky
 
PA Gross
 
Gross
 
 
 
 
Operating
 
Kentucky
 
PA Gross
 
Gross
 
 
 
 
Operating
 
 
 
 
 
 
Gross
 
Delivery
 
Energy
 
 
 
 
Income
 
Gross
 
Delivery
 
Energy
 
 
 
 
 
Income
 
 
 
 
 
 
Margins
 
Margins
 
Margins
 
Other (a)
 
(b)
 
Margins
 
Margins
 
Margins
 
Other (a)
 
(b)
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Utility
 
$
 744 
 
$
 463 
 
 
 
 
$
 532 
(c) 
 
$
 1,739 
 
$
 732 
 
$
 443 
 
 
 
 
$
 518 
(c) 
 
$
 1,693 
 
PLR intersegment utility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue (expense) (d)
 
 
 
 
 
 (11)
 
$
 11 
 
 
   
 
 
 
 
 
 
 
 
 
 (23)
 
$
 23 
 
 
   
 
 
 
 
 
Unregulated retail
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
electric and gas
 
 
 
 
 
 
 
 
 267 
 
 
 (3)
(f) 
 
 
 264 
 
 
 
 
 
 
 
 
 232 
 
 
 (14)
(f) 
 
 
 218 
 
Wholesale energy marketing
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
Realized
 
 
 
 
 
 
 
 
 981 
 
 
 (1)
 
 
 
 980 
 
 
 
 
 
 
 
 
 1,074 
 
 
 2 
(e) 
 
 
 1,076 
 
 
 
Unrealized economic
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
activity
 
 
 
 
 
 
 
 
 
 
 
 (49)
(f) 
 
 
 (49)
 
 
 
 
 
 
 
 
 
 
 
 (716)
(f) 
 
 
 (716)
 
Net energy trading margins
 
 
 
 
 
 
 
 
 12 
 
 
   
 
 
 
 12 
 
 
 
 
 
 
 
 
 (11)
 
 
   
 
 
 
 (11)
 
Energy-related businesses
 
 
 
 
 
 
 
 
 
 
 
 159 
 
 
 
 159 
 
 
 
 
 
 
 
 
   
 
 
 143 
 
 
 
 143 
 
 
 
Total Operating Revenues
 
 
 744 
 
 
 452 
 
 
 1,271 
 
 
 638 
 
 
 
 3,105 
 
 
 732 
 
 
 420 
 
 
 1,318 
 
 
 (67)
 
 
 
 2,403 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 237 
 
 
 
 
 
 256 
 
 
 1 
 
 
 
 494 
 
 
 249 
 
 
   
 
 
 310 
 
 
 11 
(g) 
 
 
 570 
 
Energy purchases
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
Realized
 
 
 23 
 
 
 144 
 
 
 427 
 
 
 (2)
 
 
 
 592 
 
 
 27 
 
 
 137 
 
 
 418 
 
 
 1 
(e) 
 
 
 583 
 
 
 
Unrealized economic
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
activity
 
 
 
 
 
 
 
 
 
 
 
 (37)
(f) 
 
 
 (37)
 
 
 
 
 
 
 
 
 
 
 
 (569)
(f) 
 
 
 (569)
 
Other operation and
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
maintenance
 
 
 26 
 
 
 19 
 
 
 5 
 
 
 619 
 
 
 
 669 
 
 
 28 
 
 
 25 
 
 
 1 
 
 
 596 
 
 
 
 650 
 
Depreciation
 
 
 1 
 
 
   
 
 
 
 
 
 288 
 
 
 
 289 
 
 
 13 
 
 
 
 
 
 
 
 
 265 
 
 
 
 278 
 
Taxes, other than income
 
 
   
 
 
 23 
 
 
 9 
 
 
 58 
 
 
 
 90 
 
 
   
 
 
 23 
 
 
 11 
 
 
 56 
 
 
 
 90 
 
Energy-related businesses
 
 
 
 
 
 
 
 
 5 
 
 
 146 
 
 
 
 151 
 
 
 
 
 
 
 
 
   
 
 
 137 
 
 
 
 137 
 
Intercompany eliminations
 
 
 
 
 
 (1)
 
 
 1 
 
 
   
 
 
 
 
 
 
 
 
 
 (1)
 
 
 1 
 
 
   
 
 
 
 
 
 
 
Total Operating Expenses
 
 
 287 
 
 
 185 
 
 
 703 
 
 
 1,073 
 
 
 
 2,248 
 
 
 317 
 
 
 184 
 
 
 741 
 
 
 497 
 
 
 
 1,739 
Total
 
$
 457 
 
$
 267 
 
$
 568 
 
$
 (435)
 
 
$
 857 
 
$
 415 
 
$
 236 
 
$
 577 
 
$
 (564)
 
 
$
 664 

 
 
 
 
 
 
2013 Nine Months
 
2012 Nine Months
 
 
 
 
 
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
 
 
 
 
 
Kentucky
 
PA Gross
 
Gross
 
 
 
 
Operating
 
Kentucky
 
PA Gross
 
Gross
 
 
 
 
Operating
 
 
 
 
 
 
Gross
 
Delivery
 
Energy
 
 
 
 
Income
 
Gross
 
Delivery
 
Energy
 
 
 
 
 
Income
 
 
 
 
 
 
Margins
 
Margins
 
Margins
 
Other (a)
 
(b)
 
Margins
 
Margins
 
Margins
 
Other (a)
 
(b)
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Utility
 
$
 2,226 
 
$
 1,388 
 
 
 
 
$
 1,730 
(c) 
 
$
 5,344 
 
$
 2,095 
 
$
 1,303 
 
 
 
 
$
 1,614 
(c) 
 
$
 5,012 
 
PLR intersegment utility
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
revenue (expense) (d)
 
 
 
 
 
 (37)
 
$
 37 
 
 
 
 
 
 
 
 
 
 
 
 
 (61)
 
$
 61 
 
 
 
 
 
 
 
 
Unregulated retail
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
electric and gas
 
 
 
 
 
 
 
 
 750 
 
 
 8 
(f) 
 
 
 758 
 
 
 
 
 
 
 
 
 638 
 
 
 (18)
(f) 
 
 
 620 
 
Wholesale energy marketing
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
Realized
 
 
 
 
 
 
 
 
 2,770 
 
 
 (3)
 
 
 
 2,767 
 
 
 
 
 
 
 
 
 3,353 
 
 
 14 
(e) 
 
 
 3,367 
 
 
 
Unrealized economic
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
activity
 
 
 
 
 
 
 
 
 
 
 
 (281)
(f) 
 
 
 (281)
 
 
 
 
 
 
 
 
 
 
 
 (322)
(f) 
 
 
 (322)
 
Net energy trading margins
 
 
 
 
 
 
 
 
 1 
 
 
   
 
 
 
 1 
 
 
 
 
 
 
 
 
 7 
 
 
   
 
 
 
 7 
 
Energy-related businesses
 
 
 
 
 
 
 
 
 
 
 
 423 
     
 
 
 423 
 
 
 
 
 
 
 
 
 
 
 
 380 
 
 
 
 380 
 
 
 
Total Operating Revenues
 
 
 2,226 
 
 
 1,351 
 
 
 3,558 
 
 
 1,877 
 
 
 
 9,012 
 
 
 2,095 
 
 
 1,242 
 
 
 4,059 
 
 
 1,668 
 
 
 
 9,064 

 
115
 
 
 
 
 
 
 
2013 Nine Months
 
2012 Nine Months
 
 
 
 
 
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
 
 
 
 
 
Kentucky
 
PA Gross
 
Gross
 
 
 
 
Operating
 
Kentucky
 
PA Gross
 
Gross
 
 
 
 
Operating
 
 
 
 
 
 
Gross
 
Delivery
 
Energy
 
 
 
 
Income
 
Gross
 
Delivery
 
Energy
 
 
 
 
 
Income
 
 
 
 
 
 
Margins
 
Margins
 
Margins
 
Other (a)
 
(b)
 
Margins
 
Margins
 
Margins
 
Other (a)
 
(b)
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 684 
 
 
 
 
 
 778 
 
 
 2 
 
 
 
 1,464 
 
 
 677 
 
 
 
 
 
 695 
 
 
 33 
(g) 
 
 1,405 
 
Energy purchases
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
Realized
 
 
 146 
 
 
 436 
 
 
 1,282 
 
 
 (9)
 
 
 
 1,855 
 
 
 135 
 
 
 410 
 
 
 1,669 
 
 
 39 
(e) 
 
 
 2,253 
 
 
 
Unrealized economic
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
activity
 
 
 
 
 
 
 
 
 
 
 
 (192)
(f) 
 
 
 (192)
 
 
 
 
 
 
 
 
 
 
 
 (420)
(f) 
 
 
 (420)
 
Other operation and
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
maintenance
 
 
 74 
 
 
 62 
 
 
 13 
 
 
 1,894 
 
 
 
 2,043 
 
 
 76 
 
 
 74 
 
 
 12 
 
 
 1,933 
 
 
 
 2,095 
 
Depreciation
 
 
 3 
 
 
   
 
 
 
 
 
 856 
 
 
 
 859 
 
 
 39 
 
 
   
 
 
   
 
 
 774 
 
 
 
 813 
 
Taxes, other than income
 
 
   
 
 
 70 
 
 
 27 
 
 
 175 
 
 
 
 272 
 
 
   
 
 
 67 
 
 
 27 
 
 
 174 
 
 
 
 268 
 
Energy-related businesses
 
 
 
 
 
 
 
 
 5 
 
 
 398 
 
 
 
 403 
 
 
 
 
 
 
 
 
   
 
 
 363 
 
 
 
 363 
 
Intercompany eliminations
 
 
 
 
 
 (3)
 
 
 3 
 
 
   
 
 
 
 
 
 
 
 
 
 (3)
 
 
 2 
 
 
 1 
 
 
 
 
 
 
 
Total Operating Expenses
 
 
 907 
 
 
 565 
 
 
 2,108 
 
 
 3,124 
 
 
 
 6,704 
 
 
 927 
 
 
 548 
 
 
 2,405 
 
 
 2,897 
 
 
 
 6,777 
Total
 
$
 1,319 
 
$
 786 
 
$
 1,450 
 
$
 (1,247)
 
 
$
 2,308 
 
$
 1,168 
 
$
 694 
 
$
 1,654 
 
$
 (1,229)
 
 
$
 2,287 

(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.
(c)
Primarily represents WPD's utility revenue.
(d)
Primarily related to PLR supply sold by PPL EnergyPlus to PPL Electric.
(e)
Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  For the three and nine months ended September 30, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $1 million and $34 million related to the monetization of certain full-requirement sales contracts.
(f)
Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.
(g)
Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  The three and nine months ended September 30, 2012 include a pre-tax loss of $17 million and $29 million related to coal contract modification payments.

Changes in Non-GAAP Financial Measures

The following table shows the non-GAAP financial measures by PPL's reportable segment and by component, as applicable, for the periods ended September 30 as well as the change between periods.  The factors that gave rise to the changes are described below the table.

 
 
 
 
Three Months
 
Nine Months
 
 
 
 
2013 
 
2012 
 
Change
 
2013 
 
2012 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kentucky Regulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Kentucky Gross Margins
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LKE
 
$
 457 
 
$
 415 
 
$ 
 42 
 
$
 1,319 
 
$
 1,168 
 
$ 
 151 
 
 
LG&E
 
 
 210 
 
 
 198 
 
 
 12 
 
 
 595 
 
 
 552 
 
 
 43 
 
 
KU
 
 
 247 
 
 
 216 
 
 
 31 
 
 
 724 
 
 
 616 
 
 
 108 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pennsylvania Regulated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PA Gross Delivery Margins
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distribution
 
$
 201 
 
$
 185 
 
$
 16 
 
$
 607 
 
$
 544 
 
$
 63 
 
Transmission
 
 
 66 
 
 
 51 
 
 
 15 
 
 
 179 
 
 
 150 
 
 
 29 
Total
 
$
 267 
 
$
 236 
 
$
 31 
 
$
 786 
 
$
 694 
 
$
 92 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supply
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unregulated Gross Energy Margins
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-trading
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Eastern U.S.
 
$
 504 
 
$
 521 
 
$
 (17)
 
$
 1,283 
 
$
 1,417 
 
$
 (134)
 
Western U.S.
 
 
 52 
 
 
 67 
 
 
 (15)
 
 
 166 
 
 
 230 
 
 
 (64)
Net energy trading
 
 
 12 
 
 
 (11)
 
 
 23 
 
 
 1 
 
 
 7 
 
 
 (6)
Total
 
$
 568 
 
$
 577 
 
$
 (9)
 
$
 1,450 
 
$
 1,654 
 
$
 (204)

Kentucky Gross Margins

Kentucky Gross Margins increased $42 million for the three months ended September 30, 2013 compared with 2012, primarily due to higher base rates of $23 million ($10 million at LG&E and $13 million at KU), environmental cost recoveries added to base rates of $13 million (at KU), returns from additional environmental capital investments of $8 million ($3 million at LG&E and $5 million at KU) and higher fuel recoveries of $6 million ($3 million at LG&E and $3 million at KU), partially offset by lower volumes of $13 million ($7 million at LG&E and $6 million at KU).  The change in volumes was primarily attributable to weather, as cooling degree days decreased 16% compared to the same period in 2012.
 
116
 
Kentucky Gross Margins increased $151 million for the nine months ended September 30, 2013 compared with 2012, primarily due to higher base rates of $72 million ($31 million at LG&E and $41 million at KU), environmental cost recoveries added to base rates of $45 million ($3 million at LG&E and $42 million at KU), returns from additional environmental capital investments of $18 million ($9 million at LG&E and $9 million at KU) and higher fuel recoveries of $11 million ($3 million at LG&E and $8 million at KU).
 
 
The increase in base rates was the result of new KPSC rates effective January 1, 2013 at LG&E and KU.  The environmental cost recoveries added to base rates were due to the transfer of the 2005 and 2006 ECR plans into base rates as a result of the 2012 Kentucky rate cases for LG&E and KU.  This transfer results in depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Kentucky Gross Margins in 2013, while the recovery of such costs remain in Kentucky Gross Margins through base rates.

Pennsylvania Gross Delivery Margins

Distribution

Distribution margins increased for the three months ended September 30, 2013 compared with 2012, primarily due to an $18 million favorable effect of price as a result of higher base rates, effective January 1, 2013, partially offset by unfavorable weather of $4 million.

Distribution margins increased for the nine months ended September 30, 2013 compared with 2012 due to a $50 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, a favorable weather effect of $9 million and higher volumes of $4 million.

Transmission

Transmission margins increased for the three and nine months ended September 30, 2013 compared with 2012, primarily due to increased capital investments and the recovery of additional costs through the FERC formula-based rates.

Unregulated Gross Energy Margins

The increase (decrease) in unregulated gross energy margins for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
Three Months
 
Nine Months
Eastern U.S.
 
 
 
 
 
 
 
Baseload energy prices
 
$
 (64)
 
$
 (310)
 
Coal prices
 
 
 (5)
 
 
 (14)
 
Nuclear fuel prices
 
 
 (4)
 
 
 (14)
 
Retail electric
 
 
 (10)
 
 
 (10)
 
Nuclear generation volume
 
 
 (12)
 
 
 (3)
 
Full-requirement sales contracts
 
 
 (6)
 
 
 4 
 
Gas optimization and storage
 
 
 5 
 
 
 16 
 
Ironwood acquisition which eliminated tolling expense
 
 
 
 
 
 17 
 
Intermediate and peaking Spark Spreads and availability
 
 
 11 
 
 
 18 
 
Net economic availability of coal and hydroelectric plants
 
 
 (10)
 
 
 29 
 
Capacity prices
 
 
 77 
 
 
 124 
 
Other
 
 
 1 
 
 
 9 
 
Total
 
$
 (17)
 
$
 (134)
 
 
 
 
 
 
 
 
Western U.S.
 
 
 
 
 
 
 
Wholesale energy prices
 
$
 (10)
 
$
 (67)
 
Net economic availability of coal and hydroelectric plants
 
 
 (8)
 
 
 (1)
 
Other
 
 
 3 
 
 
 4 
 
Total
 
$
 (15)
 
$
 (64)
 
 
 
 
 
 
 
 
Net Energy Trading Margins
 
 
 
 
 
 
 
Gas positions
 
$
 (3)
 
$
 (17)
 
Power positions
 
 
 15 
 
 
 5 
 
FTRs
 
 
 9 
 
 
 7 
 
Other
 
 
 2 
 
 
 (1)
 
Total
 
$
 23 
 
$
 (6)

 
117
 
Utility Revenues
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in utility revenues for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
Domestic:
 
 
 
 
 
 
 
PPL Electric (a)
 
$
 20 
 
$
 85 
 
LKE (b)
 
 
 12 
 
 
 131 
 
Total Domestic
 
 
 32 
 
 
 216 
 
 
 
 
 
 
 
 
 
 
U.K.:
 
 
 
 
 
 
 
Price (c)
 
 
 74 
 
 
 187 
 
Volume (d)
 
 
 (10)
 
 
 18 
 
DPCR4 accrual adjustments (e)
 
 
 (21)
 
 
 (45)
 
Recovery of allowed revenues (f)
 
 
 (22)
 
 
 (22)
 
Foreign currency exchange rates
 
 
 (9)
 
 
 (25)
 
Other
 
 
 2 
 
 
 3 
 
Total U.K.
 
 
 14 
 
 
 116 
Total
 
$
 46 
 
$
 332 

(a)
See "Pennsylvania Gross Delivery Margins" for further information.
(b)
See "Kentucky Gross Margins" for further information.
(c)
The three and nine-month periods were impacted by a price increase effective April 1, 2013.  The nine-month period was also impacted by a price increase effective April 1, 2012.
(d)
The increase for the nine-month period was primarily due to the favorable effect of weather.
(e)
The decrease for the three and nine-month periods was due to a reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4.  See Note 6 to the Financial Statements for additional information.
(f)
The decrease for the three and nine-month period was due to an accrual for over-recovered revenues as a result of price and weather related volume effects that is not expected to reverse within the regulatory year ending March 31, 2014.  Therefore, a liability was recorded and utility revenue was reduced for the amount of the over-recovery in September 2013.  These amounts are expected to be refunded within the regulatory year beginning April 1, 2014.

Other Operation and Maintenance
 
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
Domestic:
 
 
 
 
 
 
Brunner Island outage timing
$
 (4)
 
$
 (23)
 
Uncollectible accounts (a)
 
   
 
 
 (23)
 
LKE coal plant outages (b)
 
 (1)
 
 
 (18)
 
Montour outage in 2013
 
 15 
 
 
 13 
 
Act 129 costs (c)
 
 (7)
 
 
 (13)
 
PUC-reportable storm costs, net of insurance recovery
 
 (8)
 
 
 (9)
 
PPL Susquehanna projects
 
 
 
 
 (9)
 
PPL Susquehanna outages
 
 1 
 
 
 (6)
 
Ironwood outage in 2013
 
 3 
 
 
 6 
 
LKE adjustments to regulatory assets and liabilities
 
   
 
 
 4 
 
Other generation plants
 
 4 
 
 
 4 
 
Other
 
 8 
 
 
 9 
U.K.:
 
 
 
 
 
 
Third-party engineering (d)
 
 3 
 
 
 5 
 
Network maintenance (e)
 
 10 
 
 
 23 
 
Insurance claim provision release
 
   
 
 
 6 
 
Severance compensation (f)
 
 
 
 
 (8)
 
Employee related expenses
 
 (1)
 
 
 (6)
 
Foreign currency exchange rates
 
 (2)
 
 
 (4)
 
Other
 
 (2)
 
 
 (3)
Total
$
 19 
 
$
 (52)

(a)
The decrease for the nine-month period is primarily due to SMGT filing for protection under Chapter 11 of the U.S. Bankruptcy Code in 2011.  $11 million of damages billed to SMGT were fully reserved in 2012.
(b)
The decrease for the three and nine month periods is due to the timing and scope of scheduled outages.
(c)
The decrease for the three and nine month periods is due to a reduction in Act 129 energy efficiency and conservation plan costs for Phase 1 programs.  Phase 1 ended May 31, 2013.
(d)
These costs are offset by revenues reflected in "Utility" on the Statement of Income.
(e)
The increase for the three and nine month periods is primarily due to higher vegetation management costs.
(f)
The decrease for the nine month period is primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.

 
118
 
Depreciation
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
Additions to PP&E
 
$
 20 
 
$
 64 
LKE lower depreciation rates effective January 1, 2013
 
 
 (5)
 
 
 (16)
Ironwood Acquisition
 
 
   
 
 
 6 
Other
 
 
 (4)
 
 
 (8)
Total
 
$
 11 
 
$
 46 

Other Income (Expense) - net

The $72 million decrease in other income (expense) - net for the three months ended September 30, 2013 compared with 2012 was primarily due to a decrease of $70 million from realized and unrealized gains on foreign currency contracts to economically hedge GBP denominated earnings from WPD.

The $50 million increase in other income (expense) - net for the nine months ended September 30, 2013 compared with 2012 was primarily due to an increase of $46 million from realized and unrealized gains on foreign currency contracts to economically hedge GBP denominated earnings from WPD.

See Note 12 to the Financial Statements for additional information on other income (expense) - net.

Interest Expense
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in interest expense for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
Long-term debt interest expense (a)
 
$
 5 
 
$
 32 
Loss on extinguishment of debt (b)
 
 
  
 
 
 10 
Net amortization of debt discounts, premiums and issuance costs
 
 
 (4)
 
 
 (4)
Other
 
 
 (3)
 
 
 3 
Total
 
$
 (2)
 
$
 41 

(a)
The increase for the three and nine-month periods was due to debt issuances by PPL Capital Funding in March 2013 and October 2012, and by PPL Electric in July 2013 and August 2012, partially offset by the impact of lower interest rates resulting from the remarketing of the 2010 Equity Units.

 
The nine-month period also increased due to debt issuances by PPL Capital Funding in June 2012 and by WPD (East Midlands) in April 2012, as well as higher accretion expense on WPD index linked notes and three additional months of interest on debt assumed as part of the Ironwood Acquisition.  Partially offsetting these increases was PPL Energy Supply's debt maturity in July 2013.
(b)
In May 2013, PPL Capital Funding remarketed and exchanged junior subordinate notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.

See Note 7 to the Financial Statements in this Form 10-Q for information on 2013 long-term debt activity and PPL's 2012 Form 10-K for information on 2012 activity.

Income Taxes
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
Change in pre-tax income at current period tax rates
 
$
 36 
 
$
 (31)
State valuation allowance adjustments (a)
 
 
 36 
 
 
 36 
Federal and state tax reserve adjustments (b)
 
 
 1 
 
 
 (34)
Federal and state tax return adjustments
 
 
 (4)
 
 
 (4)
U.S. income tax on foreign earnings net of foreign tax credit (c)
 
 
 9 
 
 
 3 
U.K. Finance Act adjustments (d)
 
 
 (19)
 
 
 (19)
Foreign tax reserve adjustments
 
 
 (2)
 
 
 3 
Net operating loss carryforward adjustments (e)
 
 
   
 
 
 9 
Intercompany Interest on WPD Financing Entities
 
 
 2 
 
 
 2 
State deferred tax rate change (f)
 
 
 6 
 
 
 17 
Other
 
 
 2 
 
 
 (2)
Total
 
$
 67 
 
$
 (20)
 
119
 

(a)
During the three and nine months ended September 30, 2013, PPL recorded a $38 million increase in state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.
(b)
In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result of this decision, PPL recorded a tax benefit of $44 million during the nine months ended September 30, 2013.  See Note 5 to the Financial Statements for additional information.
(c)
During the three and nine months ended September 30, 2013, PPL recorded a $10 million and $24 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013.

 
During the nine months ended September 30, 2013, PPL recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.
(d)
The U.K.'s Finance Act 2013, enacted in July 2013, reduced the U.K. statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20% effective April 1, 2015.  As a result, PPL reduced its net deferred tax liabilities and recognized a $93 million deferred tax benefit in the third quarter of 2013 related to both rate decreases.

 
The U.K.'s Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a $74 million deferred tax benefit in the third quarter of 2012 related to both rate decreases.
(e)
During the nine months ended September 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(f)
During the three and nine months ended September 30, 2012, PPL recorded adjustments related to state deferred tax liabilities.

See Note 5 to the Financial Statements for additional information on income taxes.


PPL Energy Supply:  Earnings and Statement of Income Analysis

Earnings
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to PPL Energy Supply Member
 
$
 124 
 
$
 54 
 
$
 172 
 
$
 382 
Special items, after-tax
 
 
 (6)
 
 
 (105)
 
 
 (49)
 
 
 3 

Excluding special items, the decrease in earnings for the three-month period was primarily due to lower baseload energy prices, lower baseload generation and higher operation and maintenance expense, partially offset by higher capacity prices.  The decrease for the nine-month period was primarily due to lower baseload energy prices, higher fuel costs and higher depreciation, partially offset by higher capacity prices, higher intermediate and peaking margins, higher baseload generation and lower income taxes.

The table below quantifies the changes in the components of Net Income Attributable to PPL Energy Supply Member between these periods, which reflect reclassifications for items included in Unregulated Gross Energy Margins and certain items that management considers special.  See PPL's "Results of Operations - Segment Earnings - Supply Segment" for the details of special items.

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Unregulated Gross Energy Margins
 
$
 (9)
 
$
 (204)
Other operation and maintenance
 
 
 (19)
 
 
 11 
Depreciation
 
 
 (7)
 
 
 (31)
Taxes, other than income
 
 
 (2)
 
 
 2 
Other Income (Expense) - net
 
 
 (3)
 
 
 5 
Interest Expense
 
 
 4 
 
 
 (8)
Other
 
 
 (1)
 
 
 1 
Income Taxes
 
 
 8 
 
 
 66 
Special items, after-tax
 
 
 99 
 
 
 (52)
Total
 
$
 70 
 
$
 (210)

Statement of Income Analysis --

Unregulated Gross Energy Margins

"Unregulated Gross Energy Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods.
 
120
 

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

 
 
 
 
 
2013 Three Months
 
2012 Three Months
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
 
 
 
 
Gross Energy
 
 
 
 
Operating
 
Gross Energy
 
 
 
 
 
Operating
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
Margins
 
Other (a)
 
Income (b)
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale energy marketing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Realized
$
 981 
 
$ 
 (1)
 
 
$ 
 980 
 
$
 1,074 
 
$ 
 2 
(c) 
 
$ 
 1,076 
 
 
 
 
Unrealized economic activity
 
 
 
 
 (49)
(d) 
 
 
 (49)
 
 
   
 
 
 (716)
(d) 
 
 
 (716)
 
Wholesale energy marketing
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to affiliate
 
 11 
 
 
   
 
 
 
 11 
 
 
 23 
 
 
   
 
 
 
 23 
 
Unregulated retail electric and gas
 
 267 
 
 
 (1)
(d) 
 
 
 266 
 
 
 232 
 
 
 (13)
(d) 
 
 
 219 
 
Net energy trading margins
 
 12 
 
 
   
 
 
 
 12 
 
 
 (11)
 
 
   
 
 
 
 (11)
 
Energy-related businesses
 
   
 
 
 143 
 
 
 
 143 
 
 
   
 
 
 128 
 
 
 
 128 
 
 
 
Total Operating Revenues
 
 1,271 
 
 
 92 
 
 
 
 1,363 
 
 
 1,318 
 
 
 (599)
 
 
 
 719 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 256 
 
 
 2 
 
 
 
 258 
 
 
 310 
 
 
 11 
(e) 
 
 
 321 
 
Energy purchases
 
   
 
 
   
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Realized
 
 427 
 
 
 (2)
 
 
 
 425 
 
 
 418 
 
 
 3 
(c) 
 
 
 421 
 
 
 
 
Unrealized economic activity
 
   
 
 
 (37)
(d) 
 
 
 (37)
 
 
   
 
 
 (569)
(d) 
 
 
 (569)
 
Energy purchases from affiliate
 
 1 
 
 
   
 
 
 
 1 
 
 
 1 
 
 
 
 
 
 
 1 
 
Other operation and maintenance
 
 5 
 
 
 238 
 
 
 
 243 
 
 
 1 
 
 
 219 
 
 
 
 220 
 
Depreciation
 
 
 
 
 80 
 
 
 
 80 
 
 
   
 
 
 73 
 
 
 
 73 
 
Taxes, other than income
 
 9 
 
 
 9 
 
 
 
 18 
 
 
 11 
 
 
 7 
 
 
 
 18 
 
Energy-related businesses
 
 5 
 
 
 133 
 
 
 
 138 
 
 
   
 
 
 125 
 
 
 
 125 
 
 
 
Total Operating Expenses
 
 703 
 
 
 423 
 
 
 
 1,126 
 
 
 741 
 
 
 (131)
 
 
 
 610 
Total
$
 568 
 
$
 (331)
 
 
$
 237 
 
$
 577 
 
$
 (468)
 
 
$
 109 

 
 
 
 
 
 
2013 Nine Months
 
2012 Nine Months
 
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
Unregulated
 
 
 
 
 
 
 
 
 
 
 
 
Gross Energy
 
 
 
 
Operating
 
Gross Energy
 
 
 
 
 
Operating
 
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
Margins
 
Other (a)
 
Income (b)
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholesale energy marketing
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Realized
 
$
 2,770 
 
$ 
 (3)
 
 
$ 
 2,767 
 
$
 3,353 
 
$ 
 14 
(c) 
 
$ 
 3,367 
 
 
 
 
Unrealized economic activity
 
 
 
 
 
 (281)
(d) 
 
 
 (281)
 
 
   
 
 
 (322)
(d) 
 
 
 (322)
 
Wholesale energy marketing
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
to affiliate
 
 
 37 
 
 
   
 
 
 
 37 
 
 
 61 
 
 
   
 
 
 
 61 
 
Unregulated retail electric and gas
 
 
 750 
 
 
 11 
(d) 
 
 
 761 
 
 
 638 
 
 
 (15)
(d) 
 
 
 623 
 
Net energy trading margins
 
 
 1 
 
 
   
 
 
 
 1 
 
 
 7 
 
 
   
 
 
 
 7 
 
Energy-related businesses
 
 
 
 
 
 378 
 
 
 
 378 
 
 
   
 
 
 336 
 
 
 
 336 
 
 
 
Total Operating Revenues
 
 
 3,558 
 
 
 105 
 
 
 
 3,663 
 
 
 4,059 
 
 
 13 
 
 
 
 4,072 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 778 
 
 
 2 
 
 
 
 780 
 
 
 695 
 
 
 33 
(e) 
 
 
 728 
 
Energy purchases
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
Realized
 
 
 1,282 
 
 
 (5)
 
 
 
 1,277 
 
 
 1,669 
 
 
 46 
(c) 
 
 
 1,715 
 
 
 
 
Unrealized economic activity
 
 
 
 
 
 (192)
(d) 
 
 
 (192)
 
 
   
 
 
 (420)
(d) 
 
 
 (420)
 
Energy purchases from affiliate
 
 
 3 
 
 
   
 
 
 
 3 
 
 
 2 
 
 
   
 
 
 
 2 
 
Other operation and maintenance
 
 
 13 
 
 
 735 
 
 
 
 748 
 
 
 12 
 
 
 757 
 
 
 
 769 
 
Depreciation
 
 
 
 
 
 237 
 
 
 
 237 
 
 
   
 
 
 206 
 
 
 
 206 
 
Taxes, other than income
 
 
 27 
 
 
 24 
 
 
 
 51 
 
 
 27 
 
 
 26 
 
 
 
 53 
 
Energy-related businesses
 
 
 5 
 
 
 361 
 
 
 
 366 
 
 
   
 
 
 326 
 
 
 
 326 
 
 
 
Total Operating Expenses
 
 
 2,108 
 
 
 1,162 
 
 
 
 3,270 
 
 
 2,405 
 
 
 974 
 
 
 
 3,379 
Total
 
$
 1,450 
 
$
 (1,057)
 
 
$
 393 
 
$
 1,654 
 
$
 (961)
 
 
$
 693 

(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.
(c)
Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.   For the three and nine months ended September 30, 2012 "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $1 million and $34 million related to the monetization of certain full-requirement sales contracts.
(d)
Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.
(e)
Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  The three and nine months ended September 30, 2012 include pre-tax losses of $17 million and $29 million related to coal contract modification payments.

 
121
 
Other Operation and Maintenance
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Brunner Island outage timing
$
 (4)
 
$
 (23)
Uncollectible accounts (a)
 
 
 
 
 (15)
PPL Susquehanna projects
 
   
 
 
 (9)
PPL Susquehanna outages
 
 1 
 
 
 (6)
Ironwood outage in 2013
 
 3 
 
 
 6 
Montour outage in 2013
 
 15 
 
 
 13 
Other generation plants
 
 4 
 
 
 4 
Other
 
 4 
 
 
 9 
Total
$
 23 
 
$
 (21)

(a)
The decrease for the nine-month period is primarily due to SMGT filing for protection under Chapter 11 of the U.S. Bankruptcy Code in 2011.  $11 million of damages billed to SMGT were fully reserved in 2012.

Depreciation

Depreciation increased by $7 million and $31 million for the three and nine months ended September 30, 2013 compared with 2012, primarily due to $8 million and $28 million related to PP&E additions, and $6 million attributable to the Ironwood Acquisition for the nine-month period.

Interest Expense

For the nine months ended September 30, 2013 compared with 2012, interest expense increased by $8 million, primarily due to $6 million of lower capitalized interest related to the Rainbow hydroelectric redevelopment project.

Income Taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Change in pre-tax income at current period tax rates
 
$
 50 
 
$
 (122)
State valuation allowance adjustments
 
 
 2 
 
 
 2 
Federal and state tax reserve adjustments (a)
 
 
   
 
 
 6 
Federal and state tax return adjustments
 
 
 (1)
 
 
 (1)
State deferred tax rate change (b)
 
 
 6 
 
 
 17 
Other
 
 
 1 
 
 
 2 
Total
 
$
 58 
 
$
 (96)

(a)
During the nine months ended September 30, 2013, PPL Energy Supply reversed $3 million in tax benefits related to a 2008 change in method of accounting for certain expenditures for tax purposes and recorded $4 million in federal tax reserves related to differences in over (under) payment interest rates applied to audit claims as a result of the U.S. Supreme Court decision related to the Windfall Profits tax.
(b)
During the three and nine months ended September 30, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities.

See Note 5 to the Financial Statements for additional information on income taxes.


PPL Electric:  Earnings and Statement of Income Analysis

Earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income Available to PPL
 
$
 51 
 
$
 33 
 
$
 160 
 
$
 95 

The increase in earnings for both periods was primarily due to higher electricity base rates that became effective January 1, 2013 and higher transmission margins from additional capital investments, partially offset by higher income taxes.  The increase for the nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.
 
122
 

The table below quantifies the changes in the components of Net Income Available to PPL between these periods, which reflect reclassifications for items included in Pennsylvania Gross Delivery Margins.

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Pennsylvania Gross Delivery Margins
 
$
 31 
 
$
 92 
Other operation and maintenance
 
 
 8 
 
 
 28 
Depreciation
 
 
 (4)
 
 
 (13)
Interest Expense
 
 
 (5)
 
 
 (7)
Other
 
 
 (2)
 
 
 (3)
Income Taxes
 
 
 (10)
 
 
 (36)
Distributions on preference stock
 
 
   
 
 
 4 
Total
 
$
 18 
 
$
 65 

Statement of Income Analysis --

Pennsylvania Gross Delivery Margins

"Pennsylvania Gross Delivery Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods.

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

 
 
 
 
 
2013 Three Months
 
2012 Three Months
 
 
 
 
 
PA Gross
 
 
 
 
 
 
PA Gross
 
 
 
 
 
 
 
 
 
 
Delivery
 
 
 
Operating
 
Delivery
 
 
 
 
Operating
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
Margins
 
Other (a)
 
Income (b)
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail electric
$
 463 
 
 
   
 
$
 463 
 
$
 443 
 
 
   
 
$
 443 
 
Electric revenue from affiliate
 
 1 
 
 
   
 
 
 1 
 
 
 1 
 
 
   
 
 
 1 
 
 
 
Total Operating Revenues
 
 464 
 
 
   
 
 
 464 
 
 
 444 
 
 
   
 
 
 444 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
 
 144 
 
 
   
 
 
 144 
 
 
 137 
 
 
   
 
 
 137 
 
Energy purchases from affiliate
 
 11 
 
 
 
 
 
 11 
 
 
 23 
 
 
 
 
 
 23 
 
Other operation and maintenance
 
 19 
 
$
 115 
 
 
 134 
 
 
 25 
 
$
 123 
 
 
 148 
 
Depreciation
 
   
 
 
 45 
 
 
 45 
 
 
 
 
 
 41 
 
 
 41 
 
Taxes, other than income
 
 23 
 
 
 2 
 
 
 25 
 
 
 23 
 
 
 1 
 
 
 24 
 
 
 
Total Operating Expenses
 
 197 
 
 
 162 
 
 
 359 
 
 
 208 
 
 
 165 
 
 
 373 
Total
$
 267 
 
$
 (162)
 
$
 105 
 
$
 236 
 
$
 (165)
 
$
 71 

 
 
 
 
 
 
2013 Nine Months
 
2012 Nine Months
 
 
 
 
 
 
PA Gross
 
 
 
 
 
 
PA Gross
 
 
 
 
 
 
 
 
 
 
 
Delivery
 
 
 
Operating
 
Delivery
 
 
 
 
Operating
 
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
Margins
 
Other (a)
 
Income (b)
Operating Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Retail electric
 
$
 1,388 
 
 
   
 
$
 1,388 
 
$
 1,303 
 
 
   
 
$
 1,303 
 
Electric revenue from affiliate
 
 
 3 
 
 
   
 
 
 3 
 
 
 3 
 
 
   
 
 
 3 
 
 
 
Total Operating Revenues
 
 
 1,391 
 
 
   
 
 
 1,391 
 
 
 1,306 
 
 
   
 
 
 1,306 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Energy purchases
 
 
 436 
 
 
   
 
 
 436 
 
 
 410 
 
 
   
 
 
 410 
 
Energy purchases from affiliate
 
 
 37 
 
 
 
 
 
 37 
 
 
 61 
 
 
 
 
 
 61 
 
Other operation and maintenance
 
 
 62 
 
$
 329 
 
 
 391 
 
 
 74 
 
$
 357 
 
 
 431 
 
Depreciation
 
 
 
 
 
 132 
 
 
 132 
 
 
 
 
 
 119 
 
 
 119 
 
Taxes, other than income
 
 
 70 
 
 
 7 
 
 
 77 
 
 
 67 
 
 
 5 
 
 
 72 
 
 
 
Total Operating Expenses
 
 
 605 
 
 
 468 
 
 
 1,073 
 
 
 612 
 
 
 481 
 
 
 1,093 
Total
 
$
 786 
 
$
 (468)
 
$
 318 
 
$
 694 
 
$
 (481)
 
$
 213 

(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.

 
123
 
Other Operation and Maintenance
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
 
 
 
 
 
 
Vegetation management
$
 6 
 
$
 3 
PUC-reportable storm costs, net of insurance recovery
 
 (8)
 
 
 (9)
Act 129 costs (a)
 
 (7)
 
 
 (13)
Uncollectible accounts
 
   
 
 
 (3)
Corporate service (b)
 
 (2)
 
 
 (13)
Rent
 
 (3)
 
 
 (4)
Other
 
   
 
 
 (1)
Total
$
 (14)
 
$
 (40)

(a)
The decrease was due to a reduction in Act 129 energy efficiency and conservation plan costs for Phase 1 programs.  Phase 1 ended May 31, 2013.
(b)
The decrease was partially due to storm insurance policy premiums for coverage that was in place in 2012 but was not renewed in 2013.

Depreciation

Depreciation increased by $4 million and $13 million for the three and nine months ended September 30, 2013 compared with 2012, primarily due to PP&E additions as part of ongoing investments to enhance system reliability.

Taxes, Other Than Income

Taxes, other than income increased by $5 million for the nine months ended September 30, 2013 compared with 2012, primarily due to higher Pennsylvania gross receipts tax expense due to higher retail electricity revenue.  This tax is included in "Pennsylvania Gross Delivery Margins."

Financing Costs
 
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in financing costs for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Long-term debt interest expense (a)
 
$
 5 
 
$
 8 
Distributions on Preference Stock (b)
 
 
   
 
 
 (4)
Other
 
 
   
 
 
 (1)
Total
 
$
 5 
 
$
 3 

(a)
The increase was due to debt issuances in August 2012 and July 2013.
(b)
The decrease was due to the June 2012 redemption of all 2.5 million shares of preference stock.

Income Taxes
 
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Change in pre-tax income at current period tax rates
 
$
 12 
 
$
 39 
Other
 
 
 (2)
 
 
 (3)
Total
 
$
 10 
 
$
 36 

See Note 5 to the Financial Statements for additional information on income taxes.

LKE:  Earnings and Statement of Income Analysis

Earnings
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
 100 
 
$
 83 
 
$
 260 
 
$
 180 
Special items, after-tax
 
 
   
 
 
   
 
 
 2 
 
 
 (1)
 
124
 
Excluding special items, the increases in earnings for both periods were primarily due to higher electricity and gas base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery, partially offset by higher depreciation (due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates and excluded from Margins) and higher income taxes.  The increase for the three-month period was partially offset by lower sales volumes.

The table below quantifies the components of Net Income between these periods, which reflect reclassifications for items included in Margins and certain items that management considers special.  See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated Segment" for details of special items.

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Margins
 
$
 42 
 
$
 151 
Other operation and maintenance
 
 
 (4)
 
 
 4 
Depreciation
 
 
 (9)
 
 
 (26)
Taxes, other than income
 
 
 (1)
 
 
 (2)
Other Income (Expense) - net
 
 
   
 
 
 7 
Interest Expense
 
 
   
 
 
 1 
Income Taxes
 
 
 (11)
 
 
 (58)
Special items, after-tax
 
 
   
 
 
 3 
Total
 
$
 17 
 
$
 80 

Statement of Income Analysis --

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and explanations of the underlying drivers of the changes between periods.  Within PPL's discussion, LKE's Margins are referred to as "Kentucky Gross Margins."

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

 
 
 
 
 
 
2013 Three Months
 
 
2012 Three Months
 
 
 
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
 
Margins
 
Other (a)
 
Income (b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
 
$
 744 
 
 
 
 
$ 
 744 
 
 
$
 732 
 
 
 
 
$ 
 732 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 237 
 
 
 
 
 
 237 
 
 
 
 249 
 
 
 
 
 
 249 
 
Energy purchases
 
 
 23 
 
 
 
 
 
 23 
 
 
 
 27 
 
 
 
 
 
 27 
 
Other operation and maintenance
 
 
 26 
 
$ 
 162 
 
 
 188 
 
 
 
 28 
 
$ 
 158 
 
 
 186 
 
Depreciation
 
 
 1 
 
 
 83 
 
 
 84 
 
 
 
 13 
 
 
 74 
 
 
 87 
 
Taxes, other than income
 
 
   
 
 
 12 
 
 
 12 
 
 
 
   
 
 
 11 
 
 
 11 
 
 
 
Total Operating Expenses
 
 
 287 
 
 
 257 
 
 
 544 
 
 
 
 317 
 
 
 243 
 
 
 560 
Total
 
$
 457 
 
$
 (257)
 
$
 200 
 
 
$
 415 
 
$
 (243)
 
$
 172 

 
 
 
 
 
 
2013 Nine Months
 
 
2012 Nine Months
 
 
 
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
 
Margins
 
Other (a)
 
Income (b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
 
$
 2,226 
 
 
 
 
$ 
 2,226 
 
 
$
 2,095 
 
 
 
 
$ 
 2,095 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 684 
 
 
 
 
 
 684 
 
 
 
 677 
 
 
 
 
 
 677 
 
Energy purchases
 
 
 146 
 
 
 
 
 
 146 
 
 
 
 135 
 
 
 
 
 
 135 
 
Other operation and maintenance
 
 
 74 
 
$ 
 508 
 
 
 582 
 
 
 
 76 
 
$ 
 513 
 
 
 589 
 
Depreciation
 
 
 3 
 
 
 246 
 
 
 249 
 
 
 
 39 
 
 
 220 
 
 
 259 
 
Taxes, other than income
 
 
   
 
 
 36 
 
 
 36 
 
 
 
   
 
 
 34 
 
 
 34 
 
 
 
Total Operating Expenses
 
 
 907 
 
 
 790 
 
 
 1,697 
 
 
 
 927 
 
 
 767 
 
 
 1,694 
Total
 
$
 1,319 
 
$
 (790)
 
$
 529 
 
 
$
 1,168 
 
$
 (767)
 
$
 401 

(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.

 
125
 
Other Operation and Maintenance
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
Three Months
  
Nine Months
 
 
 
 
 
 
 
Coal plant outages (a)
$
 (1)
 
$
 (18)
Administrative and general (b)
 
 3 
 
 
 8 
Adjustments to regulatory assets and liabilities
 
 
 
 
 4 
Coal plant operations
 
 
 
 
 3 
Other
 
 
 
 
 (4)
Total
$
 2 
 
$
 (7)

(a)
Decrease is due to the timing and scope of scheduled outages.
(b)
Increase for the nine-month period is primarily due to an increase in outside services of $8 million.

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
Lower depreciation rates effective January 1, 2013
$
 (5)
 
$
 (16)
Additions to PP&E
 
 2 
 
 
 6 
Total
$
 (3)
 
$
 (10)

Other Income (Expense) - net

Other income (expense) - net increased by $8 million for the nine months ended September 30, 2013 compared with 2012 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

Income Taxes

Income taxes increased by $11 million and $64 million for the three and nine months ended September 30, 2013 compared with 2012 primarily due to the change in pre-tax income at current period tax rates.

See Note 5 to the Financial Statements for additional information on income taxes.

Income (Loss) from Discontinued Operations (net of income taxes)

Income (loss) from discontinued operations increased by $7 million for the nine months ended September 30, 2013 compared with 2012.  The increase was primarily related to an adjustment to the estimated liability for indemnifications related to the 2009 termination of the WKE lease recorded in 2012.


LG&E:  Earnings and Statement of Income Analysis

Earnings
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
 49 
 
$
 43 
 
$
 122 
 
$
 94 

The increases in earnings for both periods were primarily due to higher electricity and gas base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery.  The increase for the three-month period was partially offset by lower sales volumes.  The increase for the nine-month period was partially offset by higher income taxes.

The table below quantifies the changes in the components of Net Income between these periods, which reflect reclassifications for items included in Margins.

 
126
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Margins
 
$
 12 
 
$
 43 
Other operation and maintenance
 
 
 (6)
 
 
 (3)
Depreciation
 
 
   
 
 
 3 
Taxes, other than income
 
 
   
 
 
 (1)
Other Income (Expense) - net
 
 
 2 
 
 
   
Interest Expense
 
 
   
 
 
 1 
Income Taxes
 
 
 (2)
 
 
 (15)
Total
 
$
 6 
 
$
 28 

Statement of Income Analysis --

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and explanations of the underlying drivers of the changes between periods.  Within PPL's discussion, LG&E's Margins are included in "Kentucky Gross Margins."

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

 
 
 
 
 
 
2013 Three Months
 
 
2012 Three Months
 
 
 
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
 
Margins
 
Other (a)
 
Income (b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
 
$
 343 
 
 
 
 
$ 
 343 
 
 
$
 333 
 
 
 
 
$ 
 333 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 100 
 
 
 
 
 
 100 
 
 
 
 100 
 
 
 
 
 
 100 
 
Energy purchases
 
 
 20 
 
 
 
 
 
 20 
 
 
 
 21 
 
 
 
 
 
 21 
 
Other operation and maintenance
 
 
 13 
 
$ 
 80 
 
 
 93 
 
 
 
 13 
 
$ 
 74 
 
 
 87 
 
Depreciation
 
 
   
 
 
 37 
 
 
 37 
 
 
 
 1 
 
 
 37 
 
 
 38 
 
Taxes, other than income
 
 
   
 
 
 6 
 
 
 6 
 
 
 
   
 
 
 6 
 
 
 6 
 
 
 
Total Operating Expenses
 
 
 133 
 
 
 123 
 
 
 256 
 
 
 
 135 
 
 
 117 
 
 
 252 
Total
 
$
 210 
 
$
 (123)
 
$
 87 
 
 
$
 198 
 
$
 (117)
 
$
 81 

 
 
 
 
 
 
2013 Nine Months
 
 
2012 Nine Months
 
 
 
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
 
Margins
 
Other (a)
 
Income (b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
 
$
 1,049 
 
 
 
 
$ 
 1,049 
 
 
$
 990 
 
 
 
 
$ 
 990 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 284 
 
 
 
 
 
 284 
 
 
 
 281 
 
 
 
 
 
 281 
 
Energy purchases
 
 
 135 
 
 
 
 
 
 135 
 
 
 
 119 
 
 
 
 
 
 119 
 
Other operation and maintenance
 
 
 34 
 
$
 244 
 
 
 278 
 
 
 
 36 
 
$ 
 241 
 
 
 277 
 
Depreciation
 
 
 1 
 
 
 109 
 
 
 110 
 
 
 
 2 
 
 
 112 
 
 
 114 
 
Taxes, other than income
 
 
   
 
 
 18 
 
 
 18 
 
 
 
   
 
 
 17 
 
 
 17 
 
 
 
Total Operating Expenses
 
 
 454 
 
 
 371 
 
 
 825 
 
 
 
 438 
 
 
370 
 
 
 808 
Total
 
$
 595 
 
$
 (371)
 
$
 224 
 
 
$
 552 
 
$
 (370)
 
$
 182 

(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.

Other Operation and Maintenance
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Coal plant outages (a)
$
 1 
 
$
 (6)
Administrative and general (b)
 
 1 
 
 
 6 
Distribution maintenance
 
 2 
 
 
 2 
Other
 
 2 
 
 
 (1)
Total
$
 6 
 
$
 1 

(a)
Increase (decrease) is due to the timing and scope of scheduled outages.
 
127
 

(b)
Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Lower depreciation rates effective January 1, 2013
$
 (2)
 
$
 (6)
Additions to PP&E
 
 1 
 
 
 2 
Total
$
 (1)
 
$
 (4)

Income Taxes

Income taxes increased by $15 million for the nine months ended September 30, 2013 compared with 2012 primarily due to the change in pre-tax income at current period tax rates.

See Note 5 to the Financial Statements for additional information on income taxes.


KU:  Earnings and Statement of Income Analysis

Earnings
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
$
 63 
 
$
 50 
 
$
 171 
 
$
 118 

Excluding special items, the increases in earnings for both periods were primarily due to higher electricity base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery, partially offset by higher depreciation (due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates and excluded from Margins) and higher income taxes.  The increase for the three-month period was partially offset by lower sales volumes.

The table below quantifies the changes in the components of Net Income between these periods, which reflect reclassifications for items included in Margins and an item that management considers special.

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Margins
 
$
 31 
 
$
 108 
Other operation and maintenance
 
 
 (1)
 
 
 (1)
Depreciation
 
 
 (8)
 
 
 (27)
Taxes, other than income
 
 
 (1)
 
 
 (1)
Other Income (Expense) - net
 
 
 (3)
 
 
 3 
Interest Expense
 
 
 1 
 
 
 1 
Income Taxes
 
 
 (6)
 
 
 (31)
Special item - EEI adjustments, after-tax
 
 
   
 
 
 1 
Total
 
$
 13 
 
$
 53 

Statement of Income Analysis --

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and explanations of the underlying drivers of the changes between periods.  Within PPL's discussion, KU's Margins are included in "Kentucky Gross Margins."

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

 
128
 
 
 
 
 
 
 
2013 Three Months
 
 
2012 Three Months
 
 
 
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
 
Margins
 
Other (a)
 
Income (b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
 
$
 414 
 
 
 
 
$ 
 414 
 
 
$
 411 
 
 
 
 
$ 
 411 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 137 
 
 
 
 
 
 137 
 
 
 
 149 
 
 
 
 
 
 149 
 
Energy purchases
 
 
 16 
 
 
 
 
 
 16 
 
 
 
 18 
 
 
 
 
 
 18 
 
Other operation and maintenance
 
 
 13 
 
$ 
 78 
 
 
 91 
 
 
 
 16 
 
$ 
 77 
 
 
 93 
 
Depreciation
 
 
 1 
 
 
 45 
 
 
 46 
 
 
 
 12 
 
 
 37 
 
 
 49 
 
Taxes, other than income
 
 
   
 
 
 6 
 
 
 6 
 
 
 
   
 
 
 5 
 
 
 5 
 
 
 
Total Operating Expenses
 
 
 167 
 
 
 129 
 
 
 296 
 
 
 
 195 
 
 
 119 
 
 
 314 
Total
 
$
 247 
 
$
 (129)
 
$
 118 
 
 
$
 216 
 
$
 (119)
 
$
 97 

 
 
 
 
 
 
2013 Nine Months
 
 
2012 Nine Months
 
 
 
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
Margins
 
Other (a)
 
Income (b)
 
 
Margins
 
Other (a)
 
Income (b)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Revenues
 
$
 1,229 
 
 
 
 
$ 
 1,229 
 
 
$
 1,165 
 
 
 
 
$ 
 1,165 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fuel
 
 
 400 
 
 
 
 
 
 400 
 
 
 
 396 
 
 
 
 
 
 396 
 
Energy purchases
 
 
 63 
 
 
 
 
 
 63 
 
 
 
 76 
 
 
 
 
 
 76 
 
Other operation and maintenance
 
 
 40 
 
$ 
 246 
 
 
 286 
 
 
 
 41 
 
$ 
 245 
 
 
 286 
 
Depreciation
 
 
 2 
 
 
 136 
 
 
 138 
 
 
 
 36 
 
 
 109 
 
 
 145 
 
Taxes, other than income
 
 
   
 
 
 18 
 
 
 18 
 
 
 
   
 
 
 17 
 
 
 17 
 
 
 
Total Operating Expenses
 
 
 505 
 
 
 400 
 
 
 905 
 
 
 
 549 
 
 
 371 
 
 
 920 
Total
 
$
 724 
 
$
 (400)
 
$
 324 
 
 
$
 616 
 
$
 (371)
 
$
 245 

(a)
Represents amounts excluded from Margins.
(b)
As reported on the Statements of Income.

Other Operation and Maintenance
 
 
 
 
 
 
 
 
 
 
 
 
The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2013 compared with 2012 was due to:
 
 
 
 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Coal plant outages (a)
$
 (2)
 
$
 (12)
Administrative and general (b)
 
 2 
 
 
 6 
Coal plant operations
 
   
 
 
 4 
Adjustments to regulatory assets and liabilities
 
 
 
 
 4 
Other
 
 (2)
 
 
 (2)
Total
$
 (2)
 
$
   

(a)
Decrease is due to the timing and scope of scheduled outages.
(b)
Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

 
 
Three Months
 
Nine Months
 
 
 
 
 
 
 
Lower depreciation rates effective January 1, 2013
$
 (4)
 
$
 (10)
Additions to PP&E
 
 1 
 
 
 4 
Other
 
   
 
 
 (1)
Total
$
 (3)
 
$
 (7)

Other Income (Expense) - net

Other income (expense) - net increased by $4 million for the nine months ended September 30, 2013 compared with 2012 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.
 
129
 

Income Taxes

Income taxes increased by $6 million and $31 million for the three and nine months ended September 30, 2013 compared with 2012 primarily due to the change in pre-tax income at current period tax rates.

See Note 5 to the Financial Statements for additional information on income taxes.

Financial Condition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Condition and the remainder of this Item 2 are presented on a combined basis, providing information, as
applicable, for all Registrants.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liquidity and Capital Resources
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(All Registrants)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Registrants had the following at:
 
 
 
 
 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
Energy Supply
 
PPL Electric
 
LKE
 
LG&E
 
KU
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 1,291 
 
$
 551 
 
$
 225 
 
$
 21 
 
$
 12 
 
$
 9 
Short-term debt
 
 
 499 
 
 
   
 
 
   
 
 
 212 
 
 
 72 
 
 
 140 
Notes payable with affiliates
 
 
 
 
 
 
 
 
 
 
 
 52 
 
 
   
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
 901 
 
$
 413 
 
$
 140 
 
$
 43 
 
$
 22 
 
$
 21 
Short-term debt
 
 
 652 
 
 
 356 
 
 
   
 
 
 125 
 
 
 55 
 
 
 70 
Notes payable with affiliates
 
 
 
 
 
 
 
 
 
 
 
 25 
 
 
   
 
 
   

At September 30, 2013, PPL's cash and cash equivalents included $231 million denominated in GBP.  If these amounts would be remitted as dividends, PPL may be subject to additional U.S. income taxes, net of allowable foreign income tax credits.  Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings.  See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

Net cash provided by (used in) operating, investing and financing activities for the nine-month periods ended September 30, and the changes between periods were as follows.

 
 
 
 
 
PPL Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
Supply
 
PPL Electric
 
LKE
 
LG&E
 
KU
2013 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
 2,223 
 
$
 583 
 
$
 327 
 
$
 713 
 
$
 352 
 
$
 419 
Investing activities
 
 
 (2,788)
 
 
 (351)
 
 
 (697)
 
 
 (879)
 
 
 (366)
 
 
 (510)
Financing activities
 
 
 966 
 
 
 (94)
 
 
 455 
 
 
 144 
 
 
 4 
 
 
 79 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
 2,094 
 
$
 674 
 
$
 261 
 
$
 646 
 
$
 267 
 
$
 410 
Investing activities
 
 
 (2,116)
 
 
 (308)
 
 
 (614)
 
 
 (519)
 
 
 (196)
 
 
 (331)
Financing activities
 
 
 (240)
 
 
 (313)
 
 
 64 
 
 
 (96)
 
 
 (48)
 
 
 (68)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change  - Cash Provided (Used)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating activities
 
$
 129 
 
$
 (91)
 
$
 66 
 
$
 67 
 
$
 85 
 
$
 9 
Investing activities
 
 
 (672)
 
 
 (43)
 
 
 (83)
 
 
 (360)
 
 
 (170)
 
 
 (179)
Financing activities
 
 
 1,206 
 
 
 219 
 
 
 391 
 
 
 240 
 
 
 52 
 
 
 147 

Operating Activities

The components of the change in cash provided by (used in) operating activities for the nine months ended September 30, 2013 compared with 2012 were as follows.

 
130
 
 
 
 
 
 
 
 
 
PPL Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
Supply
 
PPL Electric
 
LKE
 
LG&E
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change - Cash Provided (Used)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
 58 
 
$
 (210)
 
$
 61 
 
$
 80 
 
$
 28 
 
$
 53 
 
 
Non-cash components
 
 
 244 
 
 
 169 
 
 
 42 
 
 
 15 
 
 
 (1)
 
 
 (9)
 
 
Net income, adjusted for non-cash
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
components
 
 
 302 
 
 
 (41)
 
 
 103 
 
 
 95 
 
 
 27 
 
 
 44 
 
 
Working capital
 
 
 (284)
 
 
 42 
 
 
 (45)
 
 
 (21)
 
 
 24 
 
 
 (26)
 
 
Defined benefit funding
 
 
 21 
 
 
 (37)
 
 
 (34)
 
 
 (93)
 
 
 (19)
 
 
 (42)
 
 
Other operating activities
 
 
 90 
 
 
 (55)
 
 
 42 
 
 
 86 
 
 
 53 
 
 
 33 
 
Total
 
$
 129 
 
$
 (91)
 
$
 66 
 
$
 67 
 
$
 85 
 
$
 9 

For PPL, non-cash components of net income primarily consisted of $105 million related to non-cash hedging activities, $46 million related to increased depreciation and $45 million related to 2013 charges to adjust WPD's line loss accrual.  The decrease in cash from changes in components of working capital was primarily due to increases in accounts receivable (primarily due to extended payment terms at LG&E and KU and base rate increases effective in 2013 at PPL Electric, LG&E and KU), returns of counterparty collateral and changes to certain tax-related accounts.  The increase in cash from other operating activities was primarily due to $98 million in proceeds from the settlement of forward-starting interest rate swaps.

For PPL Energy Supply, non-cash components of net income primarily consisted of $135 million related to non-cash hedging activities and $31 million related to increased depreciation.  The increase in cash from changes in components of working capital was primarily due to decreases in accounts receivable (primarily affiliate receivables), and lower unbilled revenue (primarily due to decreases in power swap sales), partially offset by returns of counterparty collateral.  The decrease in cash from other operating activities was partially due to changes to certain tax-related accounts.

For PPL Electric, non-cash components of net income primarily consisted of $31 million related to an increase in deferred tax expense and $13 million related to increased depreciation.  The decrease in cash from changes in components of working capital was primarily due to increases in accounts receivable (primarily due to the base rate increase effective January 1, 2013, partially offset by a decrease in affiliate receivables).  The increase in cash from other operating activities was partially due to changes to certain tax-related accounts.

LKE's decrease in working capital was driven primarily by increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates, offset by an increase in accounts payable due to timing of fuel purchase commitments and payments.  The increase in cash from LKE's other operating activities was driven primarily by $98 million in proceeds from the settlement of interest rate swaps.

LG&E's increase in working capital was driven primarily by lower fuel inventory purchases in 2013 and an increase in accounts payable due to timing of fuel purchase commitments and payments, offset by increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates.  The increase in cash from LG&E's other operating activities was driven primarily by $49 million in proceeds from the settlement of interest rate swaps.

KU's decrease in working capital was driven primarily by higher fuel inventory purchases in 2013 and increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates, offset by an increase in accounts payable due to timing of fuel purchase commitments and payments.  The increase in cash from KU's other operating activities was driven primarily by $49 million in proceeds from the settlement of interest rate swaps.

Investing Activities

The primary use of cash within investing activities is expenditures for PP&E.  The change in these expenditures for the nine months ended September 30, 2013 compared with 2012 was as follows.

 
 
 
 
 
PPL Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
Supply
 
PPL Electric
 
LKE
 
LG&E
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Increase) Decrease
 
$
 (690)
 
$
 119 
 
$
 (281)
 
$
 (366)
 
$
 (183)
 
$
 (181)

The increase in expenditures for PP&E was primarily due to projects to enhance system reliability at WPD and PPL Electric, the Susquehanna-Roseland transmission project at PPL Electric, environmental projects at LG&E's Mill Creek and KU's Ghent plants and construction of Cane Run Unit 7 for LG&E and KU.
 
131
 

Expenditures for PP&E decreased at PPL Energy Supply primarily related to the Rainbow hydroelectric redevelopment and Holtwood expansion projects and timing of nuclear fuel purchases.

For PPL Energy Supply and PPL Electric, the change in cash provided by (used in) investing activities was also impacted primarily by the change in notes receivable from affiliates of ($198) million and $210 million.

Financing Activities

The components of the change in cash provided by (used in) financing activities for the nine months ended September 30, 2013 compared with 2012 was as follows.

 
 
 
 
 
 
PPL Energy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
Supply
 
PPL Electric
 
LKE
 
LG&E
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change - Cash Provided (Used)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt issuances/retirements, net
 
$
 (166)
 
$
 (303)
 
$
 99 
 
 
   
 
 
   
 
 
   
 
Stock issuances/redemptions, net
 
 
 1,531 
 
 
 
 
 
 250 
 
 
 
 
 
 
 
 
 
 
Dividends
 
 
 (22)
 
 
 
 
 
 (19)
 
 
 
 
$
 (20)
 
$
 (15)
 
Capital contributions/distributions, net
 
 
   
 
 
 833 
 
 
 55 
 
$
 125 
 
 
 54 
 
 
 92 
 
Change in short-term debt, net
 
 
 (97)
 
 
 (311)
 
 
   
 
 
 87 
 
 
 17 
 
 
 70 
 
Other financing activities
 
 
 (40)
 
 
   
 
 
 6 
 
 
 28 
 
 
 1 
 
 
   
 
Total
 
$
 1,206 
 
$
 219 
 
$
 391 
 
$
 240 
 
$
 52 
 
$
 147 

See Note 7 to the Financial Statements in this Form 10-Q for information on 2013 short and long-term debt activity, equity transactions and dividends.  See the Registrant's 2012 Form 10-K for information on 2012 activity.

Credit Facilities

The Registrants maintain credit facilities to provide liquidity and to backstop commercial paper issuances.  The total committed borrowing capacity and the use of the borrowings under these facilities at September 30, 2013 was as follows.

External (All Registrants)

 
 
 
 
 
 
 
 
 
Letters of
 
 
 
 
 
 
 
 
 
 
 
 
Credit Issued
 
 
 
 
 
 
 
 
 
 
 
 
and
 
 
 
 
 
 
Committed
 
 
 
Commercial
 
Unused
 
 
 
Capacity
 
Borrowed
 
Paper Backup
 
Capacity
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply Credit Facilities (a)
 
$
 3,150 
 
 
   
 
$
 170 
 
$
 2,980 
PPL Electric Credit Facilities (a)
 
 
 300 
 
 
   
 
 
 1 
 
 
 299 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E Syndicated Credit Facility (a)
 
 
 500 
 
 
   
 
 
 72 
 
 
 428 
KU Credit Facilities (a)
 
 
 598 
 
 
   
 
 
 338 
 
 
 260 
Total LKE (a) (b)
 
 
 1,098 
 
 
   
 
 
 410 
 
 
 688 
 
Total PPL Domestic Credit Facilities (a)
 
$
 4,548 
 
 
   
 
$
 581 
 
$
 3,967 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total WPD Credit Facilities (c)
 
£
 1,055 
 
£
 184 
 
 
   
 
£
 871 

(a)
The commitments under credit facilities are provided by a diverse bank group with no one bank and its affiliates providing an aggregate commitment of more than the following percentages of the total committed capacity:  8% for PPL's domestic credit facilities, 9% for PPL Energy Supply, 5% for PPL Electric, 13% for LKE, 6% for LG&E and 22% for KU.
(b)
In October 2013, LKE entered into a $75 million syndicated credit facility that expires in October 2018.
(c)
At September 30, 2013, the USD equivalent of unused capacity under WPD's committed credit facilities was $1.3 billion.  The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity.

In September 2013, PPL Electric terminated its asset-backed commercial paper program sponsored by a financial institution.  See Note 7 in PPL's and PPL Electric's 2012 Form 10-K for more information regarding the asset-backed commercial paper program.

See Note 7 to the Financial Statements for further discussion of the Registrants' credit facilities.
 
132
 
Intercompany (All Registrants except PPL)
 
 
 
Committed
 
 
 
 
Unused
 
 
Capacity
 
Borrowed
 
Capacity
                   
PPL Energy Supply Credit Facility
 
$
200 
 
 
 
 
$
200 
PPL Electric Credit Facility
 
 
100 
 
 
 
 
 
100 
LKE Credit Facility (a)
 
 
300 
 
$
52 
 
 
248 
LG&E Money Pool (b)
 
 
500 
 
 
 
 
 
500 
KU Money Pool (b)
 
 
500 
 
 
 
 
 
500 
 
(a)  
In October 2013, LKE reduced the size of the intercompany credit facility by $75 million.
(b)  
LG&E and KU participate in an intercompany money pool agreement whereby LKE, LG&E and/or KU make available funds up to $500 million at an interest rate based on a market index of commercial paper issues.

See Note 11 to the Financial Statements for further discussion of intercompany credit facilities.

Commercial Paper (All Registrants)

PPL Energy Supply, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund their short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by the respective Registrant's Syndicated Credit Facility.

When outstanding, the amounts are reflected in "Short-term debt" on the Balance Sheets.  The following amounts were outstanding at:

 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
Commercial
 
 
 
Commercial
 
 
 
 
 
 
Paper
 
Unused
 
Paper
 
 
 
Capacity
 
Issuances
 
Capacity
 
Issuances
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PPL Energy Supply
 
$
 750 
 
 
 
 
$
 750 
 
$
 356 
PPL Electric
 
 
 300 
 
 
 
 
 
 300 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LG&E (a)
 
 
 350 
 
$
 72 
 
 
 278 
 
 
 55 
KU (a)
 
 
 350 
 
 
 140 
 
 
 210 
 
 
 70 
Total LKE
 
 
 700 
 
 
 212 
 
 
 488 
 
 
 125 
 
Total PPL
 
$
 1,750 
 
$
 212 
 
$
 1,538 
 
$
 481 

(a)
In April 2013, the capacity was increased from $250 million.

Long-term Debt and Equity Securities

(PPL and Kentucky Registrants)

During 2012, LG&E and KU received KPSC and other state approvals to issue up to $350 million for LG&E and $300 million for KU of first mortgage bond indebtedness in 2013.  The proceeds will be used to fund capital expenditures and for other general corporate purposes.

(PPL, PPL Energy Supply and PPL Electric)
 
 
 
 
 
 
 
 
 
 
 
 
The long-term debt and equity securities activity through September 30, 2013 was:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt
 
Net Stock
 
 
 
 
Issuances (a)
 
Retirements
 
Issuances (b)
Cash Flow Impact:
 
 
 
 
 
 
 
 
 
 
PPL
 
$
862 
 
$
 (309)
 
$
 1,335 
 
PPL Energy Supply
 
 
   
 
 
 (309)
 
 
 
 
PPL Electric
 
 
348 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-cash Transactions:
 
 
 
 
 
 
 
 
 
 
PPL (c)
 
$
 1,317 
 
 
 
 
 
 

(a)
Issuances are net of pricing discounts, where applicable and exclude the impact of debt issuance costs.
(b)
Net stock issuances include activity related to various stock and incentive compensation plans and other equity transactions.  See Overview - "Financial and Operational Developments" for information regarding equity forward agreements and the 2010 Equity Units.  PPL has no plans to issue new shares of common stock for the remainder of 2013.  The activity is net of the 2013 repurchase of PPL common stock.
 
133
 

(c)
The debt issuances primarily include $1.150 billion relating to the remarketing of Junior Subordinated Notes that were issued as a component of PPL's 2010 Equity Units and simultaneously exchanged into Senior Notes.

See Note 7 to the Financial Statements for further discussion of Long-term Debt and Equity Securities.

Common Stock Dividends (PPL)

In August 2013, PPL declared its quarterly common stock dividend, payable October 1, 2013, at 36.75 cents per share (equivalent to $1.47 per annum).  Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, cash flows, financial and legal requirements and other factors.

Rating Agency Actions

(All Registrants)

Fitch, Moody's and S&P periodically review the credit ratings on the debt securities of the Registrants and their subsidiaries.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of the Registrants and their subsidiaries are based on information provided by the Registrants and other sources.  The ratings of Fitch, Moody's and S&P are not a recommendation to buy, sell or hold any securities of the Registrants or their subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.

A downgrade in the Registrants' or their subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.  The Registrants and their subsidiaries have no credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.

The rating agencies took the following actions related to the Registrants and their subsidiaries during 2013:

(PPL)

In March 2013, Fitch, Moody's and S&P assigned ratings of BB+, Ba1 and BB+ to PPL Capital Funding's $450 million 5.90% Junior Subordinated Notes due 2073.  Fitch also assigned a stable outlook to these notes.

In May 2013, Fitch, Moody's and S&P assigned ratings of BBB, Baa3 and BBB- to PPL Capital Funding's $250 million 1.90% Senior Notes due 2018, $600 million 3.40% Senior Notes due 2023 and $300 million 4.70% Senior Notes due 2043.  Fitch also assigned a stable outlook to these notes.

In September 2013, Fitch affirmed the BBB-, issuer default rating, BBB, senior unsecured rating and stable outlook at PPL WW.

In September 2013, Fitch affirmed the BBB+, issuer default rating, A-, senior unsecured rating, F2 short-term issuer default rating and stable outlook at WPD (South Wales) WPD (South West).

In September 2013, Moody's and S&P assigned ratings of Baa1 and BBB to WPD (East Midlands') £65 million 1.676% Index-Linked Senior Notes due 2052.

In October 2013, Moody's and S&P assigned ratings of Baa1 and BBB to WPD (West Midlands') £400 million 3.875% Senior Notes due 2024.

(PPL and PPL Energy Supply)

In February 2013, Moody's upgraded its rating, from B2 to Ba1, and revised the outlook from under review to stable for PPL Ironwood.

In April 2013, Fitch affirmed the BBB- rating and stable outlook on PPL Montana's pass-through trust certificates due 2020.

In July 2013, Moody's withdrew its rating and outlook for PPL Ironwood.
 
134
 
In July 2013, S&P lowered its rating, from BBB- to BB+ and retained the negative outlook for PPL Montana's pass-through trust certificates due 2020.

In August 2013, Moody's affirmed the Baa3 rating and revised the outlook from stable to negative for PPL Montana's pass through trust certificates due 2020.

In September 2013, S&P affirmed the BB+ rating and revised the outlook from negative to stable for PPL Montana's pass through trust certificates due 2020.

(PPL and PPL Electric)

In July 2013, Fitch, Moody's and S&P assigned ratings of A-, A3 and A- to PPL Electric's $350 million 4.75% First Mortgage Bonds due 2043.  Fitch also assigned a stable outlook to these notes and S&P assigned a recovery rating of 1+.

(PPL, LKE and KU)

In July 2013, S&P confirmed the AA+ ratings for KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds and KU's 2004 Series A, 2006 Series B and 2008 Series A Environmental Facilities Revenue Bonds.  S&P also confirmed the A-1+ short term rating on these Bonds.

Ratings Triggers

(All Registrants except PPL Electric)

Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements (for PPL and PPL Energy Supply) and interest rate and foreign currency (for PPL) instruments, contain provisions that require the posting of additional collateral or permit the counterparty to terminate the contract, if PPL's, PPL Energy Supply's, LKE's, LG&E's or KU's or their subsidiaries' credit rating, as applicable, were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at September 30, 2013.

(All Registrants)

For additional information on the Registrants' liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in the Registrants' 2012 Form 10-K.

Risk Management

Market Risk

(All Registrants)

See Notes 13 and 14 to the Financial Statements for information about the Registrants' risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

(PPL and PPL Energy Supply)

PPL Energy Supply segregates its non-trading activities into two categories:  hedge activity and economic activity.  Transactions that are accounted for as hedge activity qualify for hedge accounting treatment.  The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.  This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL Energy Supply's competitive generation assets and full-requirement sales and retail contracts.  This economic activity is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power).
 
135
 

Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity.  See Note 14 to the Financial Statements for additional information.

To hedge the impact of market price volatility on PPL Energy Supply's energy-related assets, liabilities and other contractual arrangements, PPL Energy Supply both sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  PPL Energy Supply's non-trading commodity derivative contracts range in maturity through 2019.

The following table sets forth the changes in the net fair value of non-trading commodity derivative contracts for the periods ended September 30.  See Notes 13 and 14 to the Financial Statements for additional information.

 
 
Gains (Losses)
 
 
Three Months
 
Nine Months
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value of contracts outstanding at the beginning of the period
 
$
 285 
 
$
 961 
 
$
 473 
 
$
 1,082 
Contracts realized or otherwise settled during the period
 
 
 (95)
 
 
 (224)
 
 
 (332)
 
 
 (764)
Fair value of new contracts entered into during the period (a)
 
 
 2 
 
 
 (11)
 
 
 48 
 
 
 1 
Other changes in fair value
 
 
 25 
 
 
 (101)
 
 
 28 
 
 
 306 
Fair value of contracts outstanding at the end of the period
 
$
 217 
 
$
 625 
 
$
 217 
 
$
 625 

(a)
Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at September 30, 2013, based on the observability of the information used to determine the fair value.

 
 
 
Net Asset (Liability)
 
 
 
Maturity
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
Less Than
 
Maturity
 
Maturity
 
in Excess
 
Total Fair
 
 
 
1 Year
 
1-3 Years
 
4-5 Years
 
of 5 Years
 
Value
Source of Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prices based on significant observable inputs (Level 2)
 
$
 166 
 
$
 11 
 
$
 (2)
 
$
 5 
 
$
 180 
Prices based on significant unobservable inputs (Level 3)
 
 
 12 
 
 
 21 
 
 
 4 
 
 
   
 
 
 37 
Fair value of contracts outstanding at the end of the period
 
$
 178 
 
$
 32 
 
$
 2 
 
$
 5 
 
$
 217 

PPL Energy Supply sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets.  If PPL Energy Supply were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages.  These damages would be based on the difference between the market price and the contract price of the commodity.  Depending on price changes in the wholesale energy markets, such damages could be significant.  Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has energy contracts and other factors could affect PPL Energy Supply's ability to meet its obligations, or cause significant increases in the market price of replacement energy.  Although PPL Energy Supply attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.

(PPL and Kentucky Registrants)

LG&E's and KU's rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers.  As a result, LG&E and KU are subject to commodity price risk for only a small portion of on-going business operations.  LG&E and KU sell excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's or KU's customers.  See Note 14 to the Financial Statements for additional disclosures.

(PPL and PPL Energy Supply)

Commodity Price Risk (Trading)

PPL Energy Supply's trading commodity derivative contracts range in maturity through 2020.  The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended September 30.  See Notes 13 and 14 to the Financial Statements for additional information.

 
136
 
 
 
Gains (Losses)
 
 
Three Months
 
Nine Months
 
 
2013 
 
2012 
 
2013 
 
2012 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value of contracts outstanding at the beginning of the period
 
$
 18 
 
$
 17 
 
$
 29 
 
$
 (4)
Contracts realized or otherwise settled during the period
 
 
 (3)
 
 
 17 
 
 
 (5)
 
 
 16 
Fair value of new contracts entered into during the period (a)
 
 
 12 
 
 
 13 
 
 
 (4)
 
 
 18 
Other changes in fair value
 
 
 1 
 
 
 (15)
 
 
 8 
 
 
 2 
Fair value of contracts outstanding at the end of the period
 
$
 28 
 
$
 32 
 
$
 28 
 
$
 32 

(a)
Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of trading commodity derivative contracts at September 30, 2013, based on the observability of the information used to determine the fair value.

 
 
Net Asset (Liability)
 
 
Maturity
 
 
 
 
 
 
Maturity
 
 
 
 
Less Than
 
Maturity
 
Maturity
 
in Excess
 
Total Fair
 
 
1 Year
 
1-3 Years
 
4-5 Years
 
of 5 Years
 
Value
Source of Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prices quoted in active markets for identical instruments (Level 1)
 
$
 3 
 
 
   
 
 
   
 
 
   
 
$
 3 
Prices based on significant observable inputs (Level 2)
 
 
 5 
 
$
 8 
 
$
 2 
 
 
   
 
 
 15 
Prices based on significant unobservable inputs (Level 3)
 
 
 2 
 
 
 4 
 
 
 1 
 
$
 3 
 
 
 10 
Fair value of contracts outstanding at the end of the period
 
$
 10 
 
$
 12 
 
$
 3 
 
$
 3 
 
$
 28 

VaR Models

A VaR model is utilized to measure commodity price risk in unregulated gross energy margins for the non-trading and trading portfolios.  VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.  VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's disciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term.  The VaR for portfolios using end-of-month results for the nine months ended September 30, 2013 was as follows.

 
 
 
 
 
 
Non-Trading
 
 
 
Trading VaR
 
VaR
95% Confidence Level, Five-Day Holding Period
 
 
 
 
 
 
 
Period End
 
$
 6 
 
$
6 
 
Average for the Period
 
 
 4 
 
 
8 
 
High
 
 
 7 
 
 
10 
 
Low
 
 
 2 
 
 
5 

The trading portfolio includes all proprietary trading positions, regardless of the delivery period.  All positions not considered proprietary trading are considered non-trading.  The non-trading portfolio includes the entire portfolio, including generation, with delivery periods through the next 12 months.  Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets.  The fair value of the non-trading and trading FTR positions was insignificant at September 30, 2013.

Interest Rate Risk (All Registrants)

The Registrants and their subsidiaries issue debt to finance their operations, which exposes them to interest rate risk.  The Registrants and their subsidiaries utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of their debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate.  Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolio due to changes in the absolute level of interest rates.

The following interest rate hedges were outstanding at September 30, 2013.
 
 
 
 
 
 
 
 
 
 
 
 
 

 
137
 
 
 
 
 
 
 
 
Effect of a
 
 
 
 
 
 
 
Fair Value,
 
10% Adverse
 
Maturities
 
 
 
 Exposure
 
Net - Asset
 
Movement
 
Ranging
 
 
 
Hedged
 
(Liability) (a)
 
in Rates (b)
 
Through
PPL
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (c)
 
$
 2,264 
 
$
 68 
 
$
 (92)
 
2044 
 
Cross-currency swaps (d)
 
 
 1,262 
 
 
 26 
 
 
 (171)
 
2028 
Economic activity
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (e)
 
 
 179 
 
 
 (41)
 
 
 (3)
 
2033 
LKE
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (c)
 
 
 500 
 
 
 (14)
 
 
 (36)
 
2043 
Economic activity
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (e)
 
 
 179 
 
 
 (41)
 
 
 (3)
 
2033 
LG&E
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (c)
 
 
 250 
 
 
 (7)
 
 
 (18)
 
2043 
Economic activity
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (e)
 
 
 179 
 
 
 (41)
 
 
 (3)
 
2033 
KU
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (c)
 
 
 250 
 
 
 (7)
 
 
 (18)
 
2043 

(a)
Includes accrued interest, if applicable.
(b)
Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.  Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.
(c)
Changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through rates.  The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings.
(d)
Cross-currency swaps are utilized to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.  Changes in the fair value of these instruments are recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.
(e)
Realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.

The Registrants are exposed to a potential increase in interest expense and to changes in the fair value of their debt portfolios.  The estimated impact of a 10% adverse movement in interest rates at September 30, 2013 is shown below.

 
 
 
 
 
 
PPL Energy
 
 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
Supply
 
 
Electric
 
LKE
 
LG&E
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Increase to interest expense of 10%
 
Not 
 
Not
 
 
Not 
 
 
Not 
 
 
Not 
 
 
Not 
 
increase in interest rates
 
Significant 
 
Significant
 
 
Significant 
 
Significant 
 
Significant
 
 
Significant 
Increase in fair value of 10% decrease
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
in interest rates
 
$
 682 
 
$
 50 
 
$
 120 
 
$
 111 
 
$
 26 
 
$
 67 

Foreign Currency Risk (PPL)

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL's domestic operations may make purchases of equipment in currencies other than U.S. dollars.

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

The following foreign currency hedges were outstanding at September 30, 2013.

 
 
 
 
 
 
 
Effect of a
 
 
 
 
 
 
 
 
 
10%
 
 
 
 
 
 
 
 
 
Adverse
 
 
 
 
 
 
 
 
 
Movement
 
 
 
 
 
 
 
 
 
in Foreign
 
 
 
 
 
 
 
Fair Value,
 
Currency
 
Maturities
 
 
 
Exposure
 
Net - Asset
 
Exchange
 
Ranging
 
 
 
Hedged
 
(Liability)
 
Rates (a)
 
Through
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment hedges (b)
 
£
 320 
 
$
 (11)
 
$
 (51)
 
2015 
Economic activity (c)
 
 
 1,350 
 
 
 (55)
 
 
 (208)
 
2015 

(a)
Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.

 
138
 

(b)
To protect the value of a portion of its net investment in WPD, PPL executes forward contracts to sell GBP.  The positions outstanding exclude the amount of intercompany loans classified as net investment hedges.  See Note 14 to the Financial Statements for additional information.
(c)
To economically hedge the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP.

NDT Funds - Securities Price Risk (PPL and PPL Energy Supply)

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).  At September 30, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At September 30, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $60 million reduction in the fair value of the trust assets.  See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk (All Registrants)

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's  2012 Form 10-K and "Risk Management" in PPL Electric's 2012 Form 10-K for additional information.

Foreign Currency Translation (PPL)

The value of the British pound sterling fluctuates in relation to the U.S. dollar.  Changes in this exchange rate resulted in a foreign currency translation loss of $159 million for the nine months ended September 30, 2013, which primarily reflected a $454 million reduction to PP&E and goodwill offset by a reduction of $295 million to net liabilities.  Changes in this exchange rate resulted in a foreign currency translation gain of $53 million for the nine months ended September 30, 2012, which primarily reflected a $123 million increase to PP&E and goodwill offset by an increase of $70 million to net liabilities.  The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions (All Registrants)

The Registrants are not aware of any material ownership interests or operating responsibility by senior management of the Registrants in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with the Registrants.

See Note 11 to the Financial Statements for additional information on related party transactions for PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

Acquisitions, Development and Divestitures (All Registrants)

The Registrants from time to time evaluate opportunities for potential acquisitions, divestitures and development projects.  Development projects are reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options.  See Note 8 to the Financial Statements for information on the more significant activities.

Environmental Matters

(All Registrants)

Extensive federal, state and local environmental laws and regulations are applicable to PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of the Registrants' businesses.  The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs for their products or their demand for the Registrants' services.
 
139
 

The following is a discussion of the more significant environmental matters.  See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in the Registrants' 2012 Form 10-K for additional information on environmental matters.

GHG Regulations
In June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum the EPA was directed to issue a new proposal for new power plants by September 20, 2013, with a final rule to be issued in a timely fashion thereafter, and to issue proposed standards for existing power plants by June 1, 2014 with a final rule by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.

The EPA's re-proposal for new power plants was released on September 20, 2013.  The EPA's dependence on carbon capture and sequestration, a technology which is not presently commercially viable, effectively precludes the construction of new coal plants.  The proposal is further problematic as the proposed standards for new gas plants may not be achievable at all times.  PPL will comment on the rule to this effect.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.

Additionally, the Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may lead to more costly regulatory requirements.  Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect PPL, PPL Electric, LKE, LG&E and KU and others in the industry as transmission system modifications to improve the ability to withstand major storms may be needed in order to meet those requirements.

Climate Change
Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage, as applicable, to the Registrants' generation assets, electricity transmission and distribution systems, as well as impacts on the Registrants' customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL, PPL Energy Supply, LKE, LG&E and KU have hydroelectric generating facilities or where river water is used to cool their fossil and nuclear (as applicable) powered generators.  The Registrants cannot currently predict whether their businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

(All Registrants except PPL Electric)

Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing solid waste regulations.  A final rulemaking is currently expected by the end of 2014, as a result of litigation by environmental groups.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial and operational impact is expected to be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

In July 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from issuing final CCR regulations and would set non-hazardous CCR standards under RCRA and authorize state permit programs.  It remains uncertain whether similar legislation will likely be passed by the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's coal-fired plants.  PPL, PPL Energy Supply, LKE, LG&E and KU worked with industry groups to comment on the proposed regulation on September 20, 2013.  The final regulation is expected in May 2014.  At the present time, PPL, PPL Energy Supply, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.
 
140
 

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November 2013.  The proposed regulation would apply to nearly all PPL-owned steam electric generation plants in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  PPL, PPL Energy Supply, LKE, LG&E and KU are generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls at PPL Energy Supply and approved ECR plans to install additional controls at some of LG&E's and KU's Kentucky plants.  Additionally, PPL Energy Supply is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions.  In September 2012, PPL Energy Supply announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.  Also, PPL has received approval for two compliance extensions in Kentucky, and has requested an extension for one of its plants in Pennsylvania.  Other extension requests are under consideration.

In connection with a unanimous settlement agreement filed with the KPSC in November 2011, KU agreed to defer the requested approval for certain environmental upgrades to Units 1 and 2 at its E.W. Brown generating plant which represented approximately $200 million in capital costs.  LG&E and KU are evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants.  These measures, combined with the completion of recent feasibility studies conducted based on current market conditions, provide alternative compliance options for KU on Units 1 and 2 at the E.W. Brown station.

The anticipated retirements of certain coal-fired electricity generating units are in response to this and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the D.C. Circuit Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place in the interim, and in June 2013 the U.S. Supreme Court granted the EPA's petition for review of the D.C. Circuit Court's decision.  Oral argument before the U.S. Supreme Court has been scheduled for December 2013.  Prior to a revised rule from the EPA, coal-fired generating plants could face tighter nitrous oxide emission limitations through state action.

The PPL, PPL Energy Supply, LKE, LG&E and KU plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The D.C. Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

Regional Haze
Under the EPA's regional haze programs (developed to eliminate man-made visibility degradation by 2064), states are required to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977.  For the eastern U.S., the EPA had determined that region-wide reductions under the CAIR or CSAPR trading program could be utilized by state programs to satisfy BART requirements.  However, the August 2012 decision by the D.C. Circuit Court to vacate and remand CSAPR exposes power plants located in the eastern U.S., including PPL Energy Supply's plants in Pennsylvania and PPL's plants in Kentucky, to reductions in sulfur dioxide and nitrogen oxides as required by BART.
 
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The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for PPL Energy Supply's Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for PPL Energy Supply's Corette plant (which are not based on additional controls).  The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant.  PPL Energy Supply expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).  PPL is participating in litigation regarding this matter before the U.S. Court of Appeals for the Ninth Circuit.

National Ambient Air Quality Standards (Kentucky Registrants)
During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively.  In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide.  Final designations of non-attainment areas may occur in 2013 and 2014, respectively.  Existing environmental plans for LG&E's and KU's Kentucky plants, including announced retirements of certain plants and ECR-approved new or upgraded scrubbers or baghouses at other plants, may aid in achievement of eventual ambient air requirements.  However, depending upon the specifics of final non-attainment designations and consequent compliance plans, additional controls may be required, the financial impact of which could be significant.

New Accounting Guidance (All Registrants)

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies (All Registrants)

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following table summarizes the accounting policies by Registrant that are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in each Registrant's 2012 Form 10-K for a discussion of each critical accounting policy.

 
 
 
 
 
 
PPL
 
PPL
 
 
 
 
 
 
 
 
 
 
 
 
PPL
 
Energy Supply
 
Electric
 
LKE
 
LG&E
 
KU
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Defined Benefits
 
X
 
X
 
X
 
X
 
X
 
X
Loss Accruals
 
X
 
X
 
X
 
X
 
X
 
X
Income Taxes
 
X
 
X
 
X
 
X
 
X
 
X
Asset Impairments (Excluding Investments)
 
X
 
X
 
 
 
X
 
X
 
X
AROs
 
X
 
X
 
 
 
X
 
X
 
X
Price Risk Management
 
X
 
X
 
 
 
 
 
 
 
 
Regulatory Assets and Liabilities
 
X
 
 
 
X
 
X
 
X
 
X
Revenue Recognition - unbilled revenue
 
 
 
 
 
 
 
X
 
X
 
X
 
X

 
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PPL Corporation
PPL Energy Supply, LLC
PPL Electric Utilities Corporation
LG&E and KU Energy LLC
Louisville Gas and Electric Company
Kentucky Utilities Company

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Reference is made to "Risk Management" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."

Item 4.  Controls and Procedures

(a)           Evaluation of disclosure controls and procedures.

PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company, and Kentucky Utilities Company

The Registrants' principal executive officers and principal financial officers, based on their evaluation of the Registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of September 30, 2013, the Registrants' disclosure controls and procedures are effective to ensure that material information relating to the Registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this quarterly report has been prepared.  The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.

(b)           Change in internal controls over financial reporting.

PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company, and Kentucky Utilities Company

As reported in the June 30, 2013 Form 10-Q, the principal executive officers and principal financial officers of the Registrants concluded that the implementation of a financial consolidation and reporting system for PPL and its primary U.S. subsidiaries resulted in a material change to the Registrants' internal control over financial reporting.  The new system enhances the consolidation of subsidiary accounts, provides reporting tools for analysis and automates certain aspects of financial statement preparation for each of the Registrants.  Processes and controls over the consolidation and reporting processes that were previously considered to be effective were replaced with new or modified controls that were also determined to be effective.

The new consolidation and reporting system was subject to extensive testing and data reconciliation during implementation.  Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes.

The Registrants' principal executive officers and principal financial officers have concluded that there were no other changes in the Registrants' internal control over financial reporting during the Registrants' third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrants' internal control over financial reporting.


PPL Corporation

As reported in the June 30, 2013 Form 10-Q, PPL's principal executive officer and principal financial officer concluded that the implementation of a new general ledger system and a financial reporting system at WPD resulted in a material change to its internal control over financial reporting.  The general ledger system that was implemented at WPD replaced the existing mainframe system and resulted in more automation and enhanced controls over

 
143
 

general ledger processing and consolidation.  The reporting system that was implemented at WPD improves and automates controls over data transfer included in PPL's consolidation process and improves controls over GAAP and foreign currency adjustments.  In each of the WPD system implementations, controls that were previously determined to be effective were replaced with new or modified controls that were also determined to be effective.

The general ledger and reporting systems were subject to extensive testing and data reconciliation during their implementation.  Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes remain effective.  Risks related to the system implementations at WPD were also partially mitigated by PPL's existing policy of consolidating foreign subsidiaries on a one-month lag, which provided management additional time for review and analysis of WPD results and their incorporation into PPL's consolidated financial statements.

The Registrant's principal executive officer and principal financial officer have concluded that there were no other changes in the Registrant's internal control over financial reporting during the Registrant's third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

For additional information regarding pending administrative and judicial proceedings involving regulatory, environmental and other matters, which information is incorporated by reference into this Part II, see:

 
·
  
"Item 3. Legal Proceedings" in each Registrant's 2012 Form 10-K; and
 
·
  
Notes 5, 6 and 10 to the Financial Statements.

Item 1A.  Risk Factors

There have been no material changes in the Registrants' risk factors from those disclosed in "Item 1A. Risk Factors" of the 2012 Form 10-K.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuer Purchase of Equity Securities during the Third Quarter of 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(a)
(b)
(c)
(d)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maximum Number (or
 
 
 
 
 
 
 
 
 
 
 
 
 
Approximate Dollar
 
 
 
 
 
 
 
 
 
 
Total Number of
Value) of Shares
 
 
 
 
 
 
 
 
 
 
Shares (or Units)
(or Units) that May
 
 
 
 
Total Number of
Average Price
Purchased as Part of
Yet Be Purchased
 
 
 
 
Shares (or Units)
Paid per Share
Publicly Announced
Under the Plans
Period
 
 
Purchased (1)
(or Unit)
Plans of Programs
or Programs
July 1 to July 31, 2013
 
 
  
 
 
 
August 1 to August 31, 2013
 
 
 750,000 
$30.81 
 
 
September 1 to September 30, 2013
 
 
 750,000 
$31.00 
 
 
Total
 
 
 1,500,000 
$30.91 
   
 

(1)
  
Represents shares of common stock repurchased in the open market to offset a portion of shares issued under stock based compensation plans.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

PPL Electric Utilities Corporation

Effective October 31, 2013, PPL Electric amended and restated its Articles of Incorporation and Bylaws, copies of which are filed as exhibits 3(a) and 3(b), respectively, to this report.

 
144
 

Item 6. Exhibits

The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith.  The balance of the Exhibits have heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference.  Exhibits indicated by a [_] are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K.
 
1(a)
 
-
 
Final Terms of the WPD West Midlands £400 million 3.875% Senior Unsecured Notes due October 17, 2024 (Exhibit 1.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
 
1(b)
 
-
 
Final Terms of WPD East Midlands £40 million 1.676% Notes due 2052 (Exhibit 1.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
 
1(c)
 
-
 
Final Terms of WPD East Midlands £25 million 1.676% Notes due 2052 (Exhibit 1.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
 
2(a)
 
-
 
Purchase and Sale Agreement by and between PPL Montana, LLC and NorthWestern Corporation, dated as of September 26, 2013 (Exhibit 2.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
 
2(b)
 
-
 
Lease Termination Agreement by and between PPL Montana, LLC, Montana OL3 LLC and Montana OP3 LLC, dated as of September 26, 2013 (Exhibit 2.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
 
2(c)
 
-
 
Lease Termination Agreement by and between PPL Montana, LLC, Montana OL4 LLC and Montana OP4 LLC, dated as of September 26, 2013 (Exhibit 2.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
 
2(d)
 
-
 
Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.4 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
 
2(e)
 
-
 
Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.5 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
 
*3(a)
 
-
 
Amended and Restated Articles of Incorporation of PPL Electric Utilities Corporation, effective as of October 31, 2013
 
*3(b)
 
-
 
Amended and Restated Bylaws of PPL Electric Utilities Corporation, effective as of October 31, 2013
 
*4(a)
 
-
 
Amendment No. 10 to Employee Stock Ownership Plan, dated September 16, 2013
 
4(b)
 
-
 
Amended and Restated Trust Deed, dated September 10, 2013, by and among Western Power Distribution (East Midlands) plc, Western Power Distribution (West Midlands) plc, Western Power Distribution (South West) plc and Western Power Distribution (South Wales) plc as Issuers, and HSBC Corporate Trustee Company (UK) Limited as Note Trustee (Exhibit 4.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
 
 
-
 
PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
 
 
-
 
PPL Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
 
 
-
 
PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
 
 
-
 
LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
 
 
-
 
Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
 
 
-
 
Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges
 
     
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended September 30, 2013, filed by the following officers for the following companies:
 
     
 
-
 
PPL Corporation's principal executive officer
 
 
-
 
PPL Corporation's principal financial officer
 
 
-
 
PPL Energy Supply, LLC's principal executive officer
 
 
145
 
 
-
 
PPL Energy Supply, LLC's principal financial officer
 
 
-
 
PPL Electric Utilities Corporation's principal executive officer
 
 
-
 
PPL Electric Utilities Corporation's principal financial officer
 
 
-
 
LG&E and KU Energy LLC's principal executive officer
 
 
-
 
LG&E and KU Energy LLC's principal financial officer
 
 
-
 
Louisville Gas and Electric Company's principal executive officer
 
 
-
 
Louisville Gas and Electric Company's principal financial officer
 
 
-
 
Kentucky Utilities Company's principal executive officer
 
 
-
 
Kentucky Utilities Company's principal financial officer
 
 
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended September 30, 2013, furnished by the following officers for the following companies:
 
     
 
-
 
PPL Corporation's principal executive officer and principal financial officer
 
 
-
 
PPL Energy Supply, LLC's principal executive officer and principal financial officer
 
 
-
 
PPL Electric Utilities Corporation's principal executive officer and principal financial officer
 
 
-
 
LG&E and KU Energy LLC's principal executive officer and principal financial officer
 
 
-
 
Louisville Gas and Electric Company's principal executive officer and principal financial officer
 
 
-
 
Kentucky Utilities Company's principal executive officer and principal financial officer
 
     
101.INS
 
-
 
XBRL Instance Document for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
 
101.SCH
 
-
 
XBRL Taxonomy Extension Schema for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
 
101.CAL
 
-
 
XBRL Taxonomy Extension Calculation Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
 
101.DEF
 
-
 
XBRL Taxonomy Extension Definition Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
 
101.LAB
 
-
 
XBRL Taxonomy Extension Label Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
 
101.PRE
 
-
 
XBRL Taxonomy Extension Presentation Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
 

 
146
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.  The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.

 
PPL Corporation
 
(Registrant)
  
     
 
PPL Energy Supply, LLC
 
(Registrant)
  
     
     
     
Date:  November 1, 2013
/s/  Vincent Sorgi
  
 
Vincent Sorgi
  
 
Vice President and Controller
  
 
(Principal Accounting Officer)
  
     
     
     
 
PPL Electric Utilities Corporation
 
(Registrant)
  
     
     
     
Date:  November 1, 2013
/s/  Dennis A. Urban, Jr.
  
 
Dennis A. Urban, Jr.
  
 
Controller
  
 
(Principal Financial Officer and Principal Accounting Officer)
  


 
LG&E and KU Energy LLC
 
(Registrant)
  
     
 
Louisville Gas and Electric Company
 
(Registrant)
  
     
 
Kentucky Utilities Company
 
(Registrant)
  
     
     
     
Date:  November 1, 2013
/s/  Kent W. Blake
  
 
Kent W. Blake
Chief Financial Officer
  
 
(Principal Financial Officer and Principal Accounting Officer)
  
147